Schumer’s Completely Unhelpful Approach to Curbing Drug Shortages

December 8, 2011
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Shortages of lifesaving drugs have been rising toward crisis levels in recent years. As a result some hospitals have been forced to delay treatment, substitute other drugs, or pay high prices to secure supplies from distributors. Michelle Hudspedth, pediatric hematology and oncology chief at the Medical University of South Carolina explains that federal policy is largely responsible for the shortages. In particular it’s hard for the drug companies to make money.

Shortages of lifesaving drugs have been rising toward crisis levels in recent years. As a result some hospitals have been forced to delay treatment, substitute other drugs, or pay high prices to secure supplies from distributors. Michelle Hudspedth, pediatric hematology and oncology chief at the Medical University of South Carolina explains that federal policy is largely responsible for the shortages. In particular it’s hard for the drug companies to make money. From California Healthline:

Hudspeth identified the Medicare Modernization Act of 2003 as the main reason for drug shortages, as it shifted the reimbursement rate from a percentage of average wholesale pricing to the average selling price, including all discounts and rebates.

She said, “Generic prices are driven down by market competition, and the current model under the MMA makes it difficult for companies to raise prices more than 6% per year.” Hudspeth added, “Product margins have fallen significantly for many generic drugs, leaving companies with little incentive to continue manufacturing the drug or to increase production” (Modern Healthcare, 11/30)

Problems in manufacturing plants are also playing a role, as sterile drugs for injection/infusion are notoriously hard to produce.

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Now Senator Charles Schumer of New York is proposing a headline-grabbing but wrong headed idea: to make it illegal for drug distributors to engage in “price gouging” when they sell medications. The law would be backed up with penalties of up to $500 million per case. Said Schumer:

“Forcing hospitals to buy life-saving medications at outrageously inflated prices is unquestionably unethical, and with this legislation it would be illegal, too.”

Schumer should really be focusing on the root causes of the problem instead of blaming a seller for engaging in a market clearing transaction. The seller isn’t “forcing” a hospital to buy any more than the hospital is “forcing” the seller to sell. If anything, Schumer’s law would make things worse by eliminating the incentive for distributors to hunt down pockets of excess supply and scaring buyers and sellers away from pursuing transactions to avoid getting tangled up in a legal case.