On Monday, October 31, 2011, President Obama signed an executive order to address the increasingly severe shortages of essential chemotherapy drugs, granting three extensions of power to the FDA:

Broaden reporting power of potential shortages of certain prescription drugs. Expedite reviews of applications to begin or alter production of these drugs. Provide a greater amount of information to the Justice Department about possible instances of collusion or price gouging.

This executive order marks the fifth in a series of steps taken by the Obama administration to show voters they are serious about addressing the country’s problems. To clarify, what is meant by “drug shortage” is that there are not enough available generic drugs on the market. This, combined with prohibitively expensive brand-name alternatives, forces patients to delay treatment or use more expensive, and occasionally less effective, alternative drugs. Larger hospitals have responded to these “shortages” by purchasing their chemotherapy supplies from “gray markets”: unofficial alternative drug markets outside the usual distribution networks. These drugs are obtained and sold by vendors and can have markups of up to 3000%.

Of all the questions this executive order raises, the most important one should be “why is there a drug shortage?” A recent article in The New England Journal of Medicine states the root of the drug shortages is economic and highlights two main causes:

Manufacturing of affordable generics is no longer profitable in the United States. [1] Oncologists have less financial incentive to administer generics over brand-name drugs, resulting in a reduced demand. [2]

This article does not do a thorough job of explaining what makes the manufacturing of generics so unprofitable and implies that it is largely due to their reduced demand. An article in The Wall Street Journal explains the unprofitability of generic medications as an unintended consequence of the 2003 prescription drug bill, The Medicare Modernization Act, passed by the Bush administration. This bill was intended to reduce Medicare reimbursement costs by placing a 6% cap on markups on the sterile injectable cancer drugs and by introducing the Average Sales Price (ASP) reimbursement methodology. [3] The ASP methodology states that when a hospital buys drugs and distributes them to patients they are reimbursed by Medicare at the ASP. The flaw with the ASP methodology is that when a supplier makes a bulk discount deal to one purchaser, they must also sell the same quantity of that drug to other purchasers above the ASP, (guaranteeing that these purchasers will lose money), or the ASP will drop. As suppliers find it almost impossible to sell drugs at above ASP, the ASP has steadily dropped, and in some extreme cases the ASP has been reduced to less than the cost of administration. For example, a vial of carboplatin has a reimbursement value of $3.50 but it costs more than $3.50 to administer it, forcing prescribing physicians to distribute it at a loss. [4]

The Wall Street Journal’s explanation of the inherent unprofitability of generic cancer drugs is a direct segway into explaining why oncologists may opt for the more expensive brand-name options. Unlike other drugs, chemotherapeutics are bought and sold in the physician’s office. Before 2003, Medicare would reimburse 95% of the average wholesale price, an unregulated price set by manufacturers, whereas oncologists paid 66% to 88% of that price, resulting in roughly $1.6 billion in Medicare overpayments annually. [5] While this may sound excessive, it should be noted that more than half the revenue of an oncology office might come from their chemotherapy sales. The Medicare Modernization Act’s 6% cap, while not unreasonable in principle, introduces several problems when coupled with the inherent unprofitability of generic drugs. Take for example the drug pair of Abraxane and its generic paclitaxel. Abraxane sells for $5,824 (6% of which is $349.44) and paclitaxel for $312 (6% is $18.72). [6] The $18.72 an oncologist would receive would not cover their administrative fees and would force them to operate at a loss, often resulting in their selection of the more expensive alternative, reducing the demand for the generic, and further driving its cost down in a compounding cycle.

The remaining question about the drug shortage is “does the President’s executive order address the roots of the shortage problem?” Presented with these facts, I have to say an emphatic “no.” While the early warning system and expedited application reviews may theoretically help new generics obtain approval faster, it seems more likely that they will help new, slightly less expensive brand-name drugs enter the market. The extended reporting power to the Justice Department may indeed eliminate or severely cripple the chemotherapy gray market, but this would do little more than place further regulations that hide the price signals that govern the supply and demand dynamics of the market.

Mandy L. Gatesman, Pharm.D., and Thomas J. Smith, M.D. “The Shortage of Essential Chemotherapy Drugs in the United States.” N Engl J Med 2011; 365:1653-1655 November 3, 2011 <http://www.nejm.org/doi/full/10.1056/NEJMp1109772#t=article> Id. “The Bush-Obama Rx Shortages; Critical cancer drugs are in short supply thanks to price controls.” The Wall Street Journal November 4, 2011; Page 11 <http://online.wsj.com/article/SB10001424052970204394804577012013740860768.html> Id. Mandy L. Gatesman, Pharm.D., and Thomas J. Smith, M.D. “The Shortage of Essential Chemotherapy Drugs in the United States.” N Engl J Med 2011; 365:1653-1655 November 3, 2011 <http://www.nejm.org/doi/full/10.1056/NEJMp1109772#t=article>

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