Cost Controls Demolish America’s Medication Lack

Combating Medication Shortages in the United States: A Fresh Approach to Cost Control

The United States is facing a critical issue with medication shortages, with the second quarter of this year witnessing a staggering 309 active drug shortages. This marks the highest shortage levels in nearly a decade, and the problem has been escalating over recent years. Recent surveys conducted among over 1,100 hospital pharmacists reveal that they’ve been forced to adopt measures such as rationing, delays, or even cancellations of treatments due to these shortages. The impact is particularly severe for cancer patients, with over half of pharmacists reporting shortages of chemotherapy drugs that significantly hamper patient care. 

The root cause of this medication shortage crisis lies in the absence of financial incentives for the production of less profitable drugs, including generics. Research from esteemed institutions like the Margolis Center at Duke University and the Brookings Institution highlights that low payment rates and narrow profit margins hinder manufacturers from investing in improving their production processes. This lack of investment results in more frequent and persistent recalls and production stoppages, thereby worsening the shortage problem.

Government policies aimed at cost control within Medicare and Medicaid, which together account for 40% of prescription drug spending in the U.S., have a significant impact on the supply chain’s ability to recover from shortages. To effectively address these shortages, it is imperative for the government to critically examine its own pricing policies.

Both Medicare and Medicaid impose penalties, known as rebates, if drug prices increase faster than inflation. The Medicare Drug Discount Program, established as part of the 2022 Expansion Reduction Act, can alleviate or eliminate the inflation penalty for drugs facing shortages. In contrast, the Medicaid Drug Rebate Program, instituted in 1990, not only demands a substantial discount from drug manufacturers’ prices but also includes an inflation penalty. Unlike the Medicare Drug Rebate, the Medicaid inflation penalty provides no relief for drugs in short supply.

The Stop Medication Shortage Act, currently under consideration by the House Energy and Commerce Committee, seeks to empower Medicaid to reduce inflation penalties for generic drugs in short supply. However, it remains uncertain whether such relief can genuinely reduce the number or duration of shortages.

Government-enforced price controls are heavy-handed measures that may ultimately harm consumers. Partial efforts to alleviate inflation penalties on scarce drugs are likely to yield counterproductive results. Instead of attempting to fine-tune drug rebate policies to accommodate shortages, Congress should focus on devising solutions that promote healthy competition and sustainable pricing in the pharmaceutical market.

Joseph Antos, a senior fellow and the Wilson H. Taylor Scholar in healthcare and retirement policy at the American Enterprise Institute, collaborates with Ge Bai, a professor of accounting at the Johns Hopkins Carey Business School and of health policy and management at the Johns Hopkins Bloomberg School of Public Health, in addressing this pressing issue.