Transcript: Testimony of Walter Kalmans 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 Walter Kalmans, President of Lontra Ventures:

Walter Kalmans, President of Lontra Ventures. IMAGE SOURCE:

“Chairman and members of this subcommittee, good morning. My name is Walter Kalmans, and I’m currently employed as vice president of new ventures at WhiteGlove Health, a venture-backed company in Austin, Texas.

“This testimony is not related in any way to my current employer. Rather it’s based on work independently developed as a result of 20 years of experience working as a consultant in commercial operations executive in the pharmaceutical industry.

“Of particular relevance to this hearing is experience gained while serving as vice president of business development for Oncology Therapeutic Network (OTN) from 2003 and 2008. OTN was the second largest specialty drug distributor in the United States until its acquisition by McKesson Corporation in 2007.

“The popular press as well as recently published publications by ASPE, FDA, and IMS Health do a good job characterizing the generic drug shortages and tend to cite manufacturing and supply chain issues as chief culprits. As citizens, we’re led to believe that over time industry will fix the problem by investing in additional capacity, improving quality control, and identifying more high quality suppliers of raw materials.

“However, there’s much more to this issue. Why all of the sudden would the pharmaceutical industry – one of the most sophisticated industries on earth – have been experiencing unprecedented growth of shortages? Why in particular shortages of injectable drugs? Manufacturing and supply chain issues certainly play a role, but it’s my opinion that the Medicare Modernization Act of 2003 (MMA) is the core culprit as to why generic injectable drugs are in growing shortage.

“To most Americans, MMA is known as the act that expanded the prescription coverage for Medicare patients. However, another part of this legislation drastically altered how Medicare reimburses community-based oncologists, who administer drugs in their offices, under Medicare Part B.

“Oncologists are one of the few specialists who make make a margin on buying drugs at price X and receive a Medicare reimbursement at price X plus Y.

“Prior to MMA, Medicare reimbursed community-based oncologists based on price called AWP – average wholesale price. MMA introduced a new price called ASP – average selling price. Calculating ASP required significant pricing transparency from pharmaceutical manufacturers and resulted in lower Medicare reimbursement payments to community oncologists and, notably, a more rapid price decline for many generic injectable drugs.

In addition, because the legislation set Medicare reimbursement for Part B drugs at ASP plus 6%, it established thinly veiled price controls, making it unpalatable for a pharmaceutical manufacturer to raise price more than 6% a year. For example, if a manufacturer were to raise price on a $100 drug by more than 6% during a year, an oncologist would likely be faced with a scenario of buying the drug for $106 and receiving Medicare reimbursement of $104.

“Now fast-forward to today. If you’re a generic injectable manufacturer with finite capacity, would you focus your capacity on manufacturing generics or products that have just lost patent protection, repeating high profits for the next few quarters? Or would you manufacture low-priced generic drugs – drugs whose patents expired long ago?

“Under normal economic circumstances, if there are shortages, prices adjust upward to reach a new equilibrium until additional product comes online. Basic supply and demand economics. However, because MMA limits price increases to 6% annually, prices could not reach an equilibrium. Even worse, because the profit potential of these drugs is so low, new entrants decide to stand on the sidelines or focus on more profitable products.

“In conclusion, it’s my opinion that we will experience generic drug shortages until legislation is passed to change the way generic injectable drugs are reimbursed by Medicare. Like any piece of legislation, MMA provided many citizens with benefits. But also like any piece of legislation, it had flaws. Unfortunately, these flaws took several years to become exposed and, for a variety of reasons, it may take quite some time to fix them.

“Thank you.”


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