Guiding the Invisible Hand

If we are to believe the headlines, the U.S. is in the throes of its biggest pharmaceutical supply crisis in 30 years. The pipeline of healthcare staples, the mature drugs that allow the typical hospital or clinic to run smoothly, is drying out, forcing physicians to prescribe second- or third-tier treatments, and resulting in medication errors and missed treatments. In a recent survey from the Institute for Safe Medication Practices, 19% of 1800 physician respondents noted “poor patient outcomes” from medication errors caused by drug shortages, meaning that patients are suffering, and even dying.
Cynics ask whether this shortage has been artificially created, in order to raise prices. But the truth is much more complicated, because it’s generic drugs, particularly injectibles, that are in short supply. Economic pressures have driven unstable suppliers out of the business, but those who stay are opting out of unprofitable markets.
Teva, for instance, has reportedly stopped making the anesthetic propofol. Supplies of oncology drugs have been hit so hard that two senators recently wrote to FDA Commissioner Margaret Hamburg asking that steps be taken to ensure a stable supply.
What is the solution? The government can’t mandate production. Pharmaceuticals are a business, after all, and suppliers must pursue profit. If government were to become a customer, as it has for flu vaccines, the supply problem could get worse.
Market forces have to dictate the solution, but maybe the “invisible hand” of self-interest needs a little push.
Government might help, on the R&D side, by facilitating partnerships with its research labs and providing some immunity from liability suits for new drugs in critical areas.
However, the manufacturing of these drugs is another story entirely. Injectibles are more difficult to make than other forms, and require longer lead times.
If a capacity ceiling has been reached, perhaps generics manufacturers could take advantage of Obama’s proposed capital tax credit for industry (if it passes). Less likely to appeal to cash-rich name brand drug companies, it might be just the thing to get generics manufacturers to expand their plants and invest in new equipment, such as automated filling systems.
Certainly the manufacturers involved could apply better scheduling techniques and, perhaps, Lean and Six Sigma to operations to ensure that every drop of capacity is used. It would be in their own best interests, since pulling out of sensitive markets could mean negative publicity and bring lower sales in the future.
Perhaps large generic or even brand-name drug companies could come to the rescue, by using the “branded generics” approach for these products. They could do this individually, or via a “Sam’s Club” approach, involving pools of manufacturers, say, groups of six or seven vetted generics manufacturers located in a single area and using common materials. For each critical product area, manufacturers in each group could divide up the manufacturing and collectively ship agreed upon quantities of critical drugs to member customers. The large customer pharma companies could then handle the quality control (assuming they leave metal, wood and pallet coating chemicals out of the equation).
If empathy with patients isn’t a business driver, impatient supply chain partners will be. In the future, manufacturers can expect to see more programs like Premiere Healthcare Alliance’s “Failure to Supply,” which allows hospitals and pharmacies to analyze data to pinpoint contractual supply breaches (and collect fees).
Imagine an industry running with key products unavailable . . . Hyundai’s CEO announcing the Sonata’s availability by lotto? It wouldn’t happen. As GSK’s CEO Andrew Witty wrote recently in The Economist, pharma can no longer afford to think it’s immune to market forces. The question is, can it respond, and use them, to its advantage, and that of its primary customers?