Could Congress Make Drug Shortages Worse?

There's been a lot of press coverage over the past several weeks of the problem with prescription drug shortages. And, as you might expect, members of Congress are eager to be seen as doing something -- anything really -- to help alleviate the crisis. A bi-partisan group of House members led by Rep. John Carney (D-Del.) introduced a bill at the end of January. That came on the heels of another House bill introduce by Reps. Diana DeGette (D-Col.) and Tom Rooney (R-Fl.) in June. And Sens. Amy Klobuchar (D-Minn.) and Robert Casey (D-Penn.) recently moved to attach their drug shortage bill, first introduced last year, to a piece of transportation legislation moving through the Senate.

Unfortunately, most of the proposed action will have little to no affect on the fundamental underlying problems associated with drug shortages. And one of the bills very well may make the shortages worse.

Last week, our very own Paul Howard wrote an article for the Washington Examiner explaining how "a combination of market forces and government price controls have reduced incentives for companies to either enter the market for critical drugs or make manufacturing investments to keep their plants up to date - and running safely." Former Obama administration health policy advisor Ezekiel Emanuel delved more deeply into the price control issue in this New York Times op-ed.

The gist of the problem is that the profit margins for the generic drugs that comprise the vast majority of drugs in short supply are so small that there often are just two or three manufacturers (and occasionally just one) for a particular critical drug. And Medicare price controls contribute substantially to these profitability issues.

Health care scholar John Goodman summarized some of these and other points nicely in a post on his blog last summer. As Goodman pointed out, another contributing factor is the FDA's increasingly strict regulation of drug manufacturing facilities, which he calls a "zero tolerance regime" that is "forcing manufacturers to abide by rules that are rigid, inflexible and unforgiving." This is exacerbated by the fact that FDA not only approves drugs as safe and effective, but also regulates the production facilities themselves, including the quantities produced and the timing of production schedules. So, when one manufacturer's plant is closed, competitors need to get FDA approval before they can ramp up their own production to meet the shortfall.

Waiting for FDA to get through the approvals takes time, and that contributes to some of the drug shortages we've seen. The Carney bill would instruct FDA to expedite these reviews -- both to bring shuttered facilities back on-line more quickly and to let competitors increase production. And all three of the bills would also require drug makers to warn the FDA in advance if they decide to discontinue manufacturing a "critical" drug or if they anticipate an "interruption" in production. To some extent, these measures may help, but the FDA has taken some modest steps on its own to address some of the most problematic shortages. And nothing in the legislation is likely to change the fundamental nature of how the agency operates. Nor would any of the bills address the fundamental underlying economic considerations that are the primary cause of the shortages.

Worse still, The Carney bill would, to some degree, actually intensify the problem. It would try to stabilize prices by banning so-called "stockpiling" and "price gouging". But it's Economics 101 that, when the supply of something falls below demand, the price will rise. What every politician who complains about price gouging forgets, ignores, or just doesn't realize, is that rising prices are a signal (a) for consumers to conserve the supply of a scarce product, and (b) for manufacturers to produce more of it. That's exactly what stockpiling is, an effort to conserve a drug that's in short supply.

When prices of these drugs rise, doctors and hospitals start asking themselves, "Do we really need to use this drug in this situation, or is there a reasonable substitute?" That in turn means that the patients who most need the drugs are more likely to get them, and that patients who could make do with a lower dose or an alternative use less of the product that is scarce. No consumer likes sharply rising prices, particularly when they're seen as an effort by some sellers to profit unfairly. That's why politicians always propose these kinds of measures. But the problem with preventing so-called price gouging is that it means no signal gets sent to consumers indicating that conservation is necessary, and no signal gets sent to manufacturers that it's worth ramping up production. In short, anti-stockpiling and anti-price gouging policies almost inevitably make a shortage worse, not better.

In short, drug shortages are a real problem. But the way to alleviate them is not to eliminate the market signals that incentivize adequate production. In the end, we would be better off if Congress did nothing at all than if they enacted these bills. Better still, though, would be for Congress to lift the rules that have contributed to the shortages in the first place.

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