Kristoffer Tripplaar/Sipa USA via AP Images
You have probably been reading about the shortage of Adderall and other medications used to treat attention deficit/hyperactivity disorder (ADHD) and other neurological conditions. The artificial scarcity of these drugs is just one part of a much larger story. At the end of 2022, the FDA reported some 295 drugs in short supply, including cancer treatments, antibiotics, heart medications, and psychoactive medicines.
I find four distinct causes for these drug shortages, all of which reinforce each other. But the underlying cause is monopoly power tolerated by government.
At bottom, we have a story of markets run amok. Instead of producing innovation, consumer choice, and price competition as in economic textbooks, drug companies, drug wholesalers, and middlemen known as group purchasing organizations (GPOs) create price-gouging, monopoly profits, and scarcity.
This is all compounded by offshoring. In the 20th century, most of the raw materials that go into drugs, known as active pharmaceutical ingredients (APIs), were manufactured in the USA. To increase their profits, U.S. drugmakers increasingly went to China and India. The pandemic revealed these supply chain vulnerabilities.
It’s hard to resist the conclusion that this is an industry beyond repair. It would be far more cost-effective for government or government-sponsored nonprofits to research, develop, produce, and distribute drugs.
That may sound far-fetched, but as the Prospect has reported, the state of California has gone into the business of manufacturing and selling inexpensive generic insulin. The state is also considering manufacturing naloxone, which reverses the effects of opioid overdoses. And Washington state, looking at court decisions restricting medication abortions, has purchased a three-year supply of mifepristone. Government can distribute prescription drugs far more efficiently, reliably, and cheaply than private monopolies.
Here’s the larger story.
1. Adderall and Monopoly Wholesalers. Drugs that can be abused, such as opioids and medications for ADHD, are now often hard to get. Parents whose kids depend on these drugs are now frantic. Physicians who prescribe opiates as urgently needed painkillers often find them hard to obtain.
You might think that this scarcity occurred because government overreacted to the abuses of OxyContin and prescription stimulant medication that is also a street drug, like Adderall. But think again. The fact is that pharmacies that stock these drugs have trouble getting them because monopoly distributors overreacted and cut corners. Instead of spending the money to devise distribution systems to sort out legitimate drugstores from those allowing these drugs to be sold to excess, the big three producers just cut back supply across the board.
The monopoly wholesalers are McKesson, AmerisourceBergen, and Cardinal Health. They control 85 to 90 percent of the wholesale market. The best summary of this appalling saga was told by Matt Stoller in this explainer piece. As Stoller recounts the story, Cardinal was repeatedly caught distributing oxycodone pills to fronts for organized crime. After the crackdown, Cardinal and the others restricted supply of potentially abusive drugs with legitimate uses to pharmacies across the board. Why are these monopoly wholesalers tolerated at all?
2. Group Purchasing Organizations. A second source of widely abused monopoly power is GPOs. Ironically, GPOs were created by hospitals more than a century ago to use their bulk purchasing power to cut costs. But armed with an antitrust exemption created in 1996, GPOs have become laws unto themselves.
As David Dayen explained in this Prospect piece adapted from his 2020 book, Monopolized, four companies—Vizient, Premier, Healthtrust, and Intalere—control nearly all GPO purchasing, about $300 billion for 5,000 different health systems. About 98 percent of all hospitals use a GPO, and the top four account for 90 percent of the market.
If GPOs have become abusive and counterproductive, why use them? Because hospitals get kickbacks to give GPOs sole-source contracts. GPOs cut their own costs and maximize profits by keeping inventories lean. Because of this fragile system, the slightest disruption in production creates shortages. If a given GPO runs out of drugs or medical supplies, the hospital is unable to seek needed medical products elsewhere. It’s another case of concentration married to corruption.
3. Continued Dependence on Foreign Sources of Pharmaceutical Ingredients. In 2020, Americans suddenly became aware of a previously obscure concept: supply chains. The U.S. was suddenly short of the most basic medical supplies such as masks and hospital gowns. Upwards of 80 percent of active pharmaceutical ingredients, we learned, were made offshore, mostly in China.
Under Trump, the government launched a crash program under a division of the FDA called the Biomedical Advanced Research and Development Authority (BARDA). But most of BARDA’s efforts went to subsidize production of COVID vaccines, under Operation Warp Speed.
BARDA’s efforts to bring back some production of active pharmaceutical ingredients were set back when its director, a respected career virologist named Dr. Rick Bright, was fired after raising objections to President Trump’s promotion of hydroxychloroquine and other problems of corruption at BARDA. Bright later settled with the government for wrongful dismissal.
More recently, BARDA has worked with both startups and established companies to increase production of APIs in the U.S., including Eli Lilly. But this activity is less profitable than the quest for new blockbuster drugs, and the percentage of APIs sourced offshore has not changed much.
4. Generics Are Not Profitable to Manufacture. Another underlying cause of drug shortages is that in a concentrated, for-profit system accustomed to very high rates of return, generic drugs are low-profit items. For drugs used in hospitals, which are particularly low-margin, without a contract from one of the big four GPOs, there’s no way to gain enough market share to justify production. Therefore few companies manufacture a wide array of these generic drugs, making them prone to shortages.
For other drugs, the giant members of PhRMA, the industry trade group, have compounded the problem by either buying up makers of generics or driving them out of business, as well as creating very expensive “new” drugs, as in the case of insulin, that are actually close equivalents of generics that then become difficult to obtain.
A comprehensive staff report by the Senate Committee on Homeland Security and Governmental Affairs released last month, titled “Short Supply,” found that drug shortages from these several sources “are increasing, lasting longer, and impacting patient care.” The report found, “Although some generic drugs appear to have multiple and diverse drug suppliers, they in fact may rely on the same API source or manufacturer. As a result, the universe of actual suppliers for a particular drug may be much smaller than it appears, increasing the risk of shortage if that API source or manufacturer withdraws supply.”
Underlying all of this is another form of monopoly power: the excessively long patent terms granted to giant pharmaceutical companies that produce a different form of scarcity, namely rationing by exorbitant pricing. Far too much of the innovation that the big drug companies brag about is actually creation of me-too drugs that allow for longer patent protection and higher pricing.
Given that so much of the biomedical “research” that produces new drugs is underwritten by government agencies, and the fact that more than half of all drugs are purchased directly or indirectly by Medicare, Medicaid, or the VA, it would be far more cost-effective, as economist Dean Baker has long argued, to put all drugs in the public domain and make them all generics.
If that were done, it would also make sense to emulate California, and have government work with nonprofits to produce and distribute drugs as well. The combination of monopoly abuses by private wholesalers and purchasing organizations, coupled with abuses by drug companies granted patent monopolies, makes an eloquent case for socializing the entire pharmaceutical sector.
