The Dirty Secret of Drug Shortages

October 19, 2023 Healthcare

Every hospital needs to have lidocaine injection in stock. Doctors use this local anesthetic to relieve the pain of patients who are in labor, receiving stitches, or having a catheter inserted. First discovered in the 1940s, lidocaine has been deemed so crucial that the World Health Organization includes it in its List of Essential Medicines. Yet in the U.S., lidocaine has been in continuous shortage since 2011. Many pharmaceutical companies are approved to make lidocaine, including Fresenius Kabi, Hikma, and Pfizer, but they often have the anesthetic on backorder, blaming delays on increased demand while hospitals every day are rationing what little stock they have.

This situation doesn’t add up. The high demand for lidocaine should incentivize manufacturers to expand their production lines to guarantee consistent supply. But they are not doing so for lidocaine, nor for scores of other basic drugs that consequently have persistently gone into shortage for more than a decade. And despite years of Congressional inquiry and regulation of medical supply chains, the situation has only worsened.

Today, a record number of treatments, for everything from lead poisoning to cancer, are unavailable. This includes new shortages of generic cancer treatments called carboplatin and cisplatin, forcing doctors to ration for their sick patients. According to a recent report by the Senate Committee on Homeland Security and Governmental Affairs, there was a record five-year high of 295 active drug shortages at the end of 2022, with sterile injectables commonly used in hospitals at increased risk. The Covid-19 pandemic certainly put pressures on the industry and exposed the fragility of U.S. supply chains, but the shortage dilemma long predates the global epidemic.

At a March 22 hearing of the Senate Homeland Security and Governmental Affairs Committee this year, Democrats and Republicans tried to diagnose the problem. Many recognized that producers leave the market because many generic drugs have low profit margins despite an expensive and complex manufacturing process. Ranking Member Rand Paul (R-KY) blamed federal government regulations, while Chairman Gary Peters (D-MI) targeted drug makers’ offshoring of production and the government’s poor visibility into supply chain  Unfortunately, with few exceptions, most members on both sides overlooked a core driver of the problem.

The primary driver of the problem is not a lack of regulation, but a set of consolidated middlemen who drive producers out of business. A group of firms known as group purchasing organizations (GPOs), who do not physically manage product but operate as buyer cartels for hospitals, have immense control over medical supply markets. The three main GPOs are Vizient, Premier, and HealthTrust Purchasing Group. As former generic drug executive Bill Simmons told 60 Minutes in May 2022, “We are systematically shutting down all of our U.S. manufacturing because we do not pay enough money for the drugs to the manufacturers, and not enough money is paid because of the middlemen.”

GPOs control access to the market, and charge drugmakers and medical supply manufacturers high fees to access it. GPOs use a variety of business practices, such as long-term supply contracts and kickbacks from the largest manufacturers, which end up consolidating production and fostering a more brittle supply chain prone to collapse. These middlemen put so much pressure on manufacturers that manufacturers often discontinue production of unprofitable drugs, underinvest in factories, leading to FDA compliance problems, or go bankrupt. All of these lead to shortages.

This brief explains the medical shortage problem and the multiple roles that GPOs play in medical supply markets. It then outlines a series of common-sense reforms to rein them in: repealing GPOs’ exemption from the Anti-Kickback Statute, breaking up the largest GPOs, and requiring medical providers to use multi-source contracts when more than one manufacturer is available.