The Goldilocks problem: How to get generic drug prices “just right”?

Former Obama White House advisor Dr. Ezekiel Emanuel had an interesting op-ed in the Sunday New York Times – interesting because Dr. Emanuel, an advocate for drug price controls, actually suggests Medicare should pay higher prices to remedy a growing shortage of generic cancer drugs.

Emanuel addresses a real, and growing problem of generic drug shortages, particularly for cancer patients, with 14 of 34 generic cancer drugs on the market today in short supply.

Unfortunately, Emanuel also sets up a false dichotomy between cheap generic drugs, which “cure cancer” and newer, branded drugs that may cost tens of thousands of dollars per patient, but “just extend life for a few months.  He bemoans the fact that ”only the older but curative drugs – drugs that can cost as little as $3 per dose – have become unavailable.”

Emanuel’s slap against branded drugs is a cheap shot.  He neglects to mention that every cheap 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 the remaining and much harder to treat cancers, including metastatic colon, lung, and prostate cancer. 

And while some newer cancer drugs may – on average – only extend life for a few months at high cost, this is more function of the scientific complexity and high cost involved in developing cancer drugs for FDA approval.  Even so, more cancer drugs are coming to market that are tailored to attack specific genetic abnormalites of cancer cells, allowing physicians to tailor drug treatments to the patients most likely to benefit – producing much higher response rates.  Finally, like their older cousins, today’s expensive cancer drugs will eventually lose patent protection and become cheap generics (as Gleevec will in 2015). 

Emanuel also seems to suggest that pricing is the only issue driving current generic drug shortages:   

If the laws of supply and demand were working properly, a drug shortage would cause a price rise that would induce other manufacturers to fill the gap.  But such laws do not realy apply to cancer drugs….[because] cancer patients do not buy chemotherapy drugs from their local pharmacies the way they buy asthma inhalers or insulin.  Instead, it is their oncologists who buy the drugs, administer them and then bill Medicare and insurance companies for the costs.

Medicare certainly suffers from a “Goldilocks” problem common to all price control schemes – after paying too much for oncology drugs administered by physicians under Part B, Medicare switched to a different formula, which prevented manufacturers from quickly increasing a drug’s price in the event of a drug shortage. 

But generic drug shortages are also most likely to affect drugs called sterile injectibles, which are complex and expensive to manufacture.  After a drug goes generic, competition is likely to winnow the field to the lowest cost manufacturers, which a boon for payers (like Medicare).  But is also means that if one or more manufacturers experiences supply problems, or there’s a spike in demand or a quality problems with raw ingredients, it can be very difficult and time consuming for companies to ompensate by ramping up production. 

Finally, as companies chase the lowest cost suppliers, they’re increasingly relying on Chinese firms, which have their own serious quality control problems. The FDA needs more money and manpower to ramp up inspections of foreign producers, but they can’t do it all alone. Chinese regulators will have to pick of the slack if they want to continue to supply products for the global market. 

Increasing generic drug prices will help with some of these problems – including keeping more reputable and predictable companies in generic drug markets.  But there are not fast, easy fixes.

One “radical” suggestion that Emanuel makes isn’t a radical solution at all, which is to transfer generic cancer drugs out of Part B and into Part D, for payment 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 Part D since 2006 – while producing affordable drug coverage for seniors at about 40% less than original government estimates.  What is radical is having Dr. Emanuel endorse the Part D model at all.