Drug shortages are reaching near-record levels in the United States. There were 309 active drug shortages in the second quarter of this year—the most in nearly a decade and rising sharply over the last two years. Nearly a third of 1100 hospital pharmacists in a recent survey reported having to ration, delay or cancel treatments or procedures because of shortages. Among the hardest hit: cancer patients. More than half of the pharmacists said shortages of chemotherapy drugs have a critical impact on the care of patients. 

A lack of financial incentives to produce less profitable drugs, including generics, is at the heart of our drug shortage crisis. Recent studies from the Margolis Center at Duke University and the Brookings Institution point out that low payment rates and tight margins reduce manufacturers’ ability to upgrade their production processes. Without those improvements, recalls and production stoppages leading to shortages are both more frequent and more persistent.

Federal policies to control the prices paid by Medicare and Medicaid, which account for 40 percent of prescription drug spending in the U.S., significantly affect the supply chain’s ability to recover from a shortage. If Congress wants to address shortages, it should look first at the government’s own pricing policies.

Both Medicare and Medicaid require manufacturers to pay a penalty (known as a rebate) if their prices rise faster than inflation. The Medicare Drug Rebate Program, enacted as part of the 2022 Inflation Reduction Act, can reduce or eliminate the inflation penalty for drugs facing shortages.

The Medicaid Drug Rebate Program, enacted in 1990, requires a substantial discount from the drug manufacturer’s price as well as an inflation penalty. Unlike the Medicare Drug Rebate, the Medicaid inflation penalty offers no relief for drugs that are in short supply.

The Stop Drug Shortage Act now being considered by the House Energy and Commerce Committee would give Medicaid the authority to reduce inflation penalties for generic drugs that are in shortage. Would such relief reduce the number or duration of shortages? Not likely.

Shortages often occur due to circumstances that are controlled by the manufacturer. Drug manufacturers control their production capacity and have direct knowledge of market conditions. Some manufacturers might intentionally limit their production to avoid having to pay a large penalty for raising their prices faster than inflation. The extra revenue from higher-than-inflation price increases could result in more shortages, not fewer.

Government price controls are blunt instruments likely to be turned against consumers. Partial measures to ease the inflation penalty on shortage drugs are likely to backfire. Rather than trying to fine-tune drug rebate policies to account for shortages, Congress should develop policies to promote effective competition and realistic pricing in the pharmaceutical market.

Joseph Antos is a senior fellow and Wilson H. Taylor Scholar in health care and retirement policy at the American Enterprise Institute. Ge Bai is a professor of accounting at Johns Hopkins Carey Business School and of health policy and management at Johns Hopkins Bloomberg School of Public Health.

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