New Bill Seeks to End Drug Shortages

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The Senate Finance Committee is releasing a bipartisan discussion draft today that aims to tackle the epidemic of drug shortages, mostly in low-margin generic injectables used in hospitals. It attempts to reckon with the broken market structure that has created the most drug shortages in America on record.

The discussion draft uses Medicare and Medicaid payments to incentivize reform of contracting practices that put generic injectables and other drugs at heightened risk for shortages. In particular, Senate Finance Committee chair Ron Wyden (D-OR) has taken aim at group purchasing organizations (GPOs), three of which handle bulk purchasing for 90 percent of all hospitals. Sole-source contracts and profit-skimming by GPOs (and large wholesalers, which also have extreme concentration, with three controlling 90 percent of purchases) have been blamed for creating the conditions where low-margin drugs are no longer profitable to most manufacturers, thinning out the supply chain and opening it up to regular disruptions.

“Monopolistic middlemen have put market power and profit over families’ health care,” said Wyden in a statement accompanying the release of the discussion draft. “Our bipartisan proposal uses the power of Medicare and Medicaid to ensure the entire American health care system has adequate supply for key medicines across the country. Middlemen like GPOs should not be able to do business with Medicare if their contracting practices are actively worsening the drug shortage challenge in America.”

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Yet the bill does not take what some have identified as the easiest path to breaking the power of GPOs: removing the safe harbor from anti-kickback laws that allows the companies to maintain their dominance by taking fees from hospital suppliers in exchange for inclusion in their guaranteed sale contracts.

Some critics see that as a missed opportunity. “This draft is a convoluted, unworkable, nonsensical, overly complex mess,” said Phillip Zweig, co-founder and executive director of Physicians Against Drug Shortages, which has highlighted anti-competitive contracting practices and kickbacks as the source of the problem. “The NRA lobbyists have BB guns compared to the AK-47s wielded by the GPO lobbyists.”

That there’s a draft at all reflects renewed attention to the problematic function of middlemen in the health care system, both on prices and the timely dispensation of treatment. Pharmacy benefit managers (PBMs), which play a similar role for prescription drugs purchased at pharmacies, have also come under scrutiny in Washington. Federal regulators are currently examining both GPOs and PBMs.

But solutions have been elusive, and while the committee is optimistic that they could really get something done, critics argue that there are much simpler alternatives available: in this case, making pay-to-play GPO schemes illegal again.

THE BIG THREE GPOS—PREMIER, VIZIENT, AND HEALTHTRUST—use sole-source contracts to require hospitals to purchase virtually the same amount from suppliers every year. If a supplier cannot snag one of these contracts, they cannot sell to nearly all hospitals, and they cannot go forward as a business. This dramatically shrinks the manufacturers available for particular sterile injectable drugs, any of which can be thrown offline by the slightest imperfection.

The GPO structure therefore limits competition for these drugs, and exacerbates resiliency challenges. It also can increase prices, because the determining factor of getting a contract is often the highest fee a manufacturer can provide. These fees cut into supplier margins and induce them to take shortcuts to ramp up production, making the system even more vulnerable to supply shocks.

Hospitals have favored the scheme because they get paid too, through “share-backs” from the GPOs. This secures their participation and keeps the system stuck with supply challenges.

Ending the anti-kickback safe harbor would shift the GPO compensation model. They would be paid by hospitals as co-op purchasers, for finding the cheapest prices for medical supplies, rather than being paid by suppliers as for-profit operators, hunting the biggest fees for access. A market with suppliers competing for business rather than paying GPOs to get into hospitals would reduce what hospitals pay, studies have shown.

The discussion draft uses Medicare and Medicaid payments to incentivize reform of contracting practices that put drugs at heightened risk for shortages.

Zweig is fond of sending around a three-page bill first introduced in 2005 that would simply repeal the safe harbor. But the Wyden-Crapo discussion draft does not do that.

Instead, it creates a new framework starting in 2027 called the Medicare Drug Shortage Prevention and Mitigation Program. Hospitals and other providers would be eligible for incentive payments under the program, but only if they commit to a variety of contracting reforms to ensure that certain generic drugs are no longer chronically in shortage. This includes injectables like saline, and chemotherapy drugs that have recently gone into short supply.

The contracting reforms include minimum three-year agreements with manufacturers, with specific volume commitments and stable prices. Manufacturers could not be asked for rebates or concessions to maintain contracts. Providers would not have to make exclusive contracting arrangements, and would be required to hold contingency contracts with alternate suppliers to fill in purchases in the event of a disruption. And all quality issues and inventories at suppliers would have to be reported, thereby allowing for additional planning for shortfalls.

Anyone who repeatedly breaches the program guidelines and reporting requirements would be tossed out, and made ineligible for incentive payments. By contrast, providers adhering to advanced standards and minimizing shortages could get bonus payments.

This gets interesting when the GPOs’ role is included. GPOs, wholesalers, and other middlemen would not be eligible for incentive payments. But any one of them that enters as a “program participant” could gain the business of the hospitals in the program. Hospitals would be able to shop for the best program participant, and could also apply to become “direct program participants” to buy from suppliers themselves. Providers could operate alone or band together in a consortium. This could cut GPOs out of the market for these sensitive drugs entirely.

The goal is to create a new template contract for drugs in habitual shortage that leaves behind the problems with GPOs. The whole program is voluntary, which committee staff say was done to win broad support in Congress by avoiding mandatory requirements. But staff believe that providers will want to participate because they can gain confidence that drugs will be in proper supply, and earn money in the process. The incentive payments could be seen as a way to outbid the share-backs, to get hospitals into a more reliable system.

A separate provision in the discussion draft would use the Medicaid Drug Rebate Program to disincentivize drug shortages.

Sen. Mike Crapo (R-ID), the ranking Republican on the Finance Committee, said in a statement, “Our bipartisan discussion draft would take meaningful strides toward mitigating and preventing prescription drug shortages, ensuring that patients can receive the care they need, when they need it.”

THERE ARE A FEW SIMILARITIES BETWEEN THE COMMITTEE’S APPROACH and a concept paper written for the Brookings Institution by Marta Wosińska and Richard Frank, which sketched out a “pay-for-performance” mechanism for hospitals to reduce shortages, and transparency from suppliers for quality control. But Wosińska and Frank’s idea didn’t include a buying program with contract guidelines.

The predominantly incentive-based approach is not what advocates have traditionally seen as a resolution to the problem. Zweig’s favored solution, repealing the safe harbor, was introduced by former Sens. Herb Kohl (D-WI) and Mike DeWine (R-OH). “Its real purpose was to ‘codify’ the illegal purchasing practices—kickbacks, payola, bribes, etc.—that were already going on,” he said.

In February, the Federal Trade Commission and the Department of Health and Human Services sought public comment for an investigation into drug shortages, with an emphasis on market concentration among GPOs and large wholesalers. “Our inquiry requests information on the factors driving these shortages and scrutinizes the practices of opaque drug middlemen,” said Lina Khan, chair of the FTC.

The investigation inquiry cited the anti-kickback statute specifically, asking whether it “affect[s] market concentration and contracting practices by GPOs, as well as drug shortages.” It also questioned the rebate-led compensation model for GPOs. The FTC and HHS received over 5,800 public comments, several of which cited Zweig and highlighted kickbacks. The investigation is ongoing.

Senate staffers see the FTC investigation as complementary to their approach. They also told the Prospect that hospitals that buy direct can create the competition missing in the system right now. The new program, under this theory, will make hospitals far less dependent on GPOs.

But Zweig laments that the committee did not offer something like a safe harbor repeal. “I basically believe in markets,” he said. “The anti-kickback safe harbor busted this market. There is a reason there are laws against kickbacks. The only solution is to return to the status quo ante.”

The committee’s model legislation is a discussion draft, which Wyden and Crapo released to gain feedback from stakeholders and colleagues. This is an early stage of the process and an outcome is probably a long way off. And GPOs have begun to lobby to protect the industry’s safe harbor for a reason: Zweig isn’t the only one who thinks it should be jettisoned.

Wyden and Crapo will seek comments on the discussion draft until June 6.

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