Transcript: Testimony of Dr. Scott Gottlieb 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. Scott Gottlieb, Resident Fellow at the American Enterprise Institute:

Dr. Scott Gottlieb, Resident Fellow at the American Enterprise Institute. IMAGE SOURCE: finance.senate.gov

“Good morning, Chairman Baucus and Ranking Member Hatch. Thank you for the opportunity to testify today.

“I’m a resident fellow at the American Enterprise Institute and a practicing hospital-based physician. I have seen the effects of these shortages first hand in my clinical practice, and as a former FDA [Food and Drug Administration] commissioner and a former senior official at CMS [Center for Medicare and Medicaid Services], I’ve also seen the genesis of some of the policies that have contributed to these challenges.

“I don’t believe there’s a discrete set of policy problems that have created these shortages nor a single measure that can mitigate these woes. But I would urge this committee to focus its attentions on those elements that are in its direct purview: policy failures that reappears as common factors in many of the shortage episodes.


“The first are mechanisms that make prices sticky, limiting profitability and precluding investments in new supplies and more efficient manufacturing.

“The second are regulatory challenges that are have made the production of these drugs safer and more reliable but, in some cases, substantially more expensive at the very time the policies made it hard for producers to take and sustain price increases.

“The third category is market structures that have prevented firms from being able to earn appropriate returns when they invest in key improvements in manufacturing.

“The most significant of these issues in these markets is that pricing is sticky. These drugs are often very cheap. Sometimes just several dollars for a dose. As a result, manufacturing costs end up comprising a big proportion of the overall price of the drug. When demand for these drugs increases or when the cost of developing the medicine rises, manufacturers can’t take and sustain price increases to make up for these events. This makes it hard for firms to make the long-term investments needed to stand up to new manufacturing facilities or upgrade existing facilities to produce more supply.


“One contributor is the way that Medicare reimburses these products according to an ASP [average sales price] that’s at least six months old at any given time. This means that even if a generic firm raises its price to reflect increased production costs, Medicare won’t pay the new price until about six months later. As a result, the purchasers of the drug would be underwater for months at a time.

“Another issue is the way that Medicare lumps all the drugs in the same billing code. This means that the price paid ends up reflecting the terms of the lowest cost producer, creating pressures to shave down production costs. Once ASP falls to a new low, it’s hard for it to rise again because of its stickiness. Firms end up in a race to the bottom on manufacturing costs.

“This race to the bottom on manufacturing could work reasonably well in producing significant savings when it comes to products that are easy to manufacture, like pill forms, but it creates risks in markets like sterile injectable drugs where manufacturing is not a trivial affair.

“The regulation of pricing is made more problematic by the fact that production costs have been increasing owing to more stringent regulations in manufacturing. The FDA has legitimate concerns, but the fact is regulatory oversight has been sharply tightened over a short period of time. These low-margin producers can’t easily meet the new mandates.

“To fix the problem, we should lift price controls when it comes to critical injectable drugs that are generic and take steps to provide companies with incentives to make manufacturing upgrades that can lead to a more stable and scalable production.

“First, Medicare should move away from ASP and pay for these drugs according to more flexible market-based price that could adjust to market conditions. One consideration is to reimburse these drugs based on the price paid by wholesalers – the WAC (wholesale acquisition cost).

“Congress might also consider allowing ASP to be reset in some fashion for drugs that are approaching a shortage or considered critical and prone to shortage. These drugs should also be exempt from price control schemes that distort market prices and reduce incentives to invest in new production. This includes the 340B program.

“Medicare can also allow these drugs to have individual billing codes rather than paying for each class of drugs according to the same code.

“We also should give firms a financial incentive to invest in new IP that can improve manufacturing characteristics of generic drugs.

“Finally, we need to view production capacity for critical drugs as a national strategic asset. In the past, government approached similar issues with targeted incentives such as tax credits to encourage development of more domestic manufacturing capacity. The episode with flu vaccine provides some good proxies for how we might mitigate the current shortages.

“To resolve these shortages in the short-term, we should focus on the existing manufacturing capacity as available but has been taken offline as a result of regulatory findings.

“In the long run, the only way to improve the availability of these products is to make it possible for firms to keep pace with rising production costs and to invest in manufacturing that enables more stable and more scalable supply. We need to reform the policies governing how these products are priced if we’re going to attract new investments into these areas.

“Thank you very much.”

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3 Comments on “Transcript: Testimony of Dr. Scott Gottlieb on drug shortages

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