Millions of sick people in the United States and around the world are suffering from shortages and skyrocketing prices of generic prescription drugs, mostly generic injectables administered in hospitals and outpatient clinics. This crisis is unprecedented in the annals of economics, as well as healthcare.
In a fair, open, competitive marketplace, shortages affecting an entire industry over an extended period of time---years, in this case--- simply do not happen. In the post-World War II period, the U. S. has experienced artificial shortages resulting from external shocks such as the Arab oil embargo of 1974, and from government price controls on natural gas in the mid to late 1970s. Extreme weather, including Hurricanes Katrina and Sandy, have caused temporary, local shortages of bottled water, gasoline, milk and other commodities. During the bone-chilling winter of 2014, stores occasionally ran out of winter boots and thermal underwear. Some cities ran low on road salt. In the Midwest, shortages of propane were widespread, mainly because of logistics problems. [For a "short history of shortages," watch the GPO slide presentation].
But in the modern era, there have never been massive, prolonged shortages of generic prescription drugs. In effect, this marketplace is broken. Sadly, this worldwide crisis was "Made in the U. S. A," which for decades had been the global leader in developing and manufacturing lifesaving medications.
How could this happen in the United States, which is supposed to be a market economy? As is often the case, the crisis originated with bad government policy. At the behest of hospital industry lobbyists, Congress in 1987 enacted the Medicare anti-kickback safe harbor provision, exempting hospital group purchasing organizations from criminal prosecution for taking kickbacks from suppliers. Since 1910, GPOs had saved money for hospitals by buying in bulk. The implementation of the safe harbor rules in 1991 turned this proven business model on its ear. It created a set of perverse incentives in which GPOs sought to increase fee (a.k.a kickback) revenue by peddling exclusivity (market share) to suppliers instead of saving money for hospitals. Because GPO fees are calculated as a percentage of sales, this arrangement has also driven up the prices of everything from cotton balls to needles.
These dubious practices have created de facto monopolies. Before the GPOs gained a stranglehold on the generic injectable drug industry, there was healthy competition and ample redundancy. If one company encountered manufacturing problems, others could make up the shortfall. Shortages were rare. But in the last several years, the GPOs have reduced the number of U. S. makers of any given drug to one or two, or none at all. For example, virtually all of our propofol, the anesthetic of choice for many surgical procedures, is now imported from Germany. Incredibly, the U. S. is now forced to import saline solution (sterilized salt water) from plants in Spain and Norway.
In turn, U. S. drug shortages have had a global domino effect. Many, if not most, of the drugs in short supply in the U. S. are now scarce in other countries. This has occurred for several reasons. First, global manufacturing capacity cannot be ramped up overnight to meet demand. Second, U. S. drug makers are no longer able to meet domestic requirements, much less export their products, as most had been doing. And third, U. S. is now importing drugs to try to meet domestic needs---thereby depriving patients elsewhere of these medications. For evidence of this, see the "international media" section of the www.canadadrugshortages.com web site. Click HERE. And for a primer on this issue, read our New York Times op-ed of September 3, 2013, "How a Cabal Keeps Generics Scarce." Click HERE.
For more detail, read these two white papers: 1) "Connecting the Dots: How Anticompetitive Contracting Practices, Kickbacks, and Self-dealing by Hospital Group Purchasing Organizations (GPOs) Caused the U. S. Drug Shortage" (Patricia Earl and Phillip L. Zweig, Jan. 2012). Click HERE; and 2) "Healthcare Intermediaries: Competition and Healthcare Policy at Loggerheads?" (Diana L. Moss, American Antitrust Institute, May 2012). Click HERE.
The next obvious question is how could the U. S. government, including Congress, allow this to continue? The answer: money and politics. Since the passage of the safe harbor more than a quarter century ago, a vast network of special interests---hospital and GPO executives, suppliers that enjoy monopoly status, and others who feed at this trough--- has evolved to maintain the status quo through campaign contributions to members of Congress.
Congress may have believed it was addressing the problem in 2012 when it passed the Food and Drug Administration Safety and Innovation Act, which required drug manufacturers to inform the FDA when they anticipated shortages. But because the legislation addressed symptoms, not underlying causes, it has had little noticeable impact. More than two years later, there is still no end in sight to drug shortages.
Here's a diagram explaining drug shortages:
HOW GPO CARTELS CAUSED THE GLOBAL DRUG SHORTAGE CRISIS
The GPO industry has responded to accusations that it caused the drug shortages by saying that it's not in their self-interest to cause drug shortages, because GPOs don't make money if there's no product. This is a straw man argument, because no one has accused them of intentionally causing a global drug shortage, just as no informed observer of the 2008 financial crisis has accused Wall Street firms of intentionally triggering the global meltdown. Indeed, the drug shortages, like the financial crisis, were the inevitable result of perverse business models that rewarded self-destructive behavior.
The only way generic drugs will be readily available again is by restoring market competition and integrity to the hospital supply chain, and the only way that can be accomplished is by repealing the Medicare anti-kickback safe harbor, which gave rise to the crisis in the first place. Repeal will demonstrate to beleaguered generic drug makers that they can once again turn a reasonable profit by manufacturing inexpensive generic injectable medications.
The GPO industry and its allies have accused PADS and other reformers of trying to eliminate GPOs. Nothing could be further from the truth. All we want is to return to the old co-op business model, which saved money for its member hospitals for eighty years. In those good old days, there were no chronic artificial drug shortages.
PLEASE join with us to restore this vital industry to health by urging your members of Congress to repeal the Medicare anti-kickback safe harbor.