Drug shortages in the United States are nearing record levels. In the second quarter this year, there were 309 drug shortages. This is the most active in almost a decade. The number has also increased dramatically over the past two years. In a recent survey, nearly a third (1100) of hospital pharmacists reported that they had to delay or cancel treatment or procedures due to shortages. Cancer patients are among the most affected. More than half the pharmacists said that shortages of chemotherapy medications have a negative impact on patient care. The root of the drug shortage crisis is a lack of financial incentives for producers to produce generics and less profitable drugs. Margolis Center, Duke University, and Brookings Institution studies show that manufacturers are less able to upgrade production processes due to low margins and low payment rates. Without those improvements, recalls and production stoppages leading to shortages are both more frequent and more persistent.
Federal policies to control the prices paid by Medicare and Medicaid, which account for 40 percent of prescription drug spending in the U.S., significantly affect the supply chain’s ability to recover from a shortage. If Congress wants to address shortages, it should look first at the government’s own pricing policies.
Both Medicare and Medicaid require manufacturers to pay a penalty (known as a rebate) if their prices rise faster than inflation. The Medicare Drug Rebate Program, enacted as part of the 2022 Inflation Reduction Act, can reduce or eliminate the inflation penalty for drugs facing shortages.
The Medicaid Drug Rebate Program, enacted in 1990, requires a substantial discount from the drug manufacturer’s price as well as an inflation penalty. Medicaid’s inflation penalty does not offer relief to drugs in short supply, unlike the Medicare Drug Rebate. This relief would reduce the frequency or duration of shortages. Not likely.
Shortages often occur due to circumstances that are controlled by the manufacturer. The drug manufacturers have control over their production capacity, and they are aware of the market conditions. Manufacturers may limit production in order to avoid paying a heavy penalty for increasing their prices faster than the inflation rate. The extra revenue from higher-than-inflation price increases could result in more shortages, not fewer.
Government price controls are blunt instruments likely to be turned against consumers. Partially reducing the inflation penalty for shortage drugs is likely to have a negative impact. Rather than trying to fine-tune drug rebate policies to account for shortages, Congress should develop policies to promote effective competition and realistic pricing in the pharmaceutical market.
Joseph Antos is a senior fellow and Wilson H. Taylor Scholar in health care and retirement policy at the American Enterprise Institute. Ge Bai is a professor of accounting at Johns Hopkins Carey Business School and of health policy and management at Johns Hopkins Bloomberg School of Public Health.
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