How a Cabal Keeps Generics Scarce
nytimes.com
nytimes.com
A little background on group purchasing organizations: GPOs represent their member hospitals. They "buy in bulk" and extract discounts from manufacturers and take "administration fees" to cover theirs costs.
Who owns the GPOs? The hospitals do! The largest GPO, Novation, is owned by VHA and UHC, two of the largest healthcare alliances that is comprised of US hospitals.
Margaret Clapp, the first author of this article used to work for Mass General who is a member of VHA, who thus owns the GPO Novation.
These GPOs exist because the hospitals themselves created them.
And it's ridiculous to say that GPO discounts are responsibly for drug shortages. GPOs don't want drug shortages because (1) their member hospitals don't get the drugs they want (2) because the GPO loses money every time a hospital can't order a drug.
The current drug shortages are actually due to a number of different factors:
(1) Margins on generic drugs are razor thin, they are basically commodities. The purchasers of these drugs don't care who makes them, since they are all deemed equivalent by the FDA; the result is that whoever has the lowest price gets to sell their drug
(2) The generic drug market looks like a commodity marketplace, but in fact it isn't. There are a number of costs associated with manufacturing a drug to FDA standards. If the FDA comes in and says "you can't ship that drug", you've probably just lost all of your profits for an entire year.
(3) Drug prices are "sticky" due to the way that Medicare and Medicaid pays for drugs. If you suddenly have a manufacturing problem and need to raise the price of your drug to cover costs, you're out of luck since it means the purchasers of your drug will lose money.
(4) Because of the low profit margins, companies are simply getting out of the business. There are other products they could sell that are lower-risk and higher margin.
The exact workings are beyond my investigative ability, but I think it very likely that kickbacks, payola, and other off-book activities are involved. The cash flows are massaged until it appears that the hospital itself is operating on thinner margins, and the satellite business entities are making fatter profits. Since only the hospital deals directly with the insurers, this tricks them into paying for procedures at a rate much higher than the actual bottom-line cost to the hospital.
I think the reason hospital systems are so secretive about their billing and procurement systems is that the public would find their practices to be scandalously avaricious, if not outright fraud.
Unfortunately, I can't support even a tiny bit of my hypothesis with actual evidence.
(4) wouldn't be a concern if there was room to innovate on the business model of pharmaceutical manufacturing. It seems like this sort of thing would be a great opportunity for disruption in other industries. I'm assuming that the regulatory burden makes this difficult? Car dealerships, restaurants, and grocery stores all have razor thin margins as well.
There is room to innovate in the generic drug industry. Most generic drug manufacturers have R&D budgets aimed at reducing the cost of manufacturing.
However, the generic drug market is an odd one. It all comes down to price and some companies price certain generics at below cost (i.e. loss leaders) in order to gain other business.
The most interesting quote I've read was from Barry Sherman who runs Apotex, one of the biggest generic drug makers. I don't have the quote in front of me, but to sum it up: "I rarely make any profit on any of my drugs. Most of my profit comes from patent settlements and court cases I win again the branded drug makers."
I don't think you can reasonably call our system of medical drug production "free-market". Heck, I'm not even convinced that our drug production system is freer than the Soviet Union's was, though it's clearly still quite capitalist.
"Policy makers apparently failed to ask the important question: How could this happen in a free-market economy? That would have steered them to the giant purchasing organizations that control the procurement of up to $300 billion in drugs, devices and supplies annually for some 5,000 health care facilities. These cartels have undermined the laws of supply and demand."
I'm pretty sure the question is meant to be a question you ask to lead you to where the free market is indeed being broken, not a claim that we have a free market.
This is solid logic; if the free market can do anything, it's match supply and demand via price signals. (If you're having a political reaction to that statement, I mean this in a simple microeconomics sense; it is indeed what free markets do.) In the absence of raw material problems, pervasive shortages are effectively proof that somewhere in the system, someone's fixing prices to below production costs. Sounds like they might be combining that with some good ol' fashioned corruption.
(This is why I'm a "libertarian" and not an "anarchist"; the free market needs defenders, because as beautiful as the theory is, in the real world, stuff like this happens, and it needs to be stopped by somebody with the power to stop it.)
And in reality, there are lots of price controls on generics. That's not a bug with the theory; drug production is only a partially free market at best.
Whether it can in principle, versus whether it does in reality are of course two very different things.
Even that might not be so bad, if a huge chunk of the audience did not consider it their moral duty to shut off their brain.
Yes, what a free market does is match supply and demand via price signals. It is the aforementioned Econ 101, using mechanisms discussed in Econ 101, which are all mostly math and border on physics. What people don't like is that it does so entirely a-morally (not im-morally as some would like you to think, but actually a-morally, with no particular regard for human morals), so you will sometimes not like how it does it (thus, price gouging laws during emergencies; the free market is trying to balance a sudden supply shock with skyrocketing prices, and we don't like that), and sometimes we have to intervene to prevent it from amorally doing something we don't want to happen at all (hence the need to sometimes straight-up ban things; a free market will efficiently price slaves, drugs, or hit jobs perfectly amorally), but in the normal case, what a free market does is match supply to demand with price signals, regardless of whether we "like" the result or not. It is sufficiently efficient at this that a long-term failure to match up supply & demand is extremely strong evidence (though not quite 100% proof) that there is not a free market where the mismatch is occurring; something's fiddling with the prices outside of normal supply and demand mechanisms. (An interesting example in the other direction is that our War On Drugs has been rather ineffective, as can be shown by the fact that supply and demand are often quite well matched up via pricing; despite our best efforts there still is a fairly free market in drugs!)
That being said, the medical sector needs extreme regulation for obvious purposes (eg. to give all people access to adequate health care, not only the rich, and to make sure that the products do what advertised and do not kill the patients). What has been missing in the US is a compulsory insurance scheme...
Not only that, but sick people are making choices that, while technically free choices, are typically dilemmas, Catch-22s, Hobson's choices or worse: Sophie's choice.
And so there are shortages. Or you get stuff from China, where manufacturers can ship you 1 or 1000 KGs of stuff with a month's notice.
I have first hand experience with the brutal realities of the disgustingly low standard of healthcare in the US.
When I saw nytimes.com I thought of the Haskell project they did with the supermodels.