Executive Summary

According to the U.S. Food and Drug Administration, the number of times drugs were in short supply almost tripled from 61 in 2005 to 178 in 2010. The figure reached more than 250 in 2011. This means that manufacturers reported to the FDA that they were unable to meet demand for the drugs. Hospital and health-system pharmacists, as well as oncologists, anesthesiologists and other specialists have also increasingly reported difficulties acquiring drugs.

These are mostly injectable drugs for cancer and other important therapies, and they are frequently produced by generic drugmakers. These drugs are not dispensed by community pharmacies, but rather administered by health professionals in clinical settings. They differ from the medicines often sold as tablets in pharmacies in that they are manufactured from living things, such as bacteria. Because these injectable drugs can be infectious or poisonous in their natural state, they require a high degree of quality and care in their manufacturing, storage and distribution.

Shortage is not a permanent condition for any one of these drugs. Indeed, the absolute volume of prescriptions for the entire sample of drugs has increased in the past few years. Shortages occur for specific drugs in specific periods, but eventually get resolved. European markets do not appear to suffer from many such shortages, which are limited to the United States and Canada.

Although the problem is complex, the possible causes can be categorized as supply-side or demand-side. Supply-side factors include physical constraints due to remarkably high standards in the chain of production and in the distribution of these potentially very dangerous products. Similar constraints apply to the acquisition of the drugs’ active ingredients.

Another key supply-side factor is an unproductive FDA, which has increased its regulatory burden on current suppliers and made it very difficult to get approval for new generic medicines and manufacturing facilities. This regulatory overreach has likely reduced the ability of the supply chain to react to shortages. The evidence strongly suggests that these interventions are the major causes of the shortages.

Potential demand-side factors would include government-dictated rebates or discounts for programs such as Medicare, Medicaid, and the 340B program for safety-net hospitals and clinics. Many assert that these amount to price controls that make production unprofitable. While this view cannot be entirely discounted, the evidence that they contribute to the shortages is limited and weak.

Currently proposed solutions are unlikely to address the crisis satisfactorily. Congress appears ready to give more power to the FDA, initially by commanding drugmakers to notify the FDA six months in advance of an anticipated inability to maintain production. However, as noted above, the agency appears to be a major source of the problem. Making FDA regulations more onerous will not alleviate the current shortage of crucial medicines.

To expedite regulatory review, the generic pharmaceutical industry has lobbied to increase the FDA’s budget with user fees paid by generic drugmakers. These user fees are almost certain to be legislated this year. They may?improve the FDA’s timeliness of reviewing new applications, but they are unlikely to result in long-term, systematic improvement. Instead, some of the increased revenue will be redirected by the FDA towards bureaucratic growth, after which its performance in approving new generic medicines or facilities will likely stabilize rather than continuously improve.

A more promising approach is defusing the problem by making it easier for competitors to enter the market in response to forthcoming shortages. Short term, American patients should be freed to use generic injectable drugs authorized by regulators in other developed countries, as long as they are so labeled.

Long term, the FDA’s regulations on manufacturing should be limited to setting standards and measuring outcomes, rather than specifying every step of the manufacturing process. Instead of a bureaucratic monopoly, the FDA should be transformed into a “certifier of certifiers,” permitting qualified third parties to approve new facilities and earn some of the user fees currently harvested by the FDA. This will increase the supply of crucial medicines, while lowering prices and better serving the well-being of all Americans.

There is a residual risk that government-dictated discounts on sterile injectable drugs will compromise supply by making it unprofitable to manufacture the medicine. This risk can be mitigated by developing a plan to shift the Medicare reimbursement for certain injectable drugs — especially for cancer — from the Medicare Part B program to the Part D program. In Part D, drugmakers negotiate terms with private insurers, rather than react to government-dictated prices. The private and competitive negotiations that occur under Part D are more likely to generate prices that adequately reimburse manufacturers while keeping Medicare expenditures under control. 

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