NCPA - National Center for Policy Analysis

Not Enough Cancer Drugs, Too Many Price Controls

November 14, 2012

Cancer patients have enough to deal with. Now, they must worry about making sure there is no shortage of prescription drugs for their treatment. The reason for this stems from the 2003 Medicare Modernization Act, say Rep. Bill Cassidy (R-La.) and Dr. Patrick W. Cobb, a practicing oncologist in Billings, Mont.

  • The act prevented manufacturers from adjusting prices due to artificially low price caps.
  • This meant that manufacturers either produced drugs at a loss or had to pull them from the market.
  • In 2004, there were only 58 drug shortages.
  • However in 2011, there were 250 reported drug shortages.

Before the Medicare Modernization Act, pharmaceuticals received reimbursement proportional to the average wholesale price of the drug. Because there were concerns that these companies inflated the prices of their products, Medicare began to only reimburse providers at 106 percent of the average sales price of the drug over the previous two quarters of sales.

Whereas drug manufacturers once had a financial incentive to produce generic drugs, now they face marginal profits and losses and don't expend resources on developing generic drugs. Added to that, government requirements to provide discounts on drugs for high-need populations have also created a disincentive for drug manufacturers.

Generic drugs are more susceptible to shortages considering there are so few suppliers of them.

  • In 2010, for example, 90 percent of all generic injectable oncology drugs were produced by three or fewer companies.
  • New manufacturers are dissuaded from entering the market because the infrastructure is expensive and complex, and the laws prevent them from becoming very profitable.

Furthermore, because low-cost drugs are susceptible to shortages, middlemen will often enter and buy drugs at low prices, then sell them back at much higher prices.

Because of shortages, cancer patients that need drugs for their treatment are often placed in a situation where they either can't receive a perfect substitute, compromising their treatment, or face extraordinary costs to purchase replacement drugs.

The new health care law is likely to make the situation worse. Under the Affordable Care Act, the Independent Payment Advisory Board is forced to cut expenses if Medicare expenditures exceed a certain amount, including drug costs.

Source: Bill Cassidy and Patrick W. Cobb, "Not Enough Cancer Drugs, Too Many Price Controls," Wall Street Journal, November 11, 2012.


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