In reality, the imbalanced pricing dynamics described above form a price control mechanism. The primary referee of the health policy, the federal government, is also an active participant in the health care arena—primarily in the role of payer. No surprise, then, that the pricing mechanism favors lower prices. But is it ever that easy?
Price controls have been around for centuries, have been intensively studied by economists, and often persist because the public does not recognize the connection between price controls and the problems that they create. Potential consequences include waiting lines (as in the 1970s gasoline crisis), quality deterioration, black markets, and rationing (as with joint replacement surgery in Canada). We can find examples of almost all of these consequences in the generic drug shortage. “Gray markets” have emerged. Our patients have been placed in waiting lines through treatment delays. Rationing has occurred by forcing allocation decisions for available generics based on who needs the drug “the most.” FDA regulation may have mitigated quality deterioration, but mandated upgrades to production facilities may be encouraging manufacturers to drop out of the low-margin business of generics.
Generic drugs account for less than 2% of spending on oncology pharmaceuticals. These drugs were already inexpensive; we have made them too inexpensive. Manufacturers have to design rational business plans, and the current pricing dynamics do not support the production of enough supply. Also, it is at least possible that the ASP system may inadvertently increase the price of oncology drugs overall. Currently, there is no price control mechanism for the initial price of a drug. Faced with limited capacity to raise prices in the future, the current ASP system may encourage higher pricing of branded products when they first come to market. Price controls have also been known to fail.
Just as multiple causes of the generic drug shortage have been postulated, various solutions have been proposed. These solutions have gone as far as government stockpiling or manufacturing of generics. Other proposals include requiring redundancy in production capacity, requiring manufacturers to determine projections for product demand as well as plans to meet this demand, and extending the expiration date of a drug in short supply. While lawmakers on Capitol Hill are seemingly focused on this issue, I suspect that this is because many of them either instinctively or objectively understand that they are part of the problem. President Obama’s recent executive orders (1) instruct the FDA to broaden reporting of potential shortages by manufacturers, (2) accelerate the review process for companies that would like to begin production of generics, and (3) improve reporting of collusion or price gouging to the Justice Department. This has the classic appearance of politicians first trying to look like they are “doing something.” These measures alone will be insufficient and possibly even counterproductive.
If the fundamental problem is asymmetrical pricing mechanisms biased to the downside, then the best solution would be to allow the price of generics to rise more easily. Changing to ASP + 30% for generics or reimbursing according to the price paid by wholesalers on the open market have been proposed. Others who recognize the central role of lack of profitability have suggested measures such as tax breaks to manufacturers or offering market exclusivity. We will all have to find these solutions together. The history of price controls has lessons to teach: starting them can be easy, living with them very difficult, and ending them hardest of all.