How Misguided Drug Pricing Policies Worsen Drug Shortages
By Dan Leonard
More than 300 medicines are in short supply across the United States.
It's no great mystery why doctors and patients face an unprecedented dearth of essential medicines, especially generics. Today's shortages were created by a faulty drug marketplace and have been exacerbated by ill-considered government policies.
Shortages tend to arise when there are few suppliers in a marketplace. Consider that, if a given product is made by multiple producers in different locations, each with its own processes and inputs, then a single event -- such as a hurricane or earthquake -- probably won't shut them all down.
Ironically, a root cause of the current crisis is a "shortage" of drug buyers, rather than suppliers. Just three drug purchasing intermediaries known as pharmacy benefit managers (PBMs) control 80% of drug transactions, extracting enormous discounts and rebates from manufacturers. This near monopoly has distorted the generic drug market considerably.
Then there's the increasingly unworkable margins generic drugmakers face.
Together, PBMs and unrealistically tight margins are putting maximum pressure on manufacturers of generic drugs, which make up over 90% of all prescriptions filled in the United States. Unfortunately, lawmakers have done little to address PBMs, and have adopted strict drug price controls that could make it even harder for generic drugmakers to operate.
Through mergers with one another and other companies, PBMs have amassed enormous power. For example, CVS Health Corporation owns not just a chain of drugstores but also Aetna, an insurer, and Caremark, one of the biggest PBMs, as well as Red Oak Sourcing, one of the big three wholesale distributors of generic medicines.
A system with just a few buyers picking their suppliers purely based on cost with little to no consideration of supply chain strength, manufacturing redundancies, or multi source contracts quickly becomes a race to the bottom, driving many competing suppliers away.
A manufacturer can only lose money on a product for so long before they abandon that product altogether. That can leave just a single producer of many generic drugs, with no competitors to fill the gap in the event of interruptions.
Lawmakers have made matters worse by adopting strict price controls, like those included in last year's partisan Inflation Reduction Act. Some progressive members now want to expand the IRA's policies before they've even taken effect.
Even worse, as price controls for branded medicines take hold, some generic manufacturers could decide to leave particular therapeutic areas. Fewer suppliers would mean more single-source drugs. Patients could face new shortages -- including for brand-name drugs -- as a result.
The first price controls will be set starting this year and take effect in 2026. But critical market entry decisions will be made well before that. Generic drugmakers are already watching their future markets dry up.
Patients are in trouble, faced with rationing doses, substituting medicines, or simply waiting for the treatments they need. Tragically, between the nefarious behavior of middlemen and the price controls coming down the pike, this crisis will get worse before it gets better.
Dan Leonard is the former president and CEO of the Association for Accessible Medicines, former president and CEO of the National Pharmaceutical Council, and former executive vice president of public affairs for America's Health Insurance Plans.
