Drug Importation and Price Controls Category

The U.S. is the world's leader in biopharmaceutical innovation, mainly because the U.S. does not impose price controls on prescription drugs. However, the rise of the internet has given individual U.S. consumers access to drugs in price controlled countries, leading to a growing demand that policymakers legalize importation or impose price controls on programs like Medicare Part D. Either policy would undermine medical innovation, and reduce access to therapies that can improve health at lower cost. The CMP is devoted to cataloguing the benefits of market driven medical innovation, both in economic and human terms, and in shifting the debate on drug importation to a question of innovation and free trade. After all, since the entire world benefits from the premium U.S. consumers pay for drug research and development, U.S. trade negotiators should encourage other rich nations to help bear the full costs of innovative drug development.

I'm sure that consumers, medical policymakers and insurance companies are just oozing with joy. After all, we are rapidly heading for pharmaceutical paradise--a pharmacy packed with really cheap generics and not much else.

This will not only save tons of money, but also stick it to those bad boy pharmaceutical companies that invented the drug in the first place, and then sucked us dry by fighting off the noble generic companies for an extra two minutes of patent protection so they could suck us even drier.

Doesn't get any better than this. At least until you swallow the pill.

In today's "big surprise of the day," Ranbaxy Laboratories, India's largest generic manufacturer got a little $500 million slap on the wrist from the U.S. Justice department.

The company admitted that a few years ago that they manufactured and subsequently sold substandard drugs, which were made at two different facilities in India. Well, anyone can make an honest mistake. Except perhaps Ranbaxy, which as part of the settlement, admitted to lying about the problems by intentionally making false statements to the FDA.

Their guilty plea added up to three felony counts, $150 million in criminal penalties and another $350 million in civil penalties.

The drugs in question were for treatment of acne, epilepsy, neuropathic pain and one antibiotic-- ciprofloxacin.

This is hardly the first time that Ranbaxy has had problems with drug "quality"--a misplaced euphemism if ever there were one.

In 2008, the FDA prohibited the importation of 30 drugs from two of Ranbaxy's plants in India, and instituted a so-called "Application Integrity Policy," which stopped the review of any new drug applications from one of the company's facilities. The reason? Once again, fraudulent record keeping and reporting.

In a sane world, one might think that the company might be asked to take their business elsewhere, but sanity seems to have become, well, insane.

Despite the company's accomplished track record of incompetence and fraud, in November 2011 the FDA still gave permission for Ranbaxy (and only Ranbaxy) to sell the first generic version of the Lipitor. This was clearly well-deserved, as evidenced by the fact that in 2102, Ranbaxy was forced to recall multiple lots of the drug after the pills were found to contain glass particles.

One might think that this would be enough, but one would be wrong.

According to a recent Fortune report, the U.S. Dept. of Veterans Affairs recently signed a large contract to buy generic Lipitor from, who else? Ranbaxy. Two months ago.

OK. This stopped being funny quite a while ago. And the take home message is even less amusing--saving money is so important to our government and medical providers that they are going to look the other way while a bunch of hacks in India feed you a steady supply of crappy drugs.

And Ranbaxy's response doesn't exactly inspire confidence. According to CEO Arun Sawhney "While we are disappointed by the conduct of the past that led to this investigation, we strongly believe that settling this matter now is in the best interest of all of Ranbaxy's stakeholders; the conclusion of the DOJ investigation does not materially impact our current financial situation or performance."

Which is about as comforting as in February, when the company also issued a statement that "[I]t was confident in the continuing safety and quality of its products."

Which begs the question, "what would happen if they weren't confident? "Oops- you swallowed a hand grenade instead of a cipro? Please hold."

And if you think this is an isolated incident, you perhaps ought to consider a little Wellbutrin therapy. Except last year, Teva, Israel's giant generic manufacturer was forced to recall all of its Budeprion XL, their version of Wellbutrin XL, (the generic name is bupropion). The problem? Its U.S. manufacturer, Impax Laboratories had a little problem with the time-release formula.

This is no laughing matter with bupropion, since the 300 mg time-release pill released the drug much too soon putting patients at risk for seizures, and cardiac arrhythmias. The maximum immediate-release dose for the drug is 100 mg, which was exceeded by the failure of the time-release formulation, leaving patients susceptible to side effects early on and sub-therapeutic blood levels later.

These are two of the biggest generic companies around, which makes me wonder what will happen when Joe's Pharmaceuticals starts making generic heart drugs in a U-Haul in Newark.

These are our future medicines, and inevitably most of us will eventually run into one. The FDA has shown little ability to catch this until after the problem has already occurred, and the cheap prices are simply too enticing.

This is just getting started. Open wide folks. There's going to be a lot for you to swallow.


Markets span the gamut from monopoly (one supplier, many buyers), to competitive markets (many buyers and sellers), to monopsony (one buyer, many suppliers). Competitive markets are the most efficient: price signals in competitive markets promote competition and innovation, and provide products at a variety of prices and levels of quality to consumers.

Some markets may naturally tend to monopsony (the Pentagon for national defense) or monopoly (typically markets with very high capital costs and barriers to entry, like electric utilities).

But monopoly and monopsony are considered sub-optimal outcomes. Monopolists have the power to depress competition and charge higher prices than there would be in a competitive market. Monopsonists, on the other hand, have the power to depress prices sub-optimal levels. Both have a tendency to underprovide resources, leaving unmet demand - the "deadweight loss" of consumer and producer surplus from goods that aren't produced or consumed.

What relevance does this have for health care? Lots, actually. The increasing socialization of health care costs through government programs (Medicare, Medicaid, Obamacare) give government monopsony power, allowing it to depress prices.

From the government's perspective, this is a good thing since scarce tax dollars can be used to buy large quantities of health care at below market prices. From a political perspective, it's also easier to ask for concessions from (for instance) drugmakers than to increase patient copays, reduce coverage, or ask voters to pay more in taxes.

But monopsony power is a double edged sword. If you drive prices too low, you sharply reduce incentives to invest in R&D. You get cheaper drugs today, at the price of many fewer new (and better) medicines tomorrow. Grandpa gets cheaper drugs today, but his grandchildren get fewer new medicines, and more old ones.

European nations have used their monopsony power to control drug pricing through a variety of mechanisms (from outright price controls to reference pricing), but at the cost of driving drug R&D out of Europe and (generally) delaying European patients access to new drugs.

The U.S. hasn't used this approach - yet - but one state, Massachusetts, is at least seriously considering it. Under Section 273 of new health care legislation signed into law this week, the Bay State created a pharmaceutical cost containment commission "to study methods to reduce the cost of prescription drugs for both public and private payers." In particular,

The commission shall examine and report on the following: (i) the ability of the commonwealth to enter into bulk purchasing agreements, including agreements that would require the secretary of elder affairs, the executive director of the group insurance commission, the director of the state office of pharmacy services, the commissioners of the departments of public health, mental health and mental retardation, and any other state agencies involved in the purchase or distribution of prescription pharmaceuticals, to renegotiate current contracts; (ii) aggregate purchasing methodologies designed to lower prescription pharmaceutical costs for state and non-state providers; (iii) the ability of the commonwealth to operate as a single payer prescription pharmaceutical provider; and (iv) the feasibility of creating a program to provide all citizens access to prescription pharmaceuticals at prices negotiated by the commonwealth.

Why stop here? If it's such a good idea for the government to buy drugs in bulk, why not buy MRIs, ultrasounds, hospital beds, and bedpans?

For that matter, why bother shopping at Wal-Mart when the state can use it's purchasing power to buy your food, your clothing, and your housing at ultra-cheap prices?

The reason that we don't let the government buy these things (except for the very poor) is that it produces an economic disaster. Price controls destroy incentives to bring new products to market. The irony is that we keep trying to figure out new ways to make price controls work.

There's a much, much better way to lower costs while also improving quality.

For instance, the MA bill puts a lot of emphasis on building Accountable Care Organizations to coordinate care pay based on capitated payment rates. Whether or not ACOs are a silver bullet for fixing health care, ACOs or other health systems (and insurers) are still much better situated to negotiate with drug companies on the best bundle of old and new medicines needed to optimize health outcomes.

A central purchasing agent (in this case, the state) can't possibly account for all of the myriad ways that drugs fit into the totality of the health care system. Indeed, some ACOs/health systems might opt to increase their overall pharmaceutical spending or spending on select new drugs because it offsets other health care costs - like expensive doctors and hospital beds.

Ideally, consumers would pick from competitive bundles of care with their own cash (or vouchers, for low-income Americans). This would give providers even more powerful incentives to create innovative bundles of health care products and services.

Medicare Part D operates like this: allowing seniors to pick from a wide range of competing private insurance options at a range of prices. Plans that manage to offer the most effective drug formularies at the most attractive prices gain market share. And competition also produces robust negotiations between drug companies and insurers, helping to keep prices low for consumers. To date, Medicare Part D has come in over 40% below initial cost estimates, thanks to robust competition between insurers and drug companies.

One of the bright spots in the Massachusetts legislation appears to be an effort to collect better data on health care prices and outcomes - and this information could empower consumers to seek out the best, and most efficient providers.

We need more competition and consumer choice in health care, not less, and certainly not a single payer (for drugs or anything else). We'll have to wait and see what the Bay State commission recommends, but we'll go out on a limb right now and venture that it'll be a bad idea.

Here's hoping we're wrong.

The Wall Street Journal recently ran a detailed (and disturbing) story on how fake Avastin from Turkey wound up being injected into cancer patients in U.S. doctor's offices.

It all started in Canada, when a Canadian pharmacist and businessman realized he could make enormous profits selling price-controlled Canadian drugs to Americans by circumventing the U.S. supply chain.

Let's be frank: branded drug prices are more expensive in the U.S. because, unlike most of its wealthy competitors, the U.S. doesn't impose price controls on pharmaceuticals. This allows innovation to flourish in the U.S. and also means that U.S. patients typically get faster access to new medicines.


Encouraging drug innovation has benefits both for patients and the economy. The breakdown occurs not in drug prices, but in the insurance system. Uninsured Americans, and (until 2003) some seniors in Medicare lacked insurance or drug coverage, potentially exposing them to high drug costs in the event of a serious illness. But the solution here is to improve the insurance system, not impose price controls on new medicines.

Still, the gap between U.S. and international prices allows some companies - in this case, Canada Drugs, run by Kris Thorkelson - to open internet portals that sell to Americans looking for a quick discount.

This is a violation of U.S. law, but the FDA only enforces the ban on large scale importation of drugs - not on individuals, who may purchase small quantities of drugs online, or dash across the border into Mexico or Canada. In those cases: caveat emptor, let the buyer beware.

Of course, because Canada isn't big enough to supply the U.S. market, Canadian middlemen have to look further and further abroad to find cheaper drugs, along the way creating a complicated web of middlemen to transport and repackage drugs for American consumers.

This is a recipe for fake or counterfeit drugs infiltrating the U.S. drug supply. And this is exactly what happened in the case of the fake Avastin.

One distressing line in the Journal article was the following:

The incident was alarming because the fakes were billed as lifesaving drugs often prescribed to patients with hard-to-fight cancer. Previous counterfeiting incidents have involved fake pills such as those for cholesterol and erectile dysfunction.

This makes it sounds like counterfeiting drugs other than cancer medicines is a victimless crime. Clearly, this isn't true. Poorly controlled cholesterol can lead to heart attacks. Deaths from heart attacks due to fake statins are equally real, even if they may be harder to detect.

One other issue goes unmentioned. The U.S. should do a much better job of protecting the intellectual property rights of domestic pharmaceutical companies selling their products abroad. Inflicting price controls on pharmaceuticals is no less anticompetitive than if it was done on American made cars or computers.

Companies should charge different prices to different buyers, based on wealth. This allows manufacturers to sell drugs at lower prices in poorer countries, and higher prices in wealthier countries. But when wealthy European countries impose price controls on medicines they blunt incentives for innovation, reducing the number of medicines that will be available in the future for wealthy and poor nations alike.

And insofar as wealthy nations "reference price" new products to the prices of drugs sold in poorer countries, they create powerful incentives for companies to delay launching new products in those countries - the exact opposite of what we should be trying to acheive.

Former FDA Commissioner Mark McClellan put it best in 2003, when he said that:

If we do not find better ways to share the burden of developing new drugs and biologics, all of us will suffer. The benefits of these treatments are global, and so if we think only of the short-term interest of our own country, we all lose the opportunity for a healthier world. The heart of the problem is that we are not all paying our fair share of the costs of bringing new treatments to the world. And the problem is getting worse. . . . The United States is now covering most of these costs of developing a new drug to the point where it can be used by the population of the world.

The U.S. should use international trade negotiations to defend intellectual property rights, and demand that our wealthy trading partners pay their fair share of the costs of developing new medicines.

American patients and insurers shouldn't be asked to bear that burden alone, when the benefits are global.

Today the Senate is voting to reauthorize the Prescription Drug User Fee Act of 1992. A number of amendments have been added to and rejected from the reauthorized version of the law, but the one we've been watching most closely is amendment #2107 proposed by Sen. John McCain (R-Az). The amendment, which was recently rejected by the Senate, would have allowed American citizens to import cheap prescription drugs from Canada, under certain conditions. While this proposal might sound like good policy at first glance, it would in fact have dire consequences for pharmaceutical innovation if implemented.

Prescription drugs are cheaper in Canada only because of price controls imposed by the Canadian government, which effectively prohibit pharmaceutical companies from selling their drugs to Canadian citizens at market value prices. Faced with a choice between selling their drugs in Canada at a reduced price or not selling them at all, pharmaceutical companies reluctantly choose the former. Since the U.S. government does not force drug companies into collective purchasing agreements (insurers and PBMs bargain directly with drug companies over prices), American citizens generally pay somewhat higher prices for their patented drugs than do Canadians.

Although Americans may resent that other developed countries pay lower drug prices, it is absolutely crucial that pharmaceutical companies be free to set their own prices in at least some wealthy markets if we want pharmaceutical innovation to continue. By purchasing drugs at market prices, rather than at prices set by a government cartel, American citizens effectively subsidize global pharmaceutical innovation for everyone.

Profits that pharmaceutical companies reap from their sales to American citizens help those companies recover the extraordinary investments they make in drug research and development, and even more importantly, these profits are used to fund the next generation of pharmaceutical advances.

The failure of the McCain amendment is thus a victory for global medical innovation, insofar as it protects pharmaceutical companies' ability to charge sufficiently high prices to develop future innovations.

More importantly, is it a victory for the millions of patients who will live longer, healthier lives tomorrow because we didn't embrace price controls today.

After a recent blog post where I noted Peter Pitts' op-ed on Group Purchasing Organizations (GPOs) in the Washington Examiner, financial journalist Phil Zweig wrote to me to gently correct one of Peter's assertions:

In his article, Peter Pitts rightly attributes the drug shortages to the anticompetitive, exclusionary contracting practices and other abuses of hospital group purchasing organizations (GPOs). Those of us who have been trying to draw congressional and public attention to the GPOs' pernicious role in this crisis certainly welcome his support. Unfortunately, however, he is mistaken in stating that GPOs "keep costs low." In fact, overwhelming anecdotal and empirical evidence demonstrates that they grossly inflate healthcare costs. The reason is that GPOs are paid by vendors, including generic drug makers, in the form of "administrative" and other fees, which are calculated as a percentage of sales volume. So the higher the price of a product, the more money a GPO makes.

This perverse incentive was created by a misguided 1987 statute called the Medicare anti-kickback "safe harbor" provision, which exempted GPOs from criminal penalties for accepting vendor kickbacks. Overnight, GPOs became the marketing agents for suppliers, not the servants of hospitals. Under the original business model, which had worked well for nearly 80 years, GPOs operated like co-ops, covering their expenses out of the savings they achieved for members hospitals through volume discounts. The new kickback-based business model gave rise to a pay-to-play scheme in which GPOs awarded exclusive contracts to vendors in return for huge fees. But higher costs for providers, insurers and taxpayers are just part of the problem. Worse still, these abuses have denied patients and healthcare workers access to the best, safest, and most cost effective supplies, devices, and drugs.

This has been documented in four Senate Antitrust Subcommittee hearings held from 2002 to 2006, federal and state investigations, independent studies, media exposes, and numerous antitrust lawsuits against GPOs and/or their dominant supplier partners. A 2002 Government Accountability Office pilot study found that hospitals often got lower prices on their own. As Sen. Herb Kohl (D-WI) and former Sen. Mike DeWine (R-OH), then ranking member and chairman, respectively, of the Senate panel, pointed out in a joint 2003 letter to then Secretary of Defense Donald Rumsfeld (DOD was then considering using GPOs to procure health supplies), "the savings figures that GPOs frequently use as benchmarks to demonstrate savings are based on a manufacturer's list price that hospitals rarely, if ever, pay."

A September 2010 study initiated by Sen. Charles Grassley (R-IA), then ranking member of the Senate Finance Committee, concluded that empirical data was "lacking to support claims of savings with group purchasing organizations." More recently, a study in the current issue of the Journal of Contemporary Health Law and Policy found that in 2010 hospitals were able to save an average of 15% compared with GPO contract prices in competitive "aftermarket" bidding for capital equipment. In contrast, the GPOs have presented no independent data to support their specious claims of cost savings---only "surveys" of hospital materials managers conducted by academics hired by the powerful GPO lobby. As history has shown time and again, cartels drive up prices, competition lowers them.

Accordingly, to end the drug shortage, Congress must restore integrity and free market competition to the healthcare supplies industry. And that can only be achieved by repealing the Medicare antikickback "safe harbor" exemption.

A recent GAO report notes a general dearth of enforcement actions by relevant federal agencies who have jurisdiction over GPOs, at least since 2004, but also notes that in an earlier 2010 report GAO was unable to "identify any published peer-reviewed studies that included an empirical analysis of pricing data that indicated whether or not GPO customers obtain lower prices from vendors."

Every few years, when the FDA's user fee agreements come up for reauthorization (and this year is no exception), the usual suspects line up in Congress to try and pass legislation that would allow for the importation of drugs from price controlled countries like Canada.

This is bad economics, bad public health policy, and bad for medical innovation.

Allowing the importation of price-controlled medicines into the U.S. market undercuts protections for intellectual property rights and dampens incentive for medical innovation. It also opens the U.S. prescription drug market to penetration by counterfeit drug manufacturers run by criminal (or potentially even terrorist) enterprises, since it is impossible to completely certify the provenance of drugs imported from even close trading partners in Europe or Canada.

But the foolishness of the approach is also underscored by an article in the New York Times on a related topic - the expiration of patent protection for the blockbuster drug Plavix.

Notes the Times:

For more than a decade, cardiologists treating patients who have had a heart attack have routinely scribbled one drug onto their prescription pads: clopidogrel bisulfate, better known as Plavix. But now, in a farewell that has been years in the making, the story of Plavix is coming to an end. The drug is set to lose its patent protection on Thursday. ...

Bristol-Myers is hardly the only company to face the loss of a best-selling drug: at least 19 are set to lose patent protection this year, which is expected to cost the pharmaceutical industry about $38.5 billion in lost sales, according to an analysis by Barclay's. About 80 percent of the prescriptions written in the United States are now filled with generic drugs.

Pause and consider that for a moment: 8 out of 10 prescriptions written in the U.S. are for cheap, highly effective generic medicines. The industry has been losing patent protection for many blockbusters in recent years, and will continue to lose billions of dollars in sales from patent expirations over the next several years.

(Cue the cheers from public and private insurers.)

But wait! Each of these drugs was once an expensive branded medicine, and the profits of those drugs paid for the next generation of marketed drugs. So without the branded medicines that preceded Plavix, there would be no cheap generic Plavix now.

There is no other health care good or service like prescription medicines in this respect: MRI machines don't suddenly plummet in price after 10 years. Newer, better machines come along, to be sure, but they are also more expensive. Doctors who graduated from medical school ten years ago aren't any cheaper than their colleagues who graduated last year.

Prescription drugs are unique in that after patents expire and prices fall to pennies on the dollar they will continue to be widely used for decades and continue to generate enormous health benefits for consumers.

But you cannot get the benefits of cheap generics without paying a premium price for branded medicines. The U.S. - which generally lacks price controls for prescription drugs - pays somewhat higher prices for new medicines, but also has much lower prices than almost every other developed nation for generics, because of fierce competition among generic manufacturers after a drug loses patent protection.

This is a win-win for American consumers, who benefit both from rapid innovation and a widening array of cheap generics.

But it also means that the U.S. underwrites the lion's share of global medical innovation, allowing our wealthy trading partners to "free ride" on our investment (just as Europe underinvests in defense spending because the U.S. provides Europe with a security guarantee).

No one has better illustrated the economics than my colleague Peter Huber, who wrote in Forbes several years ago that:

Almost all the cost of a drug is in the development and the complex hardware required to concoct the chemicals that become the medicine. These costs are fixed, and they are sunk. Like the jet's fuselage, you pay for them once, up front, regardless. Once a drug is in production, churning out one more little pill costs next to nothing. You can almost give it away to the desperately poor in sub-Saharan Africa. Provided, of course, that somewhere else [someone] pay billions.

Drug-buying collectives and cartels have an unconditionally negative impact on economic welfare. As they coalesce, they transform drug manufacturers into price-regulated utilities. Sure, you can go ahead and invest a billion to develop a new vaccine or AIDS drug. But just like your electric power company, you can sell your product only at a price acceptable to Canada's minister of health. Or maybe Kenya's. Yes, Merck or Pfizer has honestly earned the government-issue, fixed-term monopoly that we call a patent. But when it tries to cash in at the store, it meets a government-established buyers' cartel on the other side of the counter.

Patent a miracle drug, choreograph the pricing just right and you recover your sunk costs efficiently, earn a good profit and move on to your next miracle. You can survive the arrival of me-too generic competitors: They put an end to your sunk-cost recovery only after the patent expires. Collectivized buying, however, imposes generic pricing from the get-go. ...

When rich people form buying cartels to put a price squeeze on properly patented drugs, the few win in the short term and everyone loses down the line.

The U.S. already subsidizes prescription drug coverage for the elderly and poor, through Medicare and Medicaid. Wal-Mart and other large buyers offer dozens of generics drugs for $4 for a 30 day supply to everyone, including the uninsured. Pharmaceutical companies offer their own prescription drug assistance programs offering free or low cost medicines for those without insurance or who cannot afford their insurance co-pays.

All this is by way of saying that the near term policy justification for any legalized importation scheme is thin to non-existent, while the long term repercussions are dire. Expanding de facto generic pricing - whether through direct importation, government drug price "negotiations" for Medicare Part D, or through expanding Medicaid's mandatory discounts - is another powerful signal to drug companies and their investors that they're investing in the wrong business.

We may cheer when many of the drugs we use are cheap generics. We'll rue the day when they all are.

(For another great article by Peter Huber on drug pricing and innovation, see this.)

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.

The FDA announced yesterday that it had taken steps to mitigate shortages of two cancer drugs, Doxil and preservative-free methotrexate. Doxil, a drug used to treat ovarian and other cancers, has been in short supply for months, after manufacturing problems shut down the drugs' sole U.S. plant. The FDA will temporarily allow importation of Doxil from an Indian manufacturer, a move that is expected to effectively end the shortage.

For preservative-free methotrexate, a critical cancer drug for pediatric acute lymphoblastic leukemia (ALL) and bone cancer, the FDA has asked other pharmaceutical companies to step in to fill demand after a major supplier, Ben Venue, shut down a plant making the drug for "maintenance and requalification of equipment."

The FDA reports that it has prevented nearly 200 shortages in 2011 thanks to advance notice from manufacturers, but 280 drugs remain in short supply. Short term fixes are welcome. Long term fixes are harder to come by.

The U.S. market strongly encourages substitution of branded drugs by generics immediately after a drug loses patent protection. For very profitable drugs (like statins) generic companies will rush in to fill the vacuum, slashing prices and saving consumers and insurers billions in annual drug costs. For high demand, high profit generics (and branded drugs), shortages will be few and far between.

But for other medicines, like sterile injectable drugs, which have high manufacturing costs and narrow profit margins, fierce price competition may eventually drive all but one or two manufacturers from the market. And when there are only one or two suppliers, it creates the opportunity for drug shortages when unexpected manufacturing problems at a single plant can place thousands of lives in jeopardy.

One solution, offered by the FDA's Sandra Kweder in an interview yesterday, is for "a shift in the industry to assuring good manufacturing practices to prevent finding themselves in a critical juncture where they have no choice but to shut down."

This, however, puts all the blame in the wrong place. By all means, companies should comply with the current Good Manufacturing Practices required by the FDA, and find ways to share information to help prevent or alleviate the effect of drug shortages.

But perverse Medicare price controls, just-in-time inventory supply practices at hospitals, reverse auctions by Group Purchasing Organizations for filling generic drug contracts, tougher FDA manufacturing and inspection standards for domestic companies (which can raise costs), and increased global competition from low-cost suppliers in India and China has created something of a "race to the bottom" in the generic drug market.

In this environment, quality (but higher cost) manufacturers may (rationally) exit the market to focus on higher margin products. And the few low cost suppliers that remain for complex drugs like sterile injectables may not be able to ensure the integrity of their manufacturing and supply chain over time at a rock-bottom price.

In other words, if private and public purchasers insist on driving prices below a sustainable level, drug shortages may become an endemic feature of the U.S. generic drug marketplace - as they have over the last several years.

You can find good articles on the problem (and potential solutions) here, here, and here (by yours truly).

Funding constraints, hopefully addressed by the new generic drug user fee agreement, have limited the FDA's ability to conduct timely inspection of foreign plants, posing a potential safety risk for patients. It also creates an imbalanced playing field for U.S.-based companies that are inspected more frequently and adhere to higher, more expensive safety and quality standards. In this environment, quality American manufactuers can't compete on price.

Until China and other developing countries raise their manufacturing standards to match those of the U.S., a market-based solution that would supplement the FDA's efforts would be for industry to work with regulators to create a voluntary third-party certification system for manufacturing standards and supply chain integrity for contractors based in developing countries where regulatory standards don't meet those of the FDA or EMA. This approach would mimic independent non-profit organizations like the Joint Commission, which certifies hospital quality, for the global pharmaceutical manufacturing and supply chain. Something like this may already be in the works at Rx360.

Under a certification system, companies that submitted to regular third party inspections and other quality measures would receive a "seal of integrity" that they met or exceeded established regulatory standards.

Generic drug purchasers could still opt to buy from the lowest bidder, but they would do so at their own (and their patients') risk. Third party certification of supply chain integrity would help counteract the "race to the bottom" in generic drug pricing without intrusive government regulation by sending better market signals about manufacturers' commitment providing a dependable supply of the highest quality medicines - not just the cheapest.

At National Review Online's Critical Condition blog, I have a long post explaining why imposing price controls on Medicare Part D in the name of deficit reduction will lead to less innovation and fewer American jobs:

Cost cutting would come in the form of laying off workers (or reducing pay and benefits), sending more jobs and manufacturing facilities to low-cost countries abroad, or reducing investment in discovering new medicines. None of these responses should count as a winner for the U.S. economy. One recent study found that the president's proposal could reduce direct and indirect employment in the pharmaceutical industry by up to 238,000 jobs by 2021.

Reducing research-and-development spending might seem like a clear "winner" for the supercommittee, since fewer expensive new drugs would come on the market. The government's drug tab would decline rapidly (aided by the expiration of existing drug patents), but as the U.S. population aged and more people became afflicted by cancer, Alzheimer's, and other expensive chronic illnesses, we'd just spend more money on hospital care and physician care -- actually increasing overall health-care spending. (Economist Frank Lichtenberg estimates that for every $1 that Medicare spends on newer medicines, it saves about $6 in other health-care costs, mainly from reduced hospital costs.)

As they say, check out the whole thing.

Yesterday, the Senate voted 45-55 to defeat an appropriations amendment that would have permitted U.S. patients to purchase individual-use quantities of FDA-approved prescription drugs from Canadian pharmacies. According to The Hill, Sen. Barbara Milkuski (D-Md.), floor manager for the underlying appropriations legislation, based her argument against reimportation on safety concerns.

"You don't know that what you are taking has been made in Canada or approved from Canada or that that it comes from a real website or from a legitimate pharmacy," she argued. "We could be importing death."

Germany has embraced a new comparative effectiveness pricing scheme that allows companies to set drug prices at launch, but then requires them to submit additional evidence to support that price to the German Federal Joint Committee (G-BA). 

Within six months, the G-BA and the office for health technology assessment (IQWig) conduct a cost-benefit assessment to a comparative therapy that the office chooses.  If the new product doesn't outperform the "comparator" it will be "reference priced", means it will have the same priace as all comparable drugs in the therapeutic class. 

This is a bad idea, and it will hamstring patient access to new medicines in Germany - the birthplace of the global pharmaceutical industry.

The new pricing scheme forces companies to go through two separate processes, one for drug approval (to the EMA), and a second for market access, to the G-BA and IQWiG. And because it can take years for companies to develop comparative effectiveness data, it will delay patient access to new therapies.

It also raises a myriad of other questions: What's the right comparator drug? What happens if a new drug comes on the market just before a new product launches, but is then held to be the new "standard of care" that new products must compare themselves to?

Already two companies, Eli Lilly and Novartis, have pulled drugs from the German market rather than risk reference pricing to generic levels that would have been used as a benchmark for other national price control schemes.

Less innovation, and less patient access to new therapies. Hardly a recipe for improved health in Germany or any other country.

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The Medical Progress Today blog provides a forum for economists, scientists, and policy experts to explore the scientific, regulatory, and market frameworks that will best support 21st century medical innovation.  We will focus especially on the U.S. Food and Drug Administration, the agency responsible for overseeing the nearly half-trillion dollar drug and medical device markets in the United States.

The blog will range widely in terms of topics and POV.  But, at its heart, MPT is about harnassing the power of science, market incentives, and (prudent) regulation to create the kind of health care system that we all want - more effective, efficient, and affordable.

We live in a time of breathtaking advances in the capacity to treat--and cure--illness. The translation of the human genome and an explosion of information from new sciences like metabolomics and proteomics have given researchers powerful new tools for understanding, treating and (eventually) curing deadly diseases like cancer and Alzheimer's. The old medical paradigm treated illnesses symptomatically with one-size-fits all medicines; the new paradigm will analyze disease at its molecular roots and to develop personalized therapies that match a patient's own unique biochemistry.

The question is not whether personalized medicine will become a reality, but when. Innovation is currently struggling in the face of regulatory, reimbursement, and insurance frameworks built around public health assumptions that fit the middle of the last century, rather than the first decades of the 21st century.

Turning personalized medicine from an aspiration into a reality will require regulators, companies, and researchers to breakdown binary regulatory frameworks; develop collaborative approaches to rapidly validate new technological standards; and embrace clinical tools that allow patients and physicians to become full partners in the innovation process.

Through both this blog site and the original essays it will commission, MPT will provide a forum to explore the most current ideas--and emerging challenges--in the field of personalized medicine.

We hope that you will find MPT a vital and provocative resource for building a health care system ready to embrace the full potential of personalized medicine and sustain U.S. leadership in biomedical innovation.

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Rhetoric and Reality—The Obamacare Evaluation Project: Cost
by Paul Howard, Yevgeniy Feyman, March 2013

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