Drug Shortages: The Problem Of Inadequate Profits

Abstract

Drug shortages are a growing problem in the United States. The scope and severity of drug shortages has caught the public eye and prodded the FDA into action. Among the potential causes of drug shortages are Medicare Part B reimbursement policies, the 340B federal drug rebate program, market consolidation and competition in the pharmaceutical industry, regulatory overreach by the FDA and manufacturing and supply problems at production plants. What these causes have in common is that they can all be understood as dampening profits for manufacturers in one way or another. Some causes effectively impose price caps which prevent manufacturers from charging a free-market price for their products. Other causes create cost floors which stymie cost-cutting efforts by manufacturers. Whether by elevating costs or reducing prices, these contributors dampen profits, and without profits, incentives to produce evaporate. Pulling these conclusions together, it becomes clear that the best approach to drug shortages is to make drug manufacture more attractive by removing price caps and reducing cost floors. Whether through tax subsidies, Medicare Part B and 340B drug rebate reform, or relaxed regulatory requirements, the most promising approach is one that makes drug manufacture more profitable.