Unsophisticated Government Regulation of Generic Drug Manufacturing: Shortages Are Surprising?

Contrary to what readers may think, the Disease Management Care Blog is not an inflexible nutcase ideologue that is 100% opposed to the government financing or regulation of health care.  It knows that it can make eminent sense for the Feds to step in when markets fail. The DMCB also understands that stepping in not only means additional spending, but laws, regulations and oversight to make sure patients as well as taxpayers get their money's worth.

And so it goes with overseas drug manufacturing.  Recall back in 2010, the widely used blood thinner heparin was tainted with look-alike chondroitin.  The source appears to have been China and in typical fashion, the plaintiff attorneys have begun to swarm. Given that recent fiasco, who could argue about the stepping up the FDA's role?

Well, since then, a generic drug shortage has emerged and no one is getting their money's worth. 

Readers can the depressing explanations here and here.  As the DMCB understands it, only a few overseas manufacturers are willing to put up with the United States' quality oversight and average-cost-plus-6%-margin price controls.  As inevitable manufacturing problems arise or as upgrading of production makes them go offline, the flow of drugs dries up. In response, middlemen and end-users resort to stockpiling, which only makes the shortages worse.  Finally, since generics aren't available, physicians have ironically turned to using more expensive brand name drugs.

And this outcome is surprising?

The U.S. Congress and the Administration have responded with characteristic pretzel logic: if government intervention and regulations have failed, the answer is more intervention and more regulations.  By recent executive order, manufacturers are now being forced to announce impending shortages (which has been criticized as likely to prompt even more stockpiling), maintain redundant production systems (which is probably one more barrier to running a profitable business) and, while keeping price controls in place, allow for more of a profit margin (which, of course, will be unilaterally set by deficit-ridden Uncle Sam in no mood for generosity).

But wait! 

None other than physician and former White House Health Policy Golden Boy Ezekiel Emanuel penned this opinion piece back in August. While not explicitly endorsing the idea that the Feds should get out of the way, he does want his former boss to reconsider:

"A more radical approach would be to take Medicare out of the generic cancer drug business entirely. Once a drug becomes generic, Medicare should stop paying, and it should be covered by a private pharmacy plan. That way prices can better reflect the market, and market incentives can work to prevent shortages."       

The DMCB finds it telling that such an ardent supporter of health reform would even consider such a notion.  Yet, when taxpayers are being forced to choose between the two extremes of a decidedly unsophisticated approach to overseas generic drug manufacturing with unintended consequences versus a competitive market-based laissez faire approach, maybe Ayn Rand had a point.

It's enough to make the DMCB think about becoming a nutcase ideologue.

But not yet.

The Obvious and Not So Obvious Ways Insurers Promote Generics (but that's not so bad)

Years ago, the Disease Management Care Blog recalls hearing a patient utter a mighty oath at his insurance company for taking his preferred blood pressure pill off formulary. ‘Not a problem,’ replied the DMCB, because it knew there were plenty of other generic pills that worked just as well. Its message to the annoyed patient: your insurance company isn’t selling what your employer bought for you. Get over it or pay your own way.

If a health insurer promotes the use of generic medications, is that good or bad? The DMCB knows that, with few exceptions, the efficacy and safety track record of generics are very high. With very few exceptions, the insurers’ preference for generics can be reconciled with the patients’ best interests. Brand drugs and generic drugs both work just as well in the vast majority of circumstances.

Clinical logic aside, is it all about money? The DMCB thinks so, but not in the way most persons understand it. When patients’ or physicians’ wishes for a ‘brand’ non-generic medication are stymied, they generally assume the high price of that drug in their particular circumstance is prompting the health insurers’ sticker-shock induced denial fever. That’s only part of the story.

Recall that insurers are all about the business of population-based risk transfer. When they sell a pharmacy benefit for a premium, they’ve already assessed the likely percentage of persons in a population that will use which drugs for what duration at which predetermined prices. So when a particular patient and their doctor chose an expensive brand medication, that behavior has already been priced in the premium.

So why deny? Insurers grow surplus by accepting risk. Anything that can mitigate that risk will be welcome. Since high utilization of pricey brand-name drugs runs the risk of losing money, a population’s anticipated medication use in the coming year can be ‘defended’ by denying coverage for the branded drugs and promoting cheaper generic medication use. In addition, there is also a sentinel effect: if physicians and patients anticipate there will be a denial, they’re more likely to choose preferred generic medications. Finally, if there are an increased number of brand prescriptions this year, that trend can foretell next years’ utilization patterns. A high trend rate means a higher premium next year, which means existing customers may flee to a lower priced competitor. A high generic utilization rate means lower prices.

In fact, the DMCB has been involved in the financial evaluation of health insurance pharmacy benefit plans. Want to know the first question you should ask if you want to know how well a pharmacy plan is being run? That’s right, it’s “What’s the generic prescribing rate?” For a taste of how critical generics can be to the price of next year’s premium, check out this report from HHS OIG about the granddaddy of all pharmacy plans: Medicare Part D.

Denials, however, are hard work. It takes personnel to man the phones and deal with disgruntled physicians and patients. It’s not only cheaper but easier to candy wrap generic promotion with other tactics such as:

Charging patients a lower co-pay for generic medications. $5 for a month’s worth of generic pills vs. $30 for the brand is an attention grabber for most consumers.

Announcing that the already low co-pays for generics will be waived in response to the bad economy. The luster of a ‘good deal’ causes patients on brand name drugs to switch, especially if money is tight. While this has the patina of social consciousness, this is really a ‘blue light’ sales special: the foregone revenue from voided co-pays pales next to the savings from reduced branded medication use. If this was all about helping patients afford their pills, ALL co-pays would be waived or reduced.

Think ‘e-prescribing’ with or without an EHR is all about patient safety? Think again. When a doc writes a paper prescription, the decision has been made. However, in e-prescribing systems, on-screen reminders and prompts have had some success in changing physician prescribing patterns toward generics before the patient walks out the door.

Mail order pharmacies, typically run by pharmacy benefit managers (PBMs) not only have the advantage of delivering pills right to the patients’ door, knowledge of their patient-customers’ addresses and telephone numbers also enables them to market generic use. That’s one way PBMs are demonstrating superior value to their real customers, the health insurers.

For an example of what doesn’t work, try appealing to physicians for their help in doing the right thing in prescribing generics as much as possible. Check out this article from JAMA showing that, while there are many publications supporting the use of generics, editorials in the peer-reviewed literature are trumping the physicians’ right to prescribe what they want when they want. Since that doesn’t work so well, better to a) pay them or b) wine and dine them, using the same approach used by pharmaceutical companies. The DMCB leaves it to its readers or members of Congress (sometimes both?) to decide if this is appropriate.

Is the obvious and not so obvious promotion of generic medications bad? The DMCB thinks the answer is ‘no,’ since we need to do everything we can to control health care costs. There is no free ride. You get what you pay for.

And a final thought for the disease management community and patient centered medical homes: an additional way to demonstrate your value is to promote generic medications whenever appropriate. You already have the patients' ear, it's the right thing to do and you'll save your customers - AND ultimately the patients - a lot of money if you're successful.