Hospitals hit back on drug pricing, but will they knock out the problem? – Ernst Berndt

From The Conversation

MIT Sloan Professor Ernst Berndt

MIT Sloan Professor Ernst Berndt

Drug manufacturing and pricing vaulted into the news several years ago when a privately held company raised the price of a drug used for infections from US$13.50 to $750 for one pill.

After an outcry from hospitals, the company later relented, dropping its price by a small margin. Still, this single dramatic increase shed light on the once obscure arena of older generic drugs that continue to be in short supply and whose prices occasionally skyrocket.

Frustrated with these shortages and alarmed by the potential for price gouging, a coalition of hospitals has recently struck back. Four not-for-profit, religiously affiliated hospital systems and the U.S. Veterans’ Administration announced their intent to form a company that would manufacture generic drugs, thereby helping to mitigate or eliminate shortages and prevent future massive price spikes for rarely used generic drugs.

I’m an economist who has studied the health care industry, including the U.S. generic industry, and I see a few regulatory and business hurdles to this approach.

Worthy goal, but challenges aplenty

The formation of a generic drug company by not-for-profit hospital chains to address continuing drug shortages and mitigate periodic price spikes of old, rarely utilized generic drugs is understandable and reflects a worthy goal. It is important to realize, however, that there are reasons the markets for these old drugs are small. Most are unprofitable, and drug availability may not be guaranteed even if they are produced and marketed by not-for-profit organizations.

Three substantial challenges face the new generic company, each involving coordination clashes within the buying consortium. First, what specific generic drugs should the new generic company manufacture and market? A press release accompanying the announced collaboration suggested the consortium would market about 20 generic drugs.

But which generic drugs? Those drugs with the greatest price increases? Those whose shortages most threaten public health? Those critical drugs currently available, but whose possible price increases or supply disruption pose the potentially greatest threat to the public health? Those associated with the lowest production costs or least complex manufacturing? Given diverse preferences among its membership, the coalition may find it very difficult to reach a consensus on which generic drugs to manufacture.

Second, once a decision has been reached on which generic drugs to manufacture and market, the consortium must obtain regulatory approval from the FDA via the Abbreviated New Drug Approval process, either by reaching an agreement with an existing manufacturer with that approval, or by filing completely anew.

Read the full post at The Conversation.

Ernst Berndt is the Louis E. Seley Professor in Applied Economics and a Professor of Applied Economics at the MIT Sloan School of Management.

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