Transcript: Testimony of Dr. Scott Gottlieb on the drug shortage crisis

House Oversight and Government Reform Committee

“Drug Shortage Crisis: Lives are in the Balance” hearing held on Nov. 30, 2011 by the Subcommittee on Health Care, District of Columbia, Census, and the National Archives

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

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

“Mr. Chairman, Mr. Ranking Member, thank you for the opportunity to testify today before the committee.

“I’m a practicing hospital-based physician and a resident fellow at the American Enterprise Institute. Previously, I’d served as the deputy commissioner of the Food and Drug Administration and as a senior official at CMS [Center for Medicare and Medicaid Services] during the implementation of MMA [Medicare Modernization Act].

“The causes of these scarcities can be complex and multi-factored. Each episode typically had unique characteristics that makes it distinct from other drug shortages. There are, however, some common problems that are to a varying degree threaded to each of these episodes. I believe these common factors should be the focus of our attention.

“I group these common factors into three categories. The first are regulatory challenges that have made the manufacturing of these products safer and more reliable but also in some cases more challenging and expensive.

“The second are mechanisms that make the prices sticky, limiting the profitability and precluding new investments of additional supply, better and more efficient manufacturing.

“And the third and final category is market structures that prevent firms from branding their products and reflecting by how they price them. Legitimate improvements to manufacturing allowed drugs to be produced more reliably and in scalable facilities.

“The first challenge is in the way the manufacturers of these drugs are being regulated. In recent years, the Food and Drug Administration has gotten tough on potentially dangerous snafus that have long plagued production of some injectable generic drugs. These include problems with sterility and particulate matters that get into solutions.

“The FDA has real concerns, but if we want to maintain high standards, we need policy measures to accommodate the economic impacts. This begins with making sure regulations governing drug manufacturing, FDA’s Good Manufacturing Practices, are as efficient as possible. Manufacturers have long complained that these policies are out of date and at times inflexible.

“Another regulatory issue plays in these shortages relates to the backlog FDA currently has for generic drug manufacturing supplements. The backlog in reviewing manufacturing supplements can add as much as several years’ delay to the approval of the manufacturing changes. Because of remediation now taking place in many plants, the FDA is about to get hit with a deluge of supplements related to the manufacturer of these shortage drugs.

“The increased regulatory scrutiny presents more immediate challenge also because of the way these generic drugs are being reimbursed by Medicare and private payers. The current system prevents manufacturers from adjusting prices to reflect the higher cost of goods as a result of manufacturing upgrades that they’re required to undertake.

“A 2003 law sets the price Medicare will pay for physician-administered drugs at the average sales price that’s at least six months old at any given time. This means that even if a generic raises its price to reflect increased production costs, Medicare won’t pay the new price for about six months later. So purchasers lose money on these drugs for months at a time.

“In order to make the long-term capital intensive investments needed to bring on new manufacturing capacity for these parenteral drugs, generic firms need to know that they can take and sustain price increases over a reasonable period of time.

“The bigger issue with the way Medicare reimburses these drugs, however, is the way it sets a single, flat price for each broad category of medicines rather than paying for these drugs individually. Medicare assigns a single billing code to each category of medicines. Since FDA’s enforcement of facilities is often uneven, one firm might be facing significantly higher manufacturing or regulatory costs while others are getting by with older and perhaps less safe facilities. Lumping all the drugs in the same billing code creates a race to the bottom on the cost of goods, with the price reflecting the lowest cost producer. The result is that prices can’t rise or reflect changing demands or the needs for bigger investments in manufacturing. Any capital requirements are hard to recoup given the way Medicare pays for these drugs.

“When higher costs of goods erodes slim profit margins, more manufacturers are choosing to exit product lines entirely rather than invest to meet higher standards.

“To fix these problems, we should lift the existing price controls when it comes to critical injectable drugs that are generic. These drugs should also get a holiday from other price control scheme that serves to distort the market prices and to reduce incentives to invest in new productions such as the 340B discount program.

“Medicare can also allow these drugs to have individual billing codes rather than paying for each class of drugs according to the same billing code. This would allow manufacturers to price their drugs individually, eliminating the race to the bottom on the cost of goods.

“Finally, we should consider policy constructs that would give manufacturers a financial incentive to develop intellectual property that improve the manufacturing characteristics of generic medicines even if these changes didn’t change the clinical properties of the drug.

“Recent policies have systematically eroded the ability of firms to earn returns on these products and make investments. The only way to mitigate these shortages is to make it profitable for firms to invest in manufacturing and enable safe, stable, and scalable supply.

“Thank you.”



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