According to one survey of pharmacists drug shortages were the predominant challenge in hospital pharmacy in 2014. Among all the classes of drugs, generic sterile injectables — frequently delivered in the inpatient setting — are most prone to shortage. Seventy percent of drug shortages are generic injectables, according to the FDA. These drugs are used, for example, as surgical anesthesia, in emergency medicine, or to treat cancer, infections, tuberculosis, syphilis, and other severe illnesses.

By all measures, incident shortages peaked in 2011 and have been on the decline, likely due to efforts by the FDA to avert them. This can be seen in data from the University of Utah Drug Information System (UUDIS), shown below. The bar chart below shows new (incident) shortages by year since 2001 from UUDIS data. The decline from 2011 is clear, though incident shortages are still above levels seen in 2001-2007.

New-Drug-Shortages-by-year

The line chart below shows active (ongoing) shortages by quarter since 2011. Sensibly, then, the numbers in the line chart below are higher than those in the bar chart above. Active shortages are also on the decline, having peaked in the third quarter of 2014.

OPA-National-Drug-Shortages

At this point, it is necessary to pause for an important technical note: UUDIS tracks shortages of drugs at the manufacturer level and the FDA tracks market-level shortages. It is possible for one manufacturer to experience a shortage (i.e., a UUDIS-type shortage) but for there to be no market-wide shortage (i.e., no FDA-style one) because other manufacturers offer adequate supply. It is also possible for a shortage to be regional, which the UUDIS would track but FDA would not, but not national, due to a distribution issue.

UUDIS-type shortages that are not FDA-type shortages are still important because they require hospitals and clinicians to switch drugs, which is itself prone to problems and risks. Supply switches can take time, causing delayed care. The same or similar drugs from different manufacturers can be packaged differently, which can lead to dosing errors. In Health Affairs, Willson wrote that

[T]wo fatal events were reported involving doctors prescribing doses of hydromorphone 'as if it were morphine,' even though it’s seven times as powerful as morphine, which was in short supply. [...] [S]ome people have awakened during surgery because anesthesiologists were not as familiar with the alternative agents they had to use.

Though it varies by year, in recent years about 25-50% of incident UUDIS-reported shortages were also FDA-type (market-wide) shortages. These are clearly most problematic because patients must go without the right medication.

The literature describes many factors that contribute to shortages of generic injectables (see chart below, click to enlarge), but, after reviewing that literature, in 2014 the GAO placed most of the blame on low profit margins stemming from the nature of the market.

shortages-causes

Profit margins are low because these are generic drugs. As such, just like most oral generics, they experience market competition that drives down prices. In addition, hospitals — where sterile drugs are usually administered — have consolidated purchasing into group purchasing organizations. GPOs play a similar role to hospitals as pharmacy benefits management (PBM) organizations play for insurers — they increase purchasing power and lower prices. When they negotiate long-term contracts for generic injectables, that constrains price levels so they cannot as easily respond (rise) when supply falls below demand.

Some have also pointed to Medicare Part B's payment method for inpatient and clinician-administered drugs as a source of price pressure, though many are not convinced it plays a significant role. One study found it responsible for one-quarter of shortage days. Medicare pays hospitals a drug's average sales price (ASP) plus 6%. If anything, this encourages hospitals to buy more expensive drugs (higher ASP), not cheaper ones. This could have an indirect effect of reducing the size of the market for cheaper generics, as hospitals switch to more expensive brand drugs, for which they receive a higher reimbursement. A smaller (or less reliable) market for generics reduces incentives to invest in manufacturing capacity, which could increase risk of shortage of generics.

It's clear that the price level and profit margins for generic injectables are low. But that's true of most oral generics too. So why are shortages concentrated in the injectables market? The answer is that manufacturing of injectables is much more difficult and costly. They must be produced in a sterile environment because these drugs are put directly into the blood, spine, or eye. They do not pass through the digestive system, which protects the body from contaminants that might exist in oral drugs. This requires a lot more care and comes with greater regulatory oversight, which itself takes time and adds costs. In short, the fixed costs are high, a barrier to entry above that which exist in oral generics markets. Just three companies sell 71 percent of sterile injectables.

Thus, when the quantity of generic injectables that can be supplied falls below the quantity demanded (e.g., because of a manufacturing plant problem, necessitating shutdown), it does not necessarily offer another manufacturer a good opportunity to step into the market, even if the price level rises. For new market entry, it would have to rise a lot and stay high for a long time — long enough for the new entrant to recoup its investment. That's rare, so manufacturing capacity remains low, and shortages more common.

If we want to do something about shortages of generic injectables, we have to increase manufacturers' profit margins, perhaps along with other changes that also incentivize supply resiliency. Yes, that means paying some drug companies more, the opposite of what most Americans want to do. But, in contrast to much of the rest of health care in the U.S., here is an area where prices may be too low.

Austin B. Frakt, PhD, is a health economist with the Department of Veterans Affairs, an Associate Professor at Boston University’s School of Medicine and School of Public Health, and a Visiting Associate Professor with the Department of Health Policy and Management at the Harvard T.H. Chan School of Public Health. He blogs about health economics and policy at The Incidental Economist and tweets at @afrakt. The views expressed in this post are that of the author and do not necessarily reflect the position of the Department of Veterans Affairs, Boston University, or Harvard University.

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