Generics Shortage in US: Costs and Consequences

Monday - July 31 2023, 00:36 UTC - 1 year ago

Patients in the US are increasingly facing limited or nonexistent supplies of drugs. The reason is that the profit margins for producing generics are too low, so production is outsourced to lower-cost countries. This creates issues with monitoring quality and supplies, leading to increasing drug shortages in the US.

Past public ire over high drug prices has recently taken a back seat to a more insidious problem – no drugs at any price. Patients and their providers increasingly face limited or nonexistent supplies of drugs, many of which treat essential conditions such as cancer, heart disease and bacterial infections. The American Society of Health System Pharmacists now lists over 300 active shortages, primarily of decades-old generic drugs no longer protected by patents.

While this is not a new problem, the number of drugs in short supply has increased in recent years, and the average shortage is lasting longer, with more than 15 critical drug products in short supply for over a decade. Current shortages include widely known drugs such as the antibiotic amoxicillin; the heart medicine digoxin; the anesthetic lidocaine; and the medicine albuterol, which is critical for treating asthma and other diseases affecting the lungs and airways.

What’s going on? I’m a health economist who has studied the pharmaceutical industry for the past 15 years. I believe the drug shortage problem illustrates a major shortcoming of capitalism. While costly brand-name drugs often yield high profits to manufacturers, there’s relatively little money to be made in supplying the market with low-cost generics, no matter how vital they may be to patients’ health.

A generic problem The problem boils down to the nature of the pharmaceutical industry and how differently the markets for brand and generic drugs operate. Perhaps the clearest indication of this is the fact that prices of brand drugs in the U.S. are among the highest in the developed world, while generic drug prices are among the lowest. When a drugmaker develops a new pill, cream or solution, the government grants the company an exclusive patent for up to 20 years, although most patents are filed before clinical testing, and thus the effective patent life is closer to eight to 12 years. Nonetheless, patents allow the drugmakers to cover the cost of research and development and earn a profit without the threat of competition from a rival making an identical product. But once the patent expires, the drug becomes generic and any company is allowed to manufacture it. Since generic manufacturers are essentially producing the same product, profits are determined by their ability to manufacture the drug at the lowest marginal cost. This often results in low profit margins and can lead to cost-cutting measures that can compromise quality and threaten supply.

Outsourced production creates more supply risks One of the consequences of generics’ meager margins is that drug companies outsource production to lower-cost countries. As of mid-2019, 72% of the manufacturing facilities making active ingredients for drugs sold in the U.S. were located overseas, with India and China alone making up nearly half of that.

While overseas manufacturers often enjoy significant cost advantages over U.S. facilities, such as easy access to raw materials and lower labor costs, outsourcing production at such a scale raises a slew of issues that can hurt the supply. Foreign factories are more difficult for the Food a Drug Administration to inspect, and subcontracting operations can be challenging to monitor, potentially creating a higher risk of quality control lapses.