Ensuring a high-quality and resilient supply chain of essential medications means paying more

Plain language summary

Several medications that patients need have been in short supply before and during the COVID-19 pandemic, including low-priced, off-patent generic drugs. The White House recently released a report highlighting medication supply as an important issue requiring intervention. We argue the report’s proposed solutions do not go far enough to address a major problem related to drug shortages, as some prices are too low. We propose additional policies aimed at increasing prices to improve the supply of generic medications.

Implications for managed care pharmacy

The policies we propose could have significant consequences to payers as higher prices for generic medications would increase their short-term costs. We argue the long-term benefits of having a more reliable and higher-quality supply of generic medications to patient outcomes and care provision may be worth the investment. Better information on supply chain quality and resiliency may also help inform formulary development.

The COVID-19 pandemic increased attention to challenges in the supply of safe, high-quality medications. Yet pharmacists and other medical providers know that prescription drug shortages and quality problems have plagued the US pharmaceutical supply chain before the pandemic.¹ Although new shortages have not appeared en masse (especially in contrast to other medical equipment), the pandemic affected prescription drug production and movement across borders and had a short-term impact on patient care.²

In June 2021, the White House released a report recommending several changes to improve the quality and resiliency of pharmaceutical supply chains and 3 other critical product markets.³ The pandemic had a major impact on the demand for various products and the recovery exposed other potential supply vulnerabilities.³ The report suggests several market factors are contributing to supply weaknesses, including low profit margins for many medications, reliance on single-source manufacturers of key ingredients overseas (largely located in China and India), and contracting practices that encourage consolidated supply. The report recommends improvements in supply chain transparency and increased production of selected medications through subsidies to support domestic manufacturing.³ The report emphasizes the importance of shoring up essential drug supply, including medicines and critical inputs identified by the US Food and Drug Administration (FDA) as necessary to have available, at all times, in an amount adequate to serve patient need.⁴

What the report stops short of recommending is improving the single most important driver of high-quality, resilient supply of any consumer product supplied by private industry in the United States including prescription medications: profitability. This is a notable omission given that the report suggests increasing private sector profitability is an important factor in improving quality and resiliency in other products. Here we argue Americans will have to consider paying more for essential medications to ensure their high quality and supply resiliency.

Current financial incentives for prescription drug supply quality and resiliency are inadequate

Don’t Americans already pay the highest prices in the world for prescription medications? Yes, we do, including the headline-grabbing $1,000 per pill for Hepatitis C and a new $56,000/year Alzheimer drug.^5,6 Part of what we are paying high prices for is quality and resiliency. Brand manufacturers have profit and regulatory incentives to ensure quality, adequate manufacturing capacity and redundancy so that if unexpected disruptions occur, sales are not appreciably impacted. As a result, quality and other supply problems, among branded medications, are exceedingly rare.

Where the US supply chain falters is in the supply of offpatent “generic” medications, such as sodium sulfasalazine tablets used for ulcerative colitis or tacrolimus capsules used following transplantation to prevent organ rejection. Many of the drugs in short supply are low priced, and lowest-priced generic medications are at a substantially greater risk of experiencing a shortage compared with higher-priced generics.⁷ Low prices for these products are a result of market forces and result in substantial savings for payers and patients.^8,9 Once a pharmaceutical loses market exclusivity, the innovator faces competition from multiple generic competitors. The opportunity to gain market share drives competition and leads to significant price concessions; more than a 95% price reduction from branded prices is commonly observed.¹⁰

Low prices for generic medications are reinforced by how they are reimbursed by payers and purchased by medical providers, seeking to minimize spending. For example, payers of medications dispensed to patients at pharmacies typically set price ceilings, sometimes called maximum allowable costs (MACs), on what they will pay for a generic medication, regardless of which manufacturer is selected. This increases price competition among competitors. This lowest-cost model also exists in the case of medications used in inpatient care. Payers commonly used “bundled” payments to outpatient clinics and hospitals, whereas a single payment is made for a patient’s care, intended to cover all costs associated with a surgery or diagnostic procedure, including any prescription medications dispensed or administered. Consequently, outpatient centers and hospitals endeavor to purchase the lowest-cost generic medications used in this patient care. In addition, many of these medical providers are a part of large group purchasing organizations that in turn negotiate lower unit costs directly from the generic manufacturers, further limiting generic manufacturer profitability and intensifying competition among suppliers.¹¹

The low prices of generic medications have benefits, but they can also have unintended consequences. Although in most cases, our system delivers on the promise of resilient generic medication supply, research suggests generic medications with the lowest prices are at an increased risk of experiencing shortages.⁷ Others have noted low prices for generic medications create incentives for manufacturers to cheat on quality, especially if it is hard to detect by patients or medical providers.¹²

Shouldn’t US regulators ensure manufacturers supply high-quality prescription medications even if their prices are low? Drug manufacturers do have to meet minimum quality standards for sale in the United States. However, regulation is limited in the following 2 ways: first, once approval is granted to a manufacturer, the US FDA relies on their voluntary willingness to comply with current good manufacturing practices rather than proactively certifying quality. Second, ensuring supply chain resiliency is largely outside the US FDA’s current purview. Regulating the quality of pharmaceutical manufacturing becomes even more complicated by a global supply chain forcing the US FDA to inspect factories all over the world.¹³

Our suggested reforms increase incentives for quality and resiliency through payment changes

To rectify these challenges, the report calls for increased transparency around manufacturing quality, location, and adequacy through a new quality rating system by the US FDA, with additional information reported by pharmaceutical manufacturers. The report argues transparency will allow manufacturers to better adjust their supply, allowing the market to self-correct when challenges emerge. It also argues transparency will improve demand for high-quality medications by patients, medical providers, and pharmacies. Although these effects are possible, they are not well supported by empirical evidence and may not benefit manufacturers.

What the report fails to emphasize is that rewarding for-profit manufacturers of generic medicines for desired investments directly through higher revenue or market share can be productive in promoting policy goals.¹⁴

Specifically, we suggest policymakers focus on public payers, such as Medicare, Medicaid, and the Department of Veterans Affairs, and consider paying higher reimbursement rates and rewarding larger market share tied to a manufacturer’s quality ratings. Conversely, lower reimbursement rates and less market share could be provided to manufacturers who consistently fail to meet supply or quality demands.¹⁵ Although this may increase pharmaceutical spending to some extent, the additional investment helps avoid higher costs during shortages.

Policymakers could consider 2 additional changes to the current Medicare and Medicaid reimbursement policy. First, payers could exclude any products on the US FDA’s list of essential medicines from MAC lists that cap reimbursement, allowing prices to rise. Second, reimbursement to outpatient centers or hospitals that cover these medicines could be unbundled from the current single payment model, allowing medical providers to choose higher-quality medications without facing reimbursement penalties.

The biggest challenge to changing reimbursement policies to reward manufacturers committed to quality and resiliency is the complexity of drug distribution in the United States. Previous authors have documented that multiple entities operating in the US prescription medication chain, such as wholesale distributors and pharmacy benefit managers, profit off higher prices paid for selected medications. Therefore, policy changes aimed at increasing revenues to generic manufacturers will have to be careful to specify how increased reimbursement would pass through to manufacturers committed to high-quality, resilient supply, and not solely absorbed by other supply chain entities.

If this challenge is deemed too difficult to address, we suggest pursuit of an alternative policy that would directly benefit manufacturers by lowering their regulatory costs and therefore boosting their financial incentive. Specifically, reduction of annual fees or the restructuring of how fees are applied to manufacturers required under the Generic Drug User Fee Amendments (GDUFA) could lower pharmaceutical manufacturers expenses significantly.¹⁶ Policymakers could consider lowering GDUFA fees as incentives for new generic manufacturers willing to make medications in short supply or for existing manufacturers willing to increase the scale of their production. The advantage of this policy is that the benefits would directly flow to manufacturers. Pursuit of these policies would require increasing US FDA oversight to prevent companies receiving these subsidies from claiming the benefit for short-term gain and then exiting the market.

The White House report recommends some worthy policy changes to support high-quality and resilient generic medication supply. To ensure Americans have access to essential medicines, manufacturers should directly benefit from reforms through financial incentives that reward socially productive behavior by for-profit pharmaceutical manufacturers. These reforms should not be a blank check but rather an enforceable agreement that aims to guarantee prescription medications in the United States remain the safest, highest quality, and most accessible in the world.