Economic Analysis of the Causes of Drug Shortages. Summary

10/28/2011

The prescription drug and vaccine markets are characterized by sporadic shortages of individual drugs and occasional periods during which several in a class are in shortage.  Currently, class-wide shortages are affecting the sterile injectables segment of the industry, particularly sterile injectable oncology products.  While the existence of shortages is an unusual feature of this market, it is important to note that most drugs do not experience shortages.  Even within the sterile injectable oncology segment of the market, where shortages today are most severe, only about 10% of the Medicare Part B volume of injectable oncology services in 2008 consisted of drugs that experienced any shortage at some point over the subsequent 4 years.

Sporadic and class-wide shortages of sterile injectable drugs occur because neither the quantity of these products needed by consumers nor the quantity of these products produced by manufacturers is very responsive to short term changes in price.  This means that product disruptions, however caused, translate into shortages rather than simply higher prices.

The current class-wide shortages in the industry appears to be a consequence of a substantial expansion in the scope and volume of products produced by the industry that has occurred over a short period of time, without a corresponding expansion in manufacturing capacity.  While several manufacturers are currently expanding capacity, most of this capacity will not become available for several years.  The expansion in product scope and quantity, in turn, stems from both an increase in the overall volume of chemotherapy drugs used and an unusually high rate of patent expirations in this sector that began in 2008 and has continued through 2010.  While the generic industry is highly competitive in the long run, the supply of products is constrained in the short-run, because it takes several years for new firms to enter or for existing firms to add capacity.  In the short run, existing firms make strategic decisions about how to deploy production capacity among products, based on their conjectures about what choices their competitors will make.

The rapid increase in volume and scope has led to a high rate of capacity utilization in the industry.  At these high levels of utilization, it may be difficult to maintain manufacturing quality levels and any disruptions to supply — through, for example, quality problems or delays in receiving an active pharmaceutical ingredient (API) — can lead to cascading and persistent shortages.

The current shortages will likely be resolved when new supply sources come on line as the manufacturing industry increases its capacity.  In addition to addressing the current situation, responses to the problem of shortages should focus on increasing the extent of supply responsiveness in the market.

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