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Critical Condition

NRO’s health-care blog.

Former Obama Adviser Warns of the Perils of Price Controls



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Former Obama White House adviser Dr. Ezekiel Emanuel wrote a surprising op-ed last week in the Sunday New York Times on the growing shortage of generic cancer drugs — 14 of 34 generic cancer drugs, he points out, are in short supply. The surprise came when Dr. Emanuel, an advocate for drug-price controls, actually suggested that Medicare should pay higher prices for generic drugs. He argues that the higher rates would increase profits and attract more generic producers.

Unfortunately, Emanuel also sets up a false dichotomy between cheap generic drugs that cure a range of cancers and newer, branded drugs that may cost tens of thousands of dollars per patient, but “just extend life for a few months.” Emanuel takes a cheap shot against branded drugs, since he neglects to mention that every generic drug was once an expensive branded medicine. And while many pediatric cancers (and some adult cancers, like testicular cancer) can respond very well to older medicines, companies are now targeting much harder-to-treat cancers, including metastatic colon, lung, and prostate cancer.

Some newer cancer drugs may, on average, only extend life for a few months at high cost, but this is a function of the scientific complexity of cancer treatment and the costs involved in developing cancer drugs for FDA approval. Even so, more cancer drugs are coming to market that are tailored to attack specific genetic abnormalities of cancer cells, allowing physicians to tailor drug treatments to the patients most likely to benefit — and producing much higher response rates.

And, like their older cousins, today’s expensive cancer drugs will eventually lose patent protection and become cheap generics.

Emanuel also oversimplifies the problem, suggesting that pricing is the only issue driving the current shortage of generic cancer drugs. But, for instance, pediatric cancer drugs aren’t covered by Medicare, and thus aren’t subject to Medicare’s cap on drug price increases for Medicare Part B. Many other types of drugs, including anesthetics, are also in short supply.

For current producers, technical and regulatory issues are more likely to affect supply than price alone. This is borne out by the data, since many drug shortages involve generics called sterile injectables, which are complex and expensive to manufacture. If one or more manufacturers have their manufacturing line temporarily shut down by the FDA due to regulatory violations, or if there’s a spike in demand, it can be very difficult and time-consuming for other companies to quickly compensate by ramping up production.

And, as companies chase the lowest-cost suppliers of active pharmaceutical ingredients (API), they’re increasingly relying on Chinese firms, which can have their own serious quality control problems (e.g., contaminated heparin). 

A 2010 summit on drug shortages (including generic cancer drugs) convened by the American Society of Health System Pharmacists and other stakeholder groups identified many regulatory and manufacturing issues that Emanuel omits, including delays in the FDA approving new and supplemental generic drug applications (which are required if a producer changes the source for “active pharmaceutical ingredients”) and new FDA-required Good Manufacturing Practice (GMP) guidelines which can cause manufacturing shutdowns or shortages if companies struggle to comply with the new guidelines. 

Prices don’t seem to be driving decisions to leave the market, the report noted: 

Some participants believed that insufficient profit margins and product liability concerns are factors that lead to market withdrawals.  However, manufacturers stated that these factors do not contribute to the decision to discontinue a product, which was described as being multifactorial (e.g., complexity of manufacturing newer drugs can necessitate shifting manufacturing processes away from other products).

Finally, the fact that health-care providers depend on “just in time” inventory practices to keep prices down also contributed to shortages when production problems emerged or demand spiked. 

A quick glance at the FDA’s drug shortages web page turned up 11 generic cancer drugs in short supply – but only two (bleomycin and cisplatin) listed product discontinuations (and even then, other suppliers remained available).  Other cancer drugs listed “higher than anticipated market demand”, “manufacturing delays”, and even a “change to new manufacturing site” as reasons for the shortages.   

Spikes in demand could probably be alleviated by instituting longer-term contracts with marginally higher prices with multiple high quality suppliers — and through tax credits for producers of critical generic drugs that agreed to keep their facilities at or above GMP guidelines.  

Still, Emanuel is right that increasing generic cancer drug prices will help reduce some shortages by giving more reputable and technically sophisticated companies incentives to stay in the market. But increasing the price won’t address other problems — like the FDA’s slowness in approving generic drug applications. 

Emanuel makes another suggestion that he considers “radical”: transfer generic cancer drugs out of Medicare Part B (the regular medical coverage) and into Part D (the prescription drug program), so that their cost could be covered by private insurers. “That way,” Emanuel concludes, “prices can better reflect the market, and market incentives can work to prevent shortages.”

This isn’t a radical solution at all, and it has worked well for Medicare Part D since 2006 — producing affordable drug coverage for seniors at about 40 percent less than original government estimates. What is radical is having Dr. Emanuel endorse higher prices and market incentives for cancer drugs. Better late than never.



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