Transcript: Testimony of Dr. Rena Conti on drug shortages

Senate Committee on Finance hearing on “Drug Shortages: Why They Happen and What They Mean” held on Dec. 7, 2011

Testimony of Dr. Rena Conti, Assistant Professor of Health Policy and Economics at the University of Chicago: 

Dr. Rena Conti, Assistant Professor of Health Policy and Economics at the University of Chicago. IMAGE SOURCE: finance.senate.gov

“Thank you. Good morning. Chairman Baucus, Sen. Hatch and members of the Senate Finance Committee, it’s my honor to speak to you today.

“I’m an assistant professor of health policy and economics at the University of Chicago, and my work focuses on the regulation of the pharmaceutical industry.

“In economic terms, a shortage exists when, at any given market price, quantity demanded by purchasers exceeds the quantity that’s supplied by firms. In a competitive industry, profit-maximizing firms would raise price, consumers would be willing to pay this increased price for necessary drugs, and over time suppliers would increase the quantities supplied, eventually eliminating shortages.

“It is my contention that the defining features of the drugs in short supply suggest aspects of the supply of and the demand for and the distribution of them may constrain competitive market behavior.


“I evaluated several proposals:

“The use of drugs used to treat diseases essential to contemporary medical practice. Most drugs in short supply in the United States are used to treat cancer, are physician administered, and lost patent protection prior to 2000. These features suggest there are four discrete aspects of the financing organizations of these drugs that have acted in concert to create the current crisis – in effect – a perfect storm.

“Regarding supply. Firms that produce generic specialty drugs are concentrated, multinational, and produce multiple drugs across therapeutic areas. These firms derive profits from reducing manufacturing costs but also by making drugs that have the highest revenue potential. All else equal, we should expect firms to shift away from manufacturing drugs with low demand to higher revenue producing drugs over time.

“Regarding demand. Oncologists choose drugs to maximize the health of their patients, to be sure. However, physicians favor newer drugs with recently established safety and efficacy profiles. In addition, Medicare’s reimbursement to physicians for the administration of these drugs has declined over the past decade, putting pressure on practice revenues. These changes reward, again, the use of higher priced drugs that offer physicians higher cost recovery, all else [being] equal.

“Regarding distribution. Drugs are purchased by providers through purchasing organizations. The discounted price and the preference for filling orders is not equally distributed across all members of a purchasing organization. Rather, they are based on a member’s purchase volume. Low-volume, community practices are most vulnerable to interruptions in product supply and also to higher prices.

“Numerous remedies have been offered. First, proposals to increase physician payment include increasing the average sales price for selected products or switching reimbursements from average sales price to wholesale acquisition price or cost or WAC.

“Empirical work suggests physicians do appear to make prescribing decisions based upon alterations in the reimbursement they receive from payers. Increased payment for drugs would reduce the strength of the incentives for physicians to prescribe the drugs at the highest cost recovery, in effect, equalizing the incentives to prescribe a generic or unbranded drug for a given disease. Firms could, in turn, raise prices.

“The trade-offs of this proposal include the following:

“Is WAC available for all drugs? Our preliminary review suggests not.

“Would the increased payment to physicians generate enough revenues for firms to compensate for the increased costs incurred from increased supply? This is an open empirical question at this time.

“And finally, in what time frame would increased supply occur? I expect the time frame varies considerably by generic firm but also by the drug.

“Second, it has been suggested that penalties on firms could be strengthened and targeted to apply to the supply of drugs that are ‘necessary.’ This policy would force firms to invest in a limited additional capacity to manufacture specific drugs and effectively raise the firm’s total costs.

“Firms’ compliance with these penalties is predicated on two things. First, the magnitude and timing of the penalty and the strength of its enforcement. And secondly, the ability of the firm to offset these penalties through higher prices. It is likely that firms would pass these costs off to purchasers, either through higher prices among all of the drugs that they make in a bundle, and/or higher prices for the given drug by all purchasers domestic but also international. It is possible not all purchasers would be affected equally by increased prices.

“I suggest a combined approach. Policymakers should consider ensuring the reimbursement firms receive for the productions of these drugs in short supply deemed necessary is increased. Second, equalize the incentives physicians have to prescribe equally effective branded and generic drugs. These incentives could be financial or could be other types of policies that encourage guideline adhered practices. Finally, assessing the benefits of enacting penalties that compel generic firms to invest in capacities to produce an adequate supply of any necessary drug in case of domestic shortages or national emergency, irrespective of the purchasing channel for which they obtain their drugs.

“Thank you.”

 

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