“It was a really frightening and sobering experience,” Andrew tells me. He is a Nova Scotian who suffers from anxiety and who asked not to be identified by his real name. Recently, he had to change his medication due to drug shortages, and he described what it was like not to know whether new medications he tried would work.
“You’re almost swimming in a huge ocean and waiting to see what will come and don’t know whether it will. I can’t even imagine if I couldn’t get access to the medication I need. I know what it’s like to live without it and it’s terrifying.”
Drug shortages are a growing international problem. In Europe, 45% of hospitals surveyed have faced shortages in “life preserving drugs.” Of 8,000 drugs approved for use in Canada, 1,250 have been affected by shortages in recent years. A quarter of Canadians have been directly impacted by a shortage or know someone who has. In the United States, drug shortages cost the healthcare system hundreds of millions annually.
When medication is suddenly unavailable, it exacts a toll in human suffering. Drugs needed for cancer treatment and for surgeries (such as anaesthesia) have been particularly prone to shortages, undermining or delaying critical treatments. Using unusual medication also increases the risk that doctors and pharmacists will make errors, such as giving the wrong dose or wrong kind. In one year, at least 15 deaths in the United States were directly attributable to shortages.
In 2018, Canada has run out of supplies of multiple antidepressant medications. Andrew tells me, “It’s a struggle and a journey to find a drug that works,” and a shortage forces a patient to start that process again. Some desperate to find the right medication take risks: 15 to 21% of Canadians have resorted to buying medications online, from friends, or from other unregulated sources.
Pharmaceutical companies do not make money by failing to provide drugs. What, then, can explain the industry’s growing incapacity to deliver medications consistently? The C.D. Howe Institute proposes one solution that could fix the problem. Oddly enough, it requires thinking about drugs like electricity.
The Economics at the Heart of the Problem
To understand the C.D. Howe Institute’s proposal, it is first necessary to understand the economic logic for why the drug industry faces so many shortages. In a normal market, commodities remain available thanks to the mechanism of supply and demand. If a new food fad increases demand for broccoli, then sellers increase prices, which in turn reduces the number of people willing to buy broccoli and ensures supplies do not run out. The higher prices also incentivize more farmers to grow broccoli the following year, allowing supply to better meet demand.
Neither of these mechanisms function efficiently in the drug market, according to the US Department of Health and Human Services. When many customers need drugs to live, higher prices do not significantly reduce demand. Many suppliers, in turn, already use all their available factory space, and so cannot easily increase supply. Building more factory space increases financial risk and can take years. If high prices are unlikely to stay high, there is little incentive to build more.
High prices should encourage more companies to produce a drug, which would up supply and drive down prices, but this too rarely happens. It can take years receive the necessary regulatory approvals to manufacture a drug. Worse, 16 companies in the United States have been accused of colluding to keep prices high on some 300 drugs, in part by voluntarily not competing with each other. Forty seven states are now suing these companies for antitrust.
In this context, generic drugs are particularly prone to shortages. They are less profitable than “innovator” drugs — those for which companies a have a patent. When generic drugs compete with innovator drugs for scarce factory capacity, generic drugs tend to lose. The same is also true when there is a shortage in an ingredient needed for multiple drugs. In most cases, the ingredient will first be used for the profitable innovator drugs. As a result, over three quarters of shortages occur in generic drugs.
Wechsler and other writers argue generic-drug suffer shortages because their low prices fail to incentivize companies to invest in production (when, that is, drug companies are not actively colluding to keep prices high). They blame, in part, Group Purchasing Organizations, which are coalitions of buyers who can negotiate down drug costs with large-scale contracts. In a normal market, low prices should not undermine supply, since no matter how much competition there is, companies shouldn’t agree to prices that won’t make them money. When generics are competing for scarce production capacity and ingredients, however, low prices may mean they are under-prioritized.
The generic drug market is also particularly vulnerable because it does not reward quality, Woodcock and Wosinska argue. Group Purchasing Organizations tend to regard generics as equivalent, meaning that pharmaceutical companies can only compete on price. Since better quality and reliability does not translate into a higher sales price, companies are incentivized to spend as little as possible on improving manufacturing processes. By one estimate, 46% of shortages are caused by quality problems such as contamination, and another 19% are caused by production problems or a lack of manufacturing capacity.
This failure to reward investment in reliability may be the primary underlying cause of many recent shortages, either directly or indirectly. If a company needs to shut down a production line to solve problems with one drug, it can also cease production for other drugs made in the same factory. Recent shortages of antidepressants in Canada are linked back to a recall in a seemingly unrelated blood pressure medication, valsartan, which had been contaminated with a probable carcinogen. Many shortages in innovator drugs are actually caused indirectly by problems in the production of generics.
The easiest kind of solution is for drug companies to better warn governments when a shortage is imminent, and to explain what happened when they occur. Eom et al. argue that giving warning about shortages gives doctors and pharmacists time to share and ration their supplies and seek alternatives. Currently, 42% of hospitals in Europe say they only receive notice about shortages the moment deliveries fail to arrive. In many countries, companies can simply choose to stop making a drug without providing any advance notice whatsoever. The chaotic consequences are preventable. Better reporting on the causes of shortages would also help governments craft regulatory solutions, Pauwels et al. argue.
Reporting requirements can be supported by an “essential medicines list,” identifying a core group of drugs the government believes should be available at all times. Eom et al. point out that 177 countries have one, but Canada does not. The list would not itself solve shortages, but it would allow regulators to place high standards on companies for reporting on those drugs. New Zealand also fines companies for failing to meet commitments to provide drugs on their list. Elizabeth Warren has put forward a bill in which the US government would itself manufacturer drugs, or pay companies to do so, when one on the essential medicines list has an excessively high price due to lack of competition.
Using Contracts to Require Consistent Supply
The Canadian Multi-Stakeholder Committee on Drug Shortages, a working group, argues that when Group Purchasing Organizations sign contracts to buy drugs, they can require companies to improve reliability. Contracts could mandate that companies stockpile a certain quantity of drugs. They could also ban companies from discontinuing drugs during the life of the contract. However, such obligations could face legal barriers in some countries. In the United States, according to Janssen (2014), the courts have found companies have no “legal duty to continue selling medicines when they want to stop.” Others argue contracts and regulations can require manufacturing processes to meet certain standards of quality, but it can be difficult to define quality and to evaluate whether a company is meeting it.
Economic Solutions: Rewarding Reliability
Another idea from the Multi-Stakeholder Committee would instead incentivize quality and reliability. They argue that large medication customers — such as government and Group Purchasing Organizations — should set explicit criteria for deciding which companies they buy drugs from based on their past track record in providing well-made drugs consistently. In this way, companies would no longer compete only on price, but could win higher-value contracts by investing in improving the reliability of their production process. Generic drugs would cease to be a commodity, interchangeable with any other generic. Instead, some brands could be recognized for achieving very low levels of defects, contamination, or interruptions. It is hard to blame drug companies for failing to invest in providing safe supplies when they are not rewarded for trying.
The Electric Solution
The C.D. Howe Institute’s solution similarly addresses the core economic defect. They point out that for both drugs and electricity, customers do not only care about the product they receive. They also want to receive it reliability. If power companies were paid only for the electricity they provide, their incentive, like drug companies, would be to only build enough capacity to meet the amount of electricity customers want most of the time. They would have little reason to build extra generators to meet rare peaks in demand. Instead, their incentive would be to allow periodic shortages, letting some customers lose electricity when too many people want it at once.
To prevent this problem, electricity contracts pay for two things: the actual amount of electricity provided, and the capacity to provide more electricity if needed. The second payment, for capacity, makes it profitable to build extra generators. If drug contracts paid for capacity, it would incentivize pharmaceutical companies to build extra factory floor space, so they would have the latent ability to increase production for unexpected peaks in demand. Simultaneously, this would mean generic drugs would no longer compete with innovator drugs for scarce factory space.
These economic solutions require, of course, that companies are genuinely competing. It is critical that the United States prosecute the alleged cartel of 16 companies that have artificially inflated prices, or no market-based solution will create progress.
Drug shortages are a solvable problem. Currently, drug companies compete based on how little they can spend on producing the most drugs, bringing them to the brink of potential problems at any time. It is no wonder we face shortages. Instead, companies should compete based on how consistently they can produce uncontaminated drugs at whatever quantities needed. Changing that underlying economic incentive depends first and foremost on whether buyers reward quality and capacity. As long as we treat drugs as interchangeable, and ignore reliability, shortages will continue, and people will suffer needlessly.
- By Tristan Cleveland