Drug shortages

Today's New York Times has an article noting the shortage of methotrexate in the US, a drug used to treat a form of cancer known as acute lymphoblastic leukemia. The shortage is so severe that the newspaper says that "hospitals across the country may exhaust their stores within the next two weeks, leaving hundreds and perhaps thousands of children at risk of dying from a largely curable disease" according to federal officials and cancer doctors.

Drug shortages? In the United States? What on earth is going on? Here is the explanation offered up:

Ben Venue Laboratories was one of the nation’s largest suppliers of injectable preservative-free methotrexate, but the company voluntarily suspended operations at its plant in Bedford, Ohio, in November because of “significant manufacturing and quality concerns,” the company announced. 

Since then, supplies of methotrexate have gradually dwindled to the point where oncologists now say they are fearful that shortfalls may occur at many hospitals within two weeks. 

...There are four other manufacturers of methotrexate in the United States, and they are trying to increase production, [said Ms. Valerie Jensen, associate director of the Food and Drug Administration’s drug shortages program]. The F.D.A. is also seeking a foreign supplier to provide emergency imports until the approved domestic ones can meet demand, she said. 

“We’re working on many fronts, and will keep this a priority,” Ms. Jensen said.

Likely reactions from the average reader:

• The private sector is either criminally incompetent or evil. How can five manufacturers fail to produce a drug when there are literally children's lives on the line?

• Thank goodness for the FDA, doing what it can to alleviate the shortage by reaching out to foreign producers. 

But nothing about this makes any sense. Methotrexate is not a new drug, first coming into use during the 1950s. Given how long it has been around and that it no longer faces patent restrictions, production should be straightforward. Why has it suddenly become more difficult? Even more puzzling is the fact that the FDA is apparently trying to convince foreign producers to sell their product here in the US. Think about that for a second: how often does the government have to induce foreigners to export their product to the US to make money? 

But here's the kicker:

So far this year, at least 180 drugs that are crucial for treating childhood leukemia, breast and colon cancer, infections and other diseases have been declared in short supply — a record number. Prices for some have risen as much as eightyfold. President Obama issued an executive order in October to help ease the problems.

Again, the reader is left with the impression that drug manufacturers are hugely incompetent, failing to produce the needed amount of drugs even in the face of rising prices. Thank goodness President Obama is on the case, issuing executive orders!

But the existence of any kind of shortage in a market-driven economy should make one's nose twinkle. One drug shortage might be some kind of freakish anomaly, but 180 crucial drug shortages? The usual suspect in these kind of situations is the dead hand of government, and according to bioethicist Ezekiel Emanuel, writing in last August's New York Times, that's exactly the case:

Only about 10 percent of the shortages can be attributed to a lack of raw materials and essential ingredients to manufacture the drugs. Most shortages appear instead to be the consequence of corporate decisions to cease production, or interruptions in production caused by money or quality problems, which manufacturers do not appear to be in a rush to fix.

If the laws of supply and demand were working properly, a drug shortage would cause a price rise that would induce other manufacturers to fill the gap. But such laws do not really apply to cancer drugs. 

The underlying reason for this is that cancer patients do not buy chemotherapy drugs from their local pharmacies the way they buy asthma inhalers or insulin. Instead, it is their oncologists who buy the drugs, administer them and then bill Medicare and insurance companies for the costs. 

Historically, this “buy and bill” system was quite lucrative; drug companies charged Medicare and insurance companies inflated, essentially made-up “average wholesale prices.” The Medicare Prescription Drug, Improvement and Modernization Act of 2003, signed by President George W. Bush, put an end to this arrangement. It required Medicare to pay the physicians who prescribed the drugs based on a drug’s actual average selling price, plus 6 percent for handling. And indirectly — because of the time it takes drug companies to compile actual sales data and the government to revise the average selling price — it restricted the price from increasing by more than 6 percent every six months. 

The act had an unintended consequence. In the first two or three years after a cancer drug goes generic, its price can drop by as much as 90 percent as manufacturers compete for market share. But if a shortage develops, the drug’s price should be able to increase again to attract more manufacturers. Because the 2003 act effectively limits drug price increases, it prevents this from happening. The low profit margins mean that manufacturers face a hard choice: lose money producing a lifesaving drug or switch limited production capacity to a more lucrative drug. 

The result is clear: in 2004 there were 58 new drug shortages, but by 2010 the number had steadily increased to 211. (These numbers include noncancer drugs as well.)  

...You don’t have to be a cynical capitalist to see that the long-term solution is to make the production of generic cancer drugs more profitable. Most of Europe, where brand-name drugs are cheaper than in the United States, while generics are slightly more expensive, has no shortage of these cancer drugs.  

...A more radical approach would be to take Medicare out of the generic cancer drug business entirely. Once a drug becomes generic, Medicare should stop paying, and it should be covered by a private pharmacy plan. That way prices can better reflect the market, and market incentives can work to prevent shortages.

In other words, government has distorted the market and removed incentives for the production of life-saving drugs. And the New York Times' readership, unless they somehow recall Emanuel's opinion piece, are left none the wiser.

Update: Well, it's an Instalanche -- thanks Professor Reynolds! Second time that's happened around these parts.

Update: The Heritage Foundation also explains how Medicare has contributed to the drug shortage.