Key Takeaways:
- Federal agencies are taking a closer look at the contracting practices and compensation models of group purchasing organizations and drug wholesalers to ascertain their impact on generic drug shortages.
- While there are many factors that can lead to shortages, this inquiry examines how these practices affect market incentives for manufacturers to produce less profitable generic drugs.
- The agencies are also interested in the impact of these practices on purchasing decisions by healthcare providers and retailers.
The Federal Trade Commission (FTC) and the Department of Health and Human Services (HHS) are soliciting public comments on the root causes of and potential solutions to drug shortages. The request for information (RFI) focuses on the contracting practices of group purchasing organizations (GPOs) and drug wholesalers, the purported lack of competition amongst them, and the impact of these factors on generic pharmaceuticals and “related markets.” This is the latest in a series of actions by federal lawmakers and regulators to formally examine market factors that may be playing a role in the shortage of generic drugs and increased drug prices.
Background on Drug Shortages
According to a recent Senate Committee on Finance white paper, the problem of drug shortages is far more pervasive for generic drugs than it is for brand drugs, and the least expensive generics tend to have the highest risk of shortage. Shortages have occurred across a range of therapeutic areas, affecting access to medications used to treat a variety of illnesses and conditions, such as children’s flu, attention deficit hyperactivity disorder (ADHD), bacterial infections, and cancer. Generic sterile injectables (GSIs), which are regularly used in hospitals, comprise roughly two-thirds of the drugs in shortage. GSIs that are or have recently been in shortage include intravenous (IV) saline solutions, morphine, cancer drugs (including leucovorin and cytarabine), crash cart drugs (including epinephrine and calcium gluconate), anesthesia drugs (including propofol), and hormones (including oxytocin and somatropin).1
A variety of interrelated factors contribute to drug shortages, including issues with obtaining active pharmaceutical ingredients (API) and other starter materials, lack of visibility into the pharmaceutical supply chains, vulnerabilities in global markets, a limited number of suppliers for certain critical medicines, increased demand, regulatory challenges, quality issues, and economic drivers. The Food and Drug Administration (FDA) outlined the following root causes of drug shortages in an October 2019 report:
- Lack of incentives for manufacturers to produce less profitable drugs;
- Lack of incentives for manufacturers to develop “mature quality systems” that focus on continuous improvement and early detection of supply chain issues; and
- Logistical and regulatory challenges that impede the market’s recovery from a disruption.
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March 2023 report by the Senate Committee on Homeland Security and Governmental Affairs (HSGAC) reached similar conclusions. The report explained that the economics of generic drug manufacturing, including the complex manufacturing process and lack of return on investment, have resulted in manufacturers exiting the market and few incentives for new entrants, leading to shortages of a critical set of generic drugs.
Role of GPOs and Drug Wholesalers
The HSGAC report also pointed out that consolidation in GPOs and distributors has led to the “unintended consequence” of squeezing generic manufacturers out of the market. The RFI defines “GPOs” as entities that broker deals for medical products between healthcare providers—including hospitals, physicians, nursing homes, and home health agencies—and manufacturers, distributors, and other vendors. “Drug wholesalers,” in turn, are defined as entities that distribute pharmaceutical products to retailers (including chain, independent, and large retailers) as well as hospitals and other healthcare providers.
Concentration in the pharmaceutical distribution market has driven up the negotiating power of these intermediaries. Market consolidation in these sectors has resulted in the three largest GPOs accounting for 80 percent of the generic medical supply market and the three largest distributors representing approximately 90 percent of the retail prescription market.2 While this has resulted in lower retail costs to final consumers, it has also led to lower margins for generic manufacturers by inducing “race to the bottom pricing” and ultimately limiting the number of available suppliers.
Generic manufacturers have blamed a variety of contracting practices by GPOs and wholesale distributors, such as “low price clauses” and “most favored nation clauses,” for extracting prices from generic manufacturers that are at an unsustainable level. The GPO compensation structure has also been challenged by economic experts who argue that GPOs have little incentive to charge lower prices to their customers. For example, GPOs are permitted to collect administrative fees so long as they meet certain requirements of a safe harbor to the antikickback provisions of the Social Security Act. Because GPOs typically charge percentage-based administrative fees, their compensation increases as prices increase.3 Moreover, generic drugs are typically marked up by a larger percentage than are brand drugs.4 As generic manufacturers fail to win GPO contracts or fail to obtain sustainable pricing, the threat of supply shortages for susceptible generic drugs rises.5
HHS/FTC Request for Information
The RFI asks a number of questions related to the impact of the lack of competition among GPOs and drug wholesalers on various entities in the healthcare system as well as questions aimed at discovering the impact of specific contracting practices and compensation models. For example, the RFI asks whether available protections for GPOs under the antikickback statute affect competition, contracting practices, and drug shortages. The agencies are also looking for evidence of or specific instances in which the market power of these intermediaries has contributed to drug shortages and whether any of these contracting practices has prohibited or disincentivized healthcare providers and retailers from purchasing lower-cost or higher-quality medical products.
Ultimately, the agencies are seeking to learn the changes that could be made in GPO contracting practices to incentivize manufacturers to maintain a steady and reliable supply of high-quality products, while also maintaining affordability for healthcare providers.
Comments in response to the RFI are due on April 15, 2024.
1M. Wosińska and R.G. Frank, Federal Policies to Address Persistent Generic Drug Shortages, The Hamilton Project (June 2023), https://www.brookings.edu/wp-content/uploads/2023/06/20230621_ES_THP_GSI_Report_Final.pdf.
2Association for Accessible Medicines, Hatch-Waxman Turns 40: Is it Over the Hill? (Or is the Hill over Hatch-Waxman…), https://accessiblemeds.org/sites/default/files/2024-02/AAM-Hatch-Waxman-White-Paper.pdf.
3GAO, Group Purchasing Organizations Funding Structure Has Potential Implications for Medicare Costs (Oct. 2014), https://www.gao.gov/assets/gao-15-13.pdf.
4The Commonwealth Fund, The Impact of Pharmaceutical Wholesalers on U.S. Drug Spending (July 20, 2022), https://www.commonwealthfund.org/publications/issue-briefs/2022/jul/impact-pharmaceutical-wholesalers-drug-spending.
5GAO, Drug Shortages: Public Health Threat Continues, Despite Efforts to Help Ensure Product Availability (Feb. 2014), https://www.gao.gov/assets/d14194.pdf.
