Of Consuming Interest - 11/1/11

Jim Turner’s guest is Gary Conko, Senior Fellow in Drug studies for The Competitive Enterprise Institute in Washington, DC.  They discuss President Obama’s Executive Order on Nov. 1, 2001 to deal with shortages of some prescription drugs.

There are shortages of about 250 drugs this year, up sharply from an annual average of just a few dozen prior to 2005. Most of these are low-cost generic drugs for which profit margins are very low. But even among those, there have been severe shortages in cancer medicines, potent antibiotics, and anesthesia drugs that are hugely important in medical treatment. When doctors and hospitals can’t get access to these products, they have to substitute more expensive brand drugs or less effective alternatives.  President Obama issued an executive order on Monday that is intended to address some of the causes of drug shortages. The executive order may have some minor positive effect. But addressing the root of the problem is not something the President can do on his own. Instead, it will require action by Congress.

Part of the problem stems from the Food and Drug Administration becoming increasingly aggressive in shutting down manufacturing facilities for minor legal violations that don’t necessarily raise safety concerns for patients. And, when manufacturing facilities are closed, other rules make it difficult or impractical for competitors to increase their production to take up the slack.

A 1992 law requires manufacturers to sell drugs to certain hospitals and clinics, as well as to state and federal health programs for below market prices. That resulted in driving a number of producers out of the market, to the point that for many essential drugs, there may be just two or three manufacturers. And a provision of the 2003 Medicare Prescription Drug Act forbids generics manufacturers from raising the prices charged to Medicare by more than six percent every six months. So, when the shut down of one manufacturing facility results in a shortage, there is little incentive for other manufacturers to ramp up production. Even if competing manufacturers wanted to increase production, they must get FDA approval to do so.

The executive order will shift some FDA resources into clearing these approvals in a more timely fashion, and shift some FDA resources into clearing facility inspections to get closed facilities back on line faster once quality control issues are corrected. Those things will help at the margins. The order also request that manufacturers give the FDA prior notice any time they intend to cease manufacturing an important drug, or when they anticipate production shortfalls due to a shortage in raw materials. That will at least help the FDA and physicians to better plan for finding alternatives ahead of drug shortages.  But the President cannot address on his own the underlying market problems associated with the price controls. That will require congressional action.

The final element of the executive order is the initiation of a study of so-called price gouging associated with drugs that are in short supply. Some of these drugs have seen significant price spikes associated with the shortages, as purchasers are bidding up the prices in order to secure access. However, when shortages occur, rising prices send a signal to physicians to conserve use of the drugs in question, and to shift to alternatives where doing so makes sense. If the government were to prevent so-called price gouging, the artificially constrained prices would send a signal to physicians that conservation isn’t necessary, thereby exacerbating the problem.