Past public ire over high drug prices has recently taken a back seat to a more insidious problem – no drugs at any price.
Patients and their providers increasingly face limited or nonexistent supplies of drugs, many of which treat essential conditions. The American Society of Health System Pharmacists now lists over 300 active shortages, primarily of decades-old generic drugs.
The number of drugs in short supply has increased in recent years, and the average shortage is lasting longer.
What’s going on?
I believe the drug shortage problem illustrates a major shortcoming of capitalism. While costly brand-name drugs often yield high profits to manufacturers, there’s relatively little money to be made in supplying the market with low-cost generics.
The problem boils down to the nature of the pharmaceutical industry and how differently the markets for brand and generic drugs operate. Perhaps the clearest indication of this is the fact that prices of brand drugs in the U.S. are among the highest in the developed world, while generic drug prices are among the lowest.
When a drugmaker develops a new pill, cream or solution, the government grants the company an exclusive patent for up to 20 years, although most patents are filed before clinical testing, and thus the effective patent life is closer to eight to 12 years. Nonetheless, patents allow the drugmakers to cover the cost of research and development and earn a profit without the threat of competition.
But once the patent expires, the drug becomes generic and any company is allowed to manufacture it. Since generic manufacturers are essentially producing the same product, profits are determined by their ability to make the drug at the lowest marginal cost. This often results in low profit margins and can lead to cost-cutting measures that can compromise quality and threaten supply.
One of the consequences of generics’ meager margins is that drug companies outsource production to lower-cost countries.
As of mid-2019, 72% of the manufacturing facilities making active ingredients for drugs sold in the U.S. were located overseas.
Outsourcing production raises a slew of issues that can hurt the supply. Foreign factories are more difficult for the U.S. Food and Drug Administration to inspect and tend to have more production problems.
The COVID-19 pandemic underscored the country’s reliance on foreign suppliers – and the risks this poses to U.S. consumers.
India is the world’s largest producer of generic drugs but imports 70% of its raw materials from China. About one-third of factories in China shut down during the pandemic. To ensure domestic supplies, the Indian government restricted the export of medications. This led to shortages.
A company that sells a new, expensive, branded drug has a strong profit motive to keep quality and production high. That’s often not the case for generic drug manufacturers.
And while there may be multiple companies selling the same generic drug in the U.S., there may be only a single manufacturer supplying the basic ingredients. Thus, any hiccup in production or shutdown due to quality issues can affect the entire market.
It is hard to quantify the impact of drug shortages on population health. However, a recent survey of U.S. hospitals, pharmacists and other health care providers found that drug shortages led to increased medication errors, delayed administration of lifesaving therapies, inferior outcomes and patient deaths.
One option is to simply find ways to produce more generic drugs in the U.S.
California passed a law in 2020 to do just that by allowing the state to contract with domestic manufacturers to produce its own generic prescription drugs. In March, California selected a Utah company to begin producing low-cost insulin for California patients.
Whether this approach is feasible on a broader scale is uncertain, but it’s a good first attempt to repatriate America’s drug supply.
Geoffrey Joyce is director of health policy at the University of Southern California Schaeffer Center. Distributed by The Associated Press.
