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Setting The Record Straight On Drug Shortages

June 21st, 2011

John Goodman of the National Center for Policy Analysis (NCPA) says in a June 8 Health Affairs Blog entry that the Public Health Service 340B drug discount program is part of a “web of [federal] regulations that are preventing life saving drugs from reaching the patients who need them.” More specifically, he says that the program, which provides discounted drugs to safety-net institutions such as hospitals and clinics that treat large numbers of indigent patients, is “contributing” to severe prescription drug shortages.

His essay, however, offers no factual support for its claim that the 340B program is somehow causing shortages. His entire case against 340B drug discounts rests upon his belief that “when prices are kept artificially low, shortages develop.”

Last month, the Pharmaceutical Research and Manufacturers of America (PhRMA) issued a statement on drug shortages and their causes. Citing the Food and Drug Administration (FDA) and other experts, the industry group says shortages can occur

for any number of reasons ranging from natural disasters; shifts in clinical practices; wholesaler and pharmacy inventory practices; raw material shortages; changes in hospital and pharmacy contractual relationships with suppliers and wholesalers that can cause fluctuations in the availability of certain products; adherence to FDA-mandated distribution protocols, which can impact patients’ timely access to medicines; individual company decisions to discontinue specific medicines; and manufacturing challenges.

The absence of any mention of 340B, or of government limits on drug prices more generally, is noteworthy given that PhRMA is not very fond of such programs.

Why The 340B Program Does Not Cause Drug Shortages

A recent analysis conducted by my organization, Safety Net Hospitals for Pharmaceutical Access (SNHPA), found that a vast majority of the more than 200 drugs listed by the FDA as being in short supply are generic products. According to the American Society of Health System Pharmacists (ASHP), which has been studying and keeping track of drug shortages for more than a decade, between 50 and 60 percent of the drugs in short supply last year were injectable products and a majority of them were generic. (Reilly, Cynthia. Telephone interview with SNHPA. June 10, 2011.)

That’s highly relevant because hospitals that do not participate in 340B can often buy generic drugs for less than hospitals that are enrolled. (That’s not the case for more expensive brand-name drugs.) In other words: If generic drugs are in short supply, it is unlikely to be because safety-net health care providers are buying them up at prices lower than anyone else can get.

In addition, the Health Resources and Services Administration (HRSA), the unit within the U.S. Department of Health and Human Services (HHS) that oversees 340B, estimates that purchases under the program make up less than 2 percent of the U.S. prescription drug market. We think it is reasonable to believe that shortages probably have more to do with the other 98 percent of the market.

Moreover, to the degree that government price controls might be playing a role in shortages, we note that the 340B program is dwarfed by the Medicaid drug rebate program, with 340B-enrolled providers spending $6 billion on covered outpatient drugs annually, compared with the approximately $23 billion that Medicaid spends yearly on prescription drugs. We also note that the Department of Defense (DOD) and Department of Veterans Affairs (VA) pharmacy benefit programs use statutorily mandated discounts to limit drug spending. In fiscal year 2009, DOD spent about $7.7 billion and VA about $3.7 billion on prescription drugs.

Listening To The Hospitals

Mr. Goodman expresses concern about drug shortages at our nation’s university hospitals. My organization, Safety Net Hospitals for Pharmaceutical Access, includes virtually every academic medical center in the country. None, to my knowledge, has cited the 340B program as a factor in actual instances of drug shortages.

In fact, The Johns Hopkins Hospital, one of those mentioned as rationing the cancer drug cytarabine says, “there is no evidence that the 340B program has contributed to shortage problems.” “Cytarabine is a generic drug, and the 340B program has a very small impact on pharmaceutical sales, yet it is of great importance to hospitals that treat large populations of uninsured and underinsured patients,” according to Vanessa Wasta, associate director of media relations at Hopkins.

Take the word of Shirley Geize, assistant director of purchasing and contracting for pharmacy at Hopkins, a 340B-enrolled institution serving inner city Baltimore. (Geize, Shirley. Telephone interview with SNHPA. June 10, 2011.) She says that, thanks to its participation in 340B, her hospital saved $15 million in fiscal 2010 out of $90 million in total combined ambulatory and inpatient drug expenditures. Most of the money saved is on outpatient chemotherapy agents.

Participation in 340B, Ms. Geize says, “means the ability to maintain our contribution to this community.” “Without it, in these financial times, it would mean having to limit our charity care program or finding other sources of support,” she continues. “No, we couldn’t fill the gap if 340B disappeared.”

Michael Powell, executive director of pharmacy services at The Nebraska Medical Center, another hospital cited in Goodman’s post, says that the 340B program “is critical to our institution’s ability to provide access to pharmaceutical care for our most vulnerable patient populations, who would otherwise not be able to obtain prescription medications.” (Powell, Michael. Telephone interview with SNHPA. June 15, 2011.) “The savings achieved through 340B pricing help us to sustain other vital services, in addition to pharmaceutical care,” he says.

A Letter To Secretary Leavitt And What It Really Said

Mr. Goodman says that shortages have been getting progressively worse since 2005, when hospitals complained to Health and Human Services Secretary Michael Leavitt that drug manufacturers and distributors were citing drug shortages on expensive products such as blood supplies. Mr. Goodman’s article links to the letter that the hospitals sent to Secretary Leavitt.

That was our letter. We used to be the Public Hospital Pharmacy Coalition (PHPC) before we became SNHPA, which represents more than 700 hospitals enrolled in the 340B program, from the largest urban hospitals to the smallest ones in remote rural areas.

We support 340B. We would like to see it expanded to the inpatient setting. We would like to see a ban on discounts on orphan drugs lifted for rural and cancer hospitals. And we do not think 340B causes drug shortages. In fact, it’s disconcerting to see our letter used to advance the argument that 340B should be repealed.

We wrote to Secretary Leavitt to inform him that some pharmaceutical companies, most notably those that make the blood product intravenous immunoglobulin (IVIG), were refusing to sell their products to 340B providers, ostensibly because there was no supply. In fact, there was plenty of supply available to commercial and retail entities that contracted directly with the companies, but nothing available to 340B providers.

The 340B Program: A Small Investment For A Large Return

The federal government spends a little over $2 million a year (that’s million with an M, not billion or trillion) administering the 340B program. The program has fewer than 20 workers. It recently had to cut its technical assistance program to the bone due to inadequate funding. And yet the 340B program saves taxpayers a vast amount of money, since 340B providers share their savings from the program with Medicaid and many entities in the program are federal grantees or state or local government institutions.

It’s beyond us why anyone would seriously question the value of a program that is proven to improve care and save money.

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9 Responses to “Setting The Record Straight On Drug Shortages”

  1. nyphil Says:

    MJBonck nailed it when he observed that the underlying reason for this problem is hospital group purchasing organizations (GPOs). The perverse incentives embedded in the kickback-based GPO business model have resulted in market concentrations and higher prices in the entire healthcare supply industry—everything from cancer drugs and cotton balls to hip implants, oxygen monitors and syringes. This began with the enactment in 1987 of an obscure statute called the Medicare antikickback “safe harbor” exemption, which excluded from criminal penalties kickbacks paid by healthcare vendors to GPOs. Since then, GPOs have become a pay-to-play scheme in which vendors (mostly dominant ones) buy exclusive access for their often inferior products to some 5,000 GPO-member hospitals. Since GPO revenue (kickbacks) is based on a percentage of sales, higher prices mean more money for the GPOs. A decade of evidence, including testimony at four Senate Antitrust hearings, numerous federal and state investigations, media exposes, lawsuits, and independent academic studies, shows that this pernicious arrangement harms (and even kills) patients and healthcare workers, discourages competition, medical innovation, and job creation, and inflates healthcare costs by tens of billions a year. This troubling situation could be eliminated by a penstroke: repealing the antikickback safe harbor. Unfortunately, that hasn’t happened because of the enormous political and financial power of the GPO lobby.
    An excellent Feb. 2005 series by Michael Hiltzik of the Los Angeles Times revealed how anticompetitive GPO contracting practices inflated the cost of cancer drugs at UCLA Medical Center. See also “Cut Kickbacks to Hospital Group Purchasing Organizations, NOT Medicare and Medicaid,” by Paul Danziger in Roll Call of Oct. 21, 2011. For more on the GPO issue, see GPO abuses are the underlying theme of a new legal/medical thriller called PUNCTURE, starring Captain America’s Chris Evans.

    Phil Zweig

  2. ddavies Says:

    In regard’s to Richard’s response of 6/22 3:52pm – Richard brings up a good point for healthcare concerning patient access for SCHIP, Medicare, Medicaid, etc and the fact that it is becoming harder and harder to find access to for-profit healthcare providers, but that discussion should be done if you are willing to include reimbursement into the discussion but this discuss started with 340B prices for drugs and drug shortages. I also agree that reimbursement changes does directly effect patient access (“Economics 101″ as mentioned by other responders”)

    A patients access to healthcare providers do not effect drug shortages. Access to drugs to treat the patient at the healthcare facility does effect a patients access to treatment. This is a cause and effect that is not related to the 340B program.

    Also Richard does make a point that when a patient is turned away from a healhcare provider with SCHIP, Medicare, and/or Medicaid that healthcare has a good chance of being a for-profit facility. For-profit facilities have a greater latitude to choose their patient population more closely tha non-profits can. So when looking at these facilities, the most likely cause is that the facility is concerned about too low of reimbursement for the services rendered to those patients. Thus these patients are driven to facility that already serve a high indigent population base. This will drive up the 340B eligibility. John’s concern about the expansion of the 340B program is valid in the standpoint that if reimbursements from the government programs and the Insurance companies continue to decline as they are projected, there will be a higher need for the 340B program at the non-profit healthcare providers.

    Paraphrasing my thoughts here on reimbursement as it related to the 340B program in economic terms: Decreased revenue in the market will drive for-profit service providers out of the market (leaving non-profit providers). Increasing service units with diminishing revenue has a negative effect on the profitability of any business operation. Therefore when faced with increase market share and diminishing revenue per service unit, the facility must find a way to lower operational expenses while maintaining its operations without interuptions to the client/patient.

  3. Ted Slafsky Says:

    In 2005, price was indeed a factor in the unavailability of intravenous immunoglobulin (IVIG) to safety-net hospitals enrolled in the 340B drug discount program.

    Unlike the current situation with respect to generic injectable pharmaceuticals, there was no real shortage of IVIG in 2005. Manufacturers and suppliers had plenty to sell at higher prices but claimed there was a “shortage” when a hospital tried to obtain the product through the 340B program.

    We said that this action circumvented the plain meaning of the 340B law, the 340B pharmaceutical pricing agreements that the manufacturers voluntarily entered into with HHS, and congressional intent in establishing a program intended to help safety-net providers continue their charitable mission.

    340B hospitals are not trying to get to the front of the line when it comes to drug allocation. Rather, we are trying to obtain equal access to pharmaceuticals just like Veterans Affairs hospitals and other taxpayer supported health care facilities. The 340B program is just as important today as the day President George H.W. Bush signed it into law.

  4. Richard Walker Says:

    Slafsky’s blog post simply not credible. Everywhere in the health care system where someone is paying below the market rate, they have access problems. Seniors and the disabled on Medicare are increasingly finding it hard to find doctors who will see them. People on Medicaid are having to turn to community health centers and safety net hospital emergency rooms for their care. SCHIP children face long waits. The newly insured in Massachusetts find it much harder to see doctors than the privately insured. Why should the market for drugs be any different? I agree with Devon Herrick. This is just economics 101.

  5. mjbonck Says:

    The drug shortages have not been exacerbated by the 340B program. The drug shortages are an issue of supply and demand. Why not interview hospital pharmacy managers involved in the Group Purchasing process if you really want to know what is going on! The 340B program has not driven generic prices to the current levels. It is the overall Group Purchasing Process in the United States. We have all witnessed tremendous price decreases with the advent of a generic medication once the innovator goes off patent. Often there are numerous generic manufacturers involved in the initial introduction of the generic product. The price point is driven down dramatically by competition and by contracting. That leads in the long run to many of the manufacturers exiting the market for that product line as there are no longer profits to be made. One to two manufacturers remain, and if there is a problem with quality, good manufacturing proceses, or raw material supply, a shortage occurs quickly. We have seen this time and again over the last few years and especially over the past 18 months to 24 months as the shortages that we are expereiencing have become more acute. On the other hand, we are seeing the “reinvention”of many generic products with price increases of 20% to 4,000% over night. Prices were driven below market sustainability and now generic products are rising by large percentages. We are witnessing that for generic oral medications, generic ophthalmics, and generic topical products, among others. One comment on the blood product market. There have been changes in the market over the years that have led to shortages and price increases- for instance, decreasing the number of blood collection facilities, changing from powdered liquid immune globulin products, etc. There has never been consistent 340B pricing available for these products, so the 340B program cannot have caused shortages. Rather, it has been the decisions of manufacturers and consolidation of manufacturers that led to those shortages.

  6. ddavies Says:

    The demand for drugs are determined by what the patients need, not by whether is a 340B facility eligible or not. Therefore I can not agree with the suggestion that an increase in the number 340B eligibility eligible entity will increase drug shortages.

    The number of sites registered are all facility addresses that access the 340B program, not the number of actually facilities accessing the program. Even though a Title X clinic or FQHC operation is actually 1 eligible entity may have 3 clinics around the city, then it is listed as 3 phyiscal addresses under the program. Ryan White or Black Lung Clinics may be listed seprataely, etc. Therefore, the mention that there are 20,000+ actually entities accessing the program presents a picture that is not entirely clear as to the scope of these facilities.

    If you go to the ASHP website on current drug shortages, I do not see any mention from the manufacturers concerning lower revenue as a reason for shortage.

    The above mentions that “when prices are kept artificially low, shortages develop”. I would agree if an entire market was kept artificially low, then the market would probably see product shortages. But since there is no 340B regulation that mandates the manufacturers’ costs be stagnent, but the program is a set discount percentage. This allows for the manufacturers to adjust their price to meet revenue expectations.

    When a manufacturer representative looks you in the eye and tells you that their company that can sell you all of our the inpatient products that you need through your GPO agreement but they can not sell you what you need for your outpatient 340B eligible needs, this is not a shortage. This appears to be a discrimination against the 340B eligibility facility needs, not the manufacturers capability to sell the product at the 340B price and fulfill their responsibility under the law.

  7. TKirkpatrick Says:

    Another key concept to consider is that of materiality. In a market where 340B constitutes less than 2% of sales, what material impact can that market segment have on the other 98%? As Ted Slafsky pointed out, the majority of the shortages with the most critical impact in in the realm of generic injectable medications. As a participant in the 340B program, I know that my pricing for generic injectables through 340B is often HIGHER than the price I would pay through contracts negotiated by my Group Purchasing Organization. 340B rules require that I pay that higher price and I cannot cherry pick for 340B eligible patient use.

    I believe these shortages are primarily the result of more than a decade of consolidation in the drug manufacturing industry. If you work through the list of more than 200 drugs in shortage condition and consider how many manufacturers were making these same products in 1995 or 2000 compared to today, there is a striking reduction in manufacturing entities. With a limited number manufacturers over broad lines of injectable products, any systemic failure or market driven decision results in a cascade of shortages that the few remaining manufacturers cannot react to with sufficient speed or quantities. Yes, these are commodity items. Yes, price increases to cause production to match demand are likely. However, the limited number of manufacturers leaves the American public vulnerable for the foreseeable future because there is no capacity to absorb failure.

  8. John Goodman Says:

    I’m not quite sure how to respond to Ted Slafsky. He insists that the 340B program has in no way caused the current and growing shortage of drugs available to hospitals. He then says:

    “We wrote to Secretary Leavitt to inform him that some pharmaceutical companies, most notably those that make the blood product intravenous immunoglobulin (IVIG), were refusing to sell their products to 340B providers, ostensibly because there was no supply. In fact, there was plenty of supply available to commercial and retail entities that contracted directly with the companies, but nothing available to 340B providers.”

    Let’s see if I understand what I just read. Every buyer who was paying the market price had no difficulty getting the drug. But those that were paying below market could not get it. Slafsky can’t tell us why that was, but he is sure that it had nothing to do with price.


  9. Devon Herrick Says:

    Ted Slafsky states… “His entire case against 340B drug discounts rests upon his belief that ‘when prices are kept artificially low, shortages develop’.”

    That is a fundamental tenant of economics – they teach the concept the first day of Economics 101. A price ceiling that’s set below the market clearing price always results in a shortage (because demand exceeds supply). This is made worse by the fact that generic drugs are largely a commodity market, with slim profit margins.

    In 2002 about 8,000 facilities qualified for drug discounts. That number is expected to increase to nearly 20,000 in the years to come. I fear that can only mean the number of drugs in short supply is bound to get worse.

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