Over the past weeks, several gut-wrenching stories surfaced regarding the impact of drug shortages, such as that of a high school football coach who died after his chemotherapy supply ran out.
I am not from the healthcare / pharma industry but my read has been that PBMs play an outsized role in the whole chain, and I am wondering if they are actually a bottleneck now? Perhaps you could write more about that piece in the chain.
great piece. I think it understates the role of the pricing and economics on supply. A lot of the money made in generic drug manufacturing is made by finding drugs where something is limiting the number of suppliers in the market. Historically, this has often been that the drug, although generic, requires a scarce capability to manufacture or distribute. I’ve known people who did well running business making injectable drugs that, at the time, were considered difficult to manufacture, or those like painkillers where control over the supply chain and documentation is difficult. In these situations, the drug company charges a relatively high price. But that price invites competition and the diffusion of the scare capability and the market settles to very low profitability. Once there are many players, firms exit the market. When the market has many players, forecasting sales can be difficult, especially when buyers like PBMs, wholesales, and hospital Group Purchasing Organizations can shift a large chunk of the market from one seller to another. When firms start exiting, shortages occur. Eventually, so many players exit that somebody can corner the market and raise price again.
In addition, shortages are more common in hospitals than in drugs distributed through retail pharmacies. I scanned the current FDA drug shortage list. Roughly 70% are injectable drugs, which means they are most likely used in hospitals. The unit sales of drugs sold in retail pharmacies tend to be relatively large. Hospitals are serving fewer patients and unit sales are lower. Demand of retail drugs is often more predictable, as most are used chronically. Hospital usage is more sensitive to community infection rates, other seasonal factors such as weather, and can get whipsawed by capacity issues from specialty physicians. This makes forecasting hospital generic drugs more difficult.
Hospitals also have a somewhat simpler supply chain. PBMs don’t play much of a role as insurers cover hospital stays as a medical benefit, while PBMs only cover pharmacy benefits. Negotiation is most often done by a Group Purchasing Organization or by a large hospital group directly with the drug manufacturer. Distribution is simpler, as many products go directly from the manufacturer through a distributor to the hospital pharmacy or, sometimes, directly from the manufacturer to the pharmacy.
This is all to say that Biden’s diagnosis may be closer to the core of the issue than it seems. However, it’s been obvious for many years that shortages would be lessened if hospitals paid more and it’s hard to see how use of the bully pulpit would change this.
Such a well-written piece. The untoward consequences of drug shortages are amplified when substitutes are not available and the only medication that the patients with many drug allergies can take is on back order.
As always, great analysis! Thanks!
I am not from the healthcare / pharma industry but my read has been that PBMs play an outsized role in the whole chain, and I am wondering if they are actually a bottleneck now? Perhaps you could write more about that piece in the chain.
Let me get deeper into it.
great piece. I think it understates the role of the pricing and economics on supply. A lot of the money made in generic drug manufacturing is made by finding drugs where something is limiting the number of suppliers in the market. Historically, this has often been that the drug, although generic, requires a scarce capability to manufacture or distribute. I’ve known people who did well running business making injectable drugs that, at the time, were considered difficult to manufacture, or those like painkillers where control over the supply chain and documentation is difficult. In these situations, the drug company charges a relatively high price. But that price invites competition and the diffusion of the scare capability and the market settles to very low profitability. Once there are many players, firms exit the market. When the market has many players, forecasting sales can be difficult, especially when buyers like PBMs, wholesales, and hospital Group Purchasing Organizations can shift a large chunk of the market from one seller to another. When firms start exiting, shortages occur. Eventually, so many players exit that somebody can corner the market and raise price again.
In addition, shortages are more common in hospitals than in drugs distributed through retail pharmacies. I scanned the current FDA drug shortage list. Roughly 70% are injectable drugs, which means they are most likely used in hospitals. The unit sales of drugs sold in retail pharmacies tend to be relatively large. Hospitals are serving fewer patients and unit sales are lower. Demand of retail drugs is often more predictable, as most are used chronically. Hospital usage is more sensitive to community infection rates, other seasonal factors such as weather, and can get whipsawed by capacity issues from specialty physicians. This makes forecasting hospital generic drugs more difficult.
Hospitals also have a somewhat simpler supply chain. PBMs don’t play much of a role as insurers cover hospital stays as a medical benefit, while PBMs only cover pharmacy benefits. Negotiation is most often done by a Group Purchasing Organization or by a large hospital group directly with the drug manufacturer. Distribution is simpler, as many products go directly from the manufacturer through a distributor to the hospital pharmacy or, sometimes, directly from the manufacturer to the pharmacy.
This is all to say that Biden’s diagnosis may be closer to the core of the issue than it seems. However, it’s been obvious for many years that shortages would be lessened if hospitals paid more and it’s hard to see how use of the bully pulpit would change this.
Such a well-written piece. The untoward consequences of drug shortages are amplified when substitutes are not available and the only medication that the patients with many drug allergies can take is on back order.