Jaap Arriens/NurPhoto via AP
Last week, the American Society of Health-System Pharmacists (ASHP) announced that the United States has the largest number of medicines in short supply in the history of its survey, which dates back to 2001. As of the end of March, 323 drugs were in shortage, disrupting treatment for patients and in many cases risking prolonged injury or death.
The news was accompanied by the usual parade of ignorance. “Health care is the US’s most highly regulated, socialist industry and shortages are endemic under socialism so the pattern fits,” mused libertarian Alex Tabarrok of George Mason University about a system where every single pharmaceutical manufacturer (save for a nascent effort in California) is private and for-profit, and pretty much every provider too (unless you believe the convenient fiction that “nonprofit” hospitals are not adopting that status as a tax dodge).
Tabarrok pivoted to an elaborate story about the Drug Enforcement Administration and Adderall. It’s true that some drugs on the controlled substances list, which include attention deficit hyperactivity disorder (ADHD) drugs and opioids, experience shortages because of tight limits on production. (I can’t imagine why.) It’s simply not true that this has much to do with our drug shortage problem. ASHP states explicitly that controlled substances account for just 12 percent of all active shortages, and two-thirds of pharmacists surveyed by ASHP say that ADHD shortages have minimal or no impact.
The vast majority of drug shortages are actually in generics; about half of them are sterile injectable drugs. In other words, we’re talking about older, routine medications that hospitals use, not what you pick up at your local pharmacy. They’re cheap and relatively easy to produce. Companies just haven’t found it worth the effort to do so.
We know the reason why, though you will almost never see it mentioned in drive-by stories about this topic. It has to do with middlemen who have made manufacturing generic injectable drugs unprofitable, magnifying the risk of shortages by artificially reducing supply. The problem, in other words, is the exact opposite of the libertarian fable. The problem is America’s kleptocratic version of laissez-faire capitalism.
I wrote about this years ago for my book Monopolized, focusing on a shortage of sodium chloride IVs, literally salt and water in a bag. Half of the nation’s IV supply is made by one company with two facilities in Puerto Rico, and at the time, everyone attributed the shortage to Hurricane Maria knocking out power on the island in 2017. But the shortage list included IV bags four years before the hurricane, and if you go to ASHP’s list today, you will still find sodium chloride IV bags on there, along with many other simple injectables, like dextrose, which is sugar and water. Decades-old chemotherapy drugs and antibiotics are also often in short supply.
Hospitals buy drugs through middlemen known as group purchasing organizations, or GPOs. The idea sounds intuitive: If hospitals band together to purchase supplies, they could earn volume discounts and save money that could be put into patient care. But there’s no real data on cost savings, and a lot of evidence that the market has devolved into monopoly dynamics.
Drug shortages today are a function of a brittle market structure. Nearly half of all generic drugs have a single manufacturer.
Three major GPOs (Vizient, Premier, and HealthTrust) control around $250 billion in health purchasing, roughly 90 percent of the entire market. This market consolidated further in 2021 when Vizient bought Intalere. Many of the remaining competitor GPOs use one of the Big Three as a purchasing partner.
The Big Three GPOs use locked-in, sole-source contracts that require hospitals to purchase virtually the same amount from suppliers year after year. There is no alternative supplier for a hospital; they have to hope their GPO-selected supplier comes through. The GPOs perpetuate this because they skim an ever-increasing percentage of the product cost from suppliers, as a fee for inclusion on the guaranteed sale list. These fees are supposed to be capped, but “marketing” and other fees that are exempt from the cap are often layered on top. The hospitals also make out, with administrators paid what are known as “share-backs.” A safe harbor from anti-kickback laws passed in the 1980s preserves the scheme.
Though GPOs claim their monopolistic system drives down what hospitals pay for drugs and supplies, studies have shown a competitive market would reduce costs further. And the impact on resiliency—on the very availability of drugs—is obvious. If generic manufacturers can’t win one of the sole-source contracts from the Big Three for their low-margin products, they have no way to get into hospitals. This has caused rampant consolidation on the manufacturing side, as volume contracts were the only way to stay in business. Nearly half of all generic drugs have a single manufacturer. And concentrated markets are fragile, prone to break at the slightest disruption. When you’re dealing with sterile injectable drugs, the presence of a single strand of human hair can cause that disruption.
In other words, drug shortages today are a function of a brittle market structure. If you read contemporary stories closely enough, you can figure this out. Erin Fox, a University of Utah Health official who is always quoted in these stories, calls it a “race to the bottom,” with shortcuts taken on quality. Yes, that’s because GPOs have denied a functioning market. Bad actors will be magnified because any quality problem creates an instant shortage. And funds that manufacturers could use to invest in facility upgrades and more capacity are instead skimmed by the GPOs. (Fox, incidentally, discloses in slide presentations that her data comes from Vizient, the nation’s largest GPO.)
One of the only reports to tell the truth about drug shortages came from 60 Minutes. “We are systematically shutting down all of our U.S. manufacturing because we do not pay enough money for the drugs to the manufacturers, and not enough money is paid because of the middlemen,” said one former generic drug executive.
The Biden administration is aware of this situation, and has taken some tentative early steps. A white paper on drug shortages released last month cites the impact of concentrated middlemen and the need for diversification of supply. “Prices for generic drugs … are driven to levels so low that they create insufficient incentives for redundancy or resilience-oriented manufacturing, distribution, and purchasing,” the report states.
Outside of reporting requirements, the Centers for Medicare & Medicaid Services (CMS) is exploring a separate Medicare payment to hospitals that establish a six-month buffer stock of critical medicines to draw from in times of short supply. The president issued a memorandum last year to use the Defense Production Act for essential medicines. And the Administration for Strategic Preparedness and Response has invested $500 million toward domestic manufacturing of active pharmaceutical ingredients to bolster supply.
None of this really deals with the market structure that creates shortages, however. On this front, in February the Federal Trade Commission (FTC) put out a request for public comment on GPOs, to better understand the supply chain for generic hospital drugs. They are specifically looking at whether the industry’s safe harbor from anti-kickback laws is impacting “market concentration and contracting practices by GPOs.” The public had 60 days to comment, and over 5,500 comments were published.
This isn’t really a new phenomenon. Recently deceased former Sen. Herb Kohl (D-WI) was poking around GPOs as far back as the 2000s. There’s even an entire other set of middlemen, known as pharmacy benefit managers (PBMs), that claim to provide the same discount purchasing benefits for insurance plans, and use similar tactics to skim off the top and make prescription drugs more expensive. (Watching GPOs try to differentiate themselves from PBMs is a comical exercise.)
The bottom line is that most hospital pharmacists say they would be willing to spend a little more to alleviate drug shortages. But the pay-to-play schemes that dominate hospital purchasing disable them from doing so. This is a known problem that we have decided not to solve for a few decades, because of the influence of big-money middlemen. People die as collateral damage. Every day we don’t fix this is a policy choice.
