Economic Analysis of the Causes of Drug Shortages. Demand


The potential for sterile injectable oncology drugs to treat cancer was first discovered in the 1940s when scientists discovered that some drugs when injected would shrink tumors.  Today, sterile injectable oncology drugs are typically administered intravenously and act by killing cells that multiply rapidly, which is characteristic of most cancer cells.  These drugs are highly effective against some cancers, like testicular, lymphoma, and cervical cancers and less effective against others, like prostate and pancreatic cancers.

In most cases, sterile injectable oncology drugs are not purchased directly by consumers or reimbursed directly by insurance.  Rather, these drugs are purchased by health care providers (generally hospitals and, in some cases, physicians).  Providers are paid for the delivery of the service that includes the drug; they are also directly paid by public and private insurers for the cost of the drugs.  Under the Medicare program, reimbursement for these drugs is under Medicare Part B.

Most hospitals do not purchase sterile injectable oncology drugs directly.  Rather, these drugs are purchased through group purchasing organizations (GPOs), which negotiate prices with generic manufacturers on behalf of their clients.  GPOs typically do not take physical possession of the drugs.  Instead, a wholesaler takes possession of the drug at the wholesale acquisition price and then sells the drugs to the GPO clients at the GPO negotiated price.  Once the transaction has taken place, the manufacturer will issue the wholesaler a “chargeback” if the wholesale acquisition price is higher than the GPO negotiated price.

The GPO market is relatively concentrated with five GPOs commanding 85-90 percent of the market[6]. This concentration figure may be misleading, however.  While GPOs negotiate the lowest prices they can with manufacturers, based on anticipated volume of sales, their members are not compelled to purchase drugs from a contracted manufacturer, so the GPO contracts do not necessarily contain minimum quantity guarantees.  Some respondents reported that hospitals not infrequently source their drugs outside the GPO structure.

GPO contracts are generally in place for years and typically include price adjustment clauses.  If a GPO is offered a lower price by a competing manufacturer, the original contracted manufacturer has a right of first refusal to match the new price.  GPO contracts also typically include “failure to supply” clauses.  These clauses generally require the manufacturer to reimburse the GPO for the price difference between the negotiated price and purchased price.  These failure to supply clauses, however, provide no reimbursement if there are no alternative sources for the drug, do not reimburse for resources expended looking for other sources, and are of limited duration[7].  Respondents reported that the duration of compensation required under these clauses has diminished over time.  Failure to supply clauses are generally limited to 60 days and are becoming narrower over time — on average, GPOs recover just 10% of losses due to failure to supply[8].  Section 615 of the Uniform Commercial Code suggests that failure to provide contracted products is not a breach of contract if the product is not available in the market.  The erosion of failure to supply clauses in GPO contracts is consistent with the evidence from the FDA and University of Utah data that, until the recent crisis in injectable products, the level of drug shortages was relatively stable and low.

Most sterile injectable drugs are purchased through GPOs and obtained through authorized wholesalers.  There is, however, a secondary or “gray” market, that purchases drugs from end users (infusion companies, home care companies, hospitals) and sells them to other end users.  When drugs are in shortage, there are frequently reports of gray market or secondary distributors offering limited quantities of the drugs for sale to health care providers at large markups.  Health care providers are reluctant to purchase from these distributors due to the large price markups and because of concerns about the integrity of the supply chain, including the potential for poor handling practices and counterfeits.  These gray market distributions appear to be a result of a drug shortage, not a cause, but the potential for hoarding and strategic behavior in the gray market is a concern with respect to future policy actions.

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