The medications most vulnerable to running short have a few things in common: They are generic, high-volume, and low-margin for their makers—not the cutting-edge specialty drugs that pad pharmaceutical companies’ bottom lines. Companies have little incentive to make the workhorse drugs we use most.
Congress’s response was to pass legislation in 2012, requiring manufacturers to give more notice ahead of anticipated shortages—but that seems to miss the point: What we’ve been witnessing, in slow motion, is market failure. It boils down to a lack of economic incentives.
Manufacturers of widely used, inexpensive drugs make relatively little off the products, whose prices are largely determined in contract negotiations between drugmakers and group purchasing organizations (or GPOs), which exist to broker better deals for hospitals. That makes this a high-volume, low-cost game, a reality that has driven consolidation in the market. It’s also a highly regulated and somewhat costly industry, which has chased some companies out. The economics make it hard to invest in the business or in building supply chain redundancy. When shortages happen, the financial losses tend to be marginal and temporary; there are too few players for customers to take their business elsewhere. What’s left is a system with just enough inventory to get by if nothing goes wrong.
Last year, a lot went wrong.It seems to me that a field that relies on low margins and high volumes and high regulatory standards and high capital requirements will have a low number of players, and a very low number of entrants.