Planet Money - Why do hospitals keep running out of generic drugs?

Episode Date: October 25, 2024

There's something strange going on in hospitals. Cheap, common drugs that nurses use every day seem to be constantly hit by shortages. These are often generic drugs that don't seem super complicated to make, things like dextrose and saline (aka sugar water and salt water).So what's going on? The answer, as with anything in healthcare, is complicated.On today's show: why hospitals keep running out of generic drugs. The story behind these shortages tells us a lot about how these drugs are made, bought and sold–and, it shows us how these markets can falter without the proper care.This episode was hosted by Sally Helm and Alexi Horowitz-Ghazi. It was produced by Willa Rubin, with help from James Sneed and Sam Yellowhorse Kesler. It was edited by Martina Castro. Fact-checking by Dania Suleman. Planet Money's executive producer is Alex Goldmark.Help support Planet Money and hear our bonus episodes by subscribing to Planet Money+ in Apple Podcasts or at plus.npr.org/planetmoney.Learn more about sponsor message choices: podcastchoices.com/adchoicesNPR Privacy Policy

If you enjoy Planet Money, you should try out NPR+. With Planet Money+, you get sponsor-free listening and exclusive bonus episodes from just this show, but you can upgrade to the NPR Plus bundle and access perks from over 20 of NPR's most popular podcasts and more. Give a little, get a lot in return. Visit plus.npr.org. This is Planet Money from NPR. I recently talked to a nurse who has been facing a medical economic

mystery. His name is Jared Sibbit. He lives in the Mountain West. I've been working in emergency and ICU and flight medicine for about 14 years now. What's flight medicine? With transport medicine. So some days I'm on a helicopter, some days I'm on a fixed wing aircraft. It's unpredictable, I guess. You could get somebody who fell off a cliff and broke their leg.

You could get a bare mauling. So it keeps me on my toes. Jared spoke to us unofficially, as in without clearance from his higher-ups, so we're going to leave the name of his hospital out. But he works with a mid-sized regional medical center. And Jared's problem, his medical economic mystery, it actually affects nurses all over the country. Drugs that they use to treat patients every single day are sometimes just not available. This has been a part of health care as long as I've been there. We've had rolling drug shortages of different medications at different

times and for seemingly different reasons. Often this is happening to the cheapest, oldest, most common drugs. Things Jared is routinely using to treat nausea or anxiety or infections or pain. He said there's a whiteboard at his work where someone writes down the names of the drugs that have run out, and there is always something on it. I asked him, over the course of his whole career, what drugs have been on the list? Dandcetron, epinephrine, lorazepam, ceftriaxone. It's hard to even keep track of a list

just because it's been so constant. New ones don't even register unless the shortage lasts more than a few months because we're so used to having shortages at this point. When a drug shortage happens, Jared and his colleagues will figure out a workaround. Like sometimes you can't get dextrose. That's basically just sugar water used to help people with low blood sugar. But if you don't have IV dextrose, there is

a solid form of sugar that you can squirt into someone's mouth. Jared said it's basically cake frosting. It isn't perfect, but it works. But sometimes the workarounds can be really difficult, like with epinephrine, used in epipens, but also on a crash cart to revive patients in cardiac arrest. You need a specific concentration of epinephrine to do that, and sometimes you can't get it. So then you try to dilute some other concentration to revive the patient. We just have the one big bottle, and you've got numbers scribbled on the side of it reminding you how to do the right dilution depending on the size of your patient.

And you're doing a lot of math. Is this one to 1,000 or is this one to 10,000? Am I giving one milligram per kilogram or am I giving 0.01 milligrams per kilogram? Trying to do that kind of math while someone is in cardiac arrest, it does not sound like a good situation. And I will say like to Jared,

this is kind of a fact of life. But to me, this whole situation sounds truly insane. I did not know that this was going on behind the scenes at hospitals. Yeah, this is really scary. And for his part, Jared has gotten so fed up with this shortage situation that he wrote us an email here at Planet Money

because all of this offends his sense of reason. This is like week one of economics right? This problem is a solvable problem in a free market and the simpler the drug is the more upsetting the feeling is. Salty water and sugary water that's like as old as time so could we please just fix that already? Yeah, the recipe for saltwater is not complicated, right? And we need it in these life and death situations. It really feels like somebody should have solved this by now. Like what is even happening? We told Jared we would try to figure it out.

Hello and welcome to Planet Money. I'm Sally Helm. I'm Alexi Horowitz-Ghazi. In a market economy like ours, shortages are a puzzle. Laws of supply and demand should basically solve them. But for some of the cheapest and most common drugs around, shortages have become a fact of life. So, what is going on here?

Why have the basic economic dynamics failed to solve this problem? And what can be done to fix it? Adrian, do you feel that nip in the air, the smell of pumpkin spice wafting from your local coffee shop? Yeah, the overwhelming urge to suddenly watch holiday rom-coms. Yes, with all of these warm and fuzzies on the brain, it is the perfect time to explore about the science of why we die and come out the other side with answers to live better as we live longer. Hear about the innovations when you subscribe now to shortwave, the science podcast from NPR.

All right. So to recap, we got an email from a Planet Money listener, a nurse, who told us that cheap, common drugs that hospitals use every day are constantly running out. And he asked, why is that? Finding the answer to this question took us on a long, convoluted journey. Healthcare, as you may have heard, is complicated. The economics get kind of strange. Thankfully, early on, I found a very helpful guide.

When I first started making calls about drug shortages, one name came up over and over. Marta Woszczyńska. Yeah, well, I have been looking at these issues since 2011. And at the time, I was at the Food and Drug Administration. And so I was pulled into the drug shortage crisis. Marta is a healthcare economist. She's now a senior fellow at the Brookings Institution, a think tank. In 2011, when she was at the FDA, the drug shortage crisis was really bad and 13 years later, it still is. In some cases, chemotherapy drugs run low, that can interrupt treatment. Studies

have found that drug shortages hurt patient outcomes, that patients can even die. Marta has been studying all of this for more than a decade, and she told us the majority of shortages are happening with one particular kind of drug. They are called generic sterile injectables. Usually administered in hospitals, Almost all the drugs that Jared told us about are in this category. Like IV fluids are generic sterile injectables. This kind of drug is super common. I recently did an analysis looking at basically what share of patients that go to a hospital get a generic sterile injectable of some sort.

And the answer was in the upper 90s. Upper 90s. Almost everyone who ever goes to a hospital gets one of these drugs. That's right. So we are focusing on those drugs today. And there are three words here, all of them important to understanding this story.

Number one, generic. That means these are older drugs that are not protected by patents. Anyone can make them. Number two, injectable. These drugs older drugs that are not protected by patents. Anyone can make them. Number two, injectable. These drugs are liquids that are administered through a syringe or an IV bag, not pills. And that brings us to word number three. Because these drugs get injected straight into our veins, they have to be sterile.

Don't want any bacteria or viruses sneaking in there. There have been problems where there were metal shavings or glass particles. Oh my god. You do not want to have these contaminants in these products, right? You absolutely do not. Nope. We do not want to be injecting metal shavings right into our veins. So these drugs are made in super sterile factories. It's expensive.

You know, there's like bazillions of miles of piping involved. There's really no room for error. And that brings us to kind of the first explanation for these shortages. A lot of times the immediate cause is a factory closure or a recall or a manufacturing problem. Because like if you find some bugs in your clean room, you got to stop and figure out where they're coming from. And a lot of the violations the FDA has found over the years, they are a lot worse than that. I don't even want to tell you what FDA inspectors found in some of these facilities because...

Uh-oh. Oh, I almost don't want to ask, but will you tell me one that gives you nightmares? A bucket of urine in the corner. No. Why? Yes. I don't... They didn't want to go to another...

I don't know. Don't ask me. But that was... want to go to another. I don't know. Don't ask me. Okay, so a lot of times these shortages are coming after the FDA does an inspection and finds a bucket of urine or whatever. And of course, like we could say the FDA won't do inspections. People can just run their factories however they want. That could mean fewer shortages. Right. That is an argument. But like, of course, we can also see the other argument here. Like, it's good that the FDA does inspections. We don't want metal shavings in our veins.

And also, there is still a mystery here, because this kind of shortage should be temporary. When a drug runs low, other manufacturers should see an opportunity to make money, and they should swoop in and start making this drug themselves. And sometimes that does happen. You know, there'll be a problem at a factory, a couple of drugs start to run low, other people make them, then the factory gets back online, things get back to normal.

But Marta says that doesn't seem to be the full story. For one thing, some of these shortages are lasting a long time. And if you look at some of the more recent data on how long shortages last, it's three years. The markets don't adjust very easily. And also like we know from Jared that these shortages have been happening over and over for years with all different kinds of sterile injectables. Yeah, so why does this keep happening time and time again?

Why isn't supply bouncing back as we would hope it would? Why aren't manufacturers stepping up, making more of these drugs? One part of the explanation is just, it is hard to build one of these factories. It's also not totally easy to switch from making one drug to making another, but there's a bigger answer here.

To understand it, you gotta focus on something that so far we haven't talked about a lot. And that is the word generic. These drugs that we're talking about are generic sterile injectables, meaning they are not under patent. Any manufacturer can make them if they want to. And yet, oddly, for a lot of the drugs

that have had shortages, there are not a ton of manufacturers. There are like one or two. And to understand why, I talked to Ned McCoy. These days he runs a nonprofit called Civica RX that wants to combat drug shortages. That nonprofit has actually done this difficult, expensive thing. They have built their own sterile factory to make these generic sterile injectable drugs. And Ned told me, look, generic sterile injectables, they are generally not great business. They tend to be older and they tend to be really cheap and other people have quit making

them. So if I'm a person who wants to make money, you actually don't recommend this business. No, I don't recommend it. And Ned knows what he's talking about here. He hasn't been a non-profit dreamer forever. Before he joined Civica, he spent more than 30 years at the big drug company Abbott in the big bad world of capitalism. And he said, look, step back and look at the whole life cycle of a drug. Think of the world's most famous sterile injectable right now, Ozempic.

It's proprietary, it's under patent, actually multiple patents, and it's expensive. It can sell for like $700 or $800 a dose. It's on the market, it's a proprietary drug, Novo owns all the patents. When the patent expires, several generic companies do the development to do their own generic injectable. At first, they will be able to charge relatively high prices. That's when those generic companies make money. They make money as the price is coming down. And the price will come down as more players come to market.

Alright, so manufacturers will see that there's money to be made selling generic Ozempic, so they will get into the generic Ozempic game. And that will lead to competition. Producers will start undercutting each other on price to get customers, and so the price will go down. And that is kind of the promise of generic drugs. There was a big law in the 1980s that helped stimulate this competition by making it easier to get into the generics game, and that helped bring down prices.

Today in the United States, the manufacturer price of generic drugs is actually less on average than it is in other similar countries. Branded drugs are a very different story, but in general, generics are cheap. Okay, so then think about what will happen in this market over time. Someday when there's 10 suppliers, when the price gets down somewhere between $2 and $4 per unit, some of the U.S. players, they say, let's make a $10 product. Let's not make the $2 product anymore because we have a responsibility to our shareholders to maximize profit. They stop making the product.

Manufacturers drop out. The number of exits, aka drug companies dropping a product, it is surging. Between 2022 and 2023, it went up by 40%. You also might not totally drop out, but you might have an incentive to cut your own costs. Because you know, you're charging a low price, cutting costs can increase your margins. So maybe you run your machinery really hard, or you don't invest as much to clean your lines. All that makes manufacturing problems more likely. There's also offshoring that happens, moving factories to India, for example, where labor

costs are lower, or you might buy your ingredients from companies overseas. Try to get them for cheap. Now, say for a given drug you've gotten down to just one or two manufacturers. If one of them finds some bacteria in one of their vials and has to shut down, or a hurricane hits a factory, suddenly you got a shortage. But that medication may be essential. That medication might be a fedrin that's on a crash cart that's been around since 1905. You know, it may be essential medication, but the problem is it sells for $2.

And that's kind of the situation. That's kind of the situation. That's kind of the situation. We don't have enough manufacturers of these important generic drugs. The few that we do have are incentivized to keep their costs as low as possible, which can make shortages more likely. But, Alexi, even still we have an economic mystery on our hands. Yes, because we are essentially saying that weirdly weirdly, the price of these generic sterile injectables might be too low. Too low for manufacturers to stay in the game, too low

for them to upgrade their factories and equipment to the point that they wouldn't have all these manufacturing problems. And if you look to classical economics, you will see an obvious solution here. Why don't these manufacturers simply raise the price? Why indeed. That is after the break. Darian, why have so many people fallen out of love with dating apps? That is such a question of the moment and I posed it to the CEO of Hinge for Love Week on the indicator. That's our week-long investigation into the

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This year, the NPR Politics Podcast talked to voters who didn't like either Joe Biden or Donald Trump. But with Biden out of the race and Election Day looming, how are they planning to vote now? Check out the NPR Politics Podcast conversation with these double haters. Listen wherever you get your podcasts. Okay, Alexi. We have been talking about these persistent rolling shortages of generic sterile injectables, drugs that we are all extremely likely to need should we ever end up in a hospital. And we are beginning to get to the heart of the matter. It seems like the question we really need to ask is, why is the price of these drugs so low? Why isn't it going up?

It feels like a kind of a counterintuitive question, like, don't we want drug prices to be low? So it is worth stepping back for a moment to remind ourselves about the basic laws of supply and demand, and how price fits into that picture. Right. In a free market, over time, supply and demand are supposed to come into this perfect balance. And that happens through the beautiful and gorgeous mechanism of price. Amen. Thank you. Price is a signal that determines how much of something people are willing to buy and how much producers are people are willing to buy and

how much producers are willing to make to meet that demand. So when a shortage comes, if all is working as it should, the price of these drugs should rise. Then more manufacturers will want to make the drug, more supply comes online, and the shortage goes away. And to some extent during these shortages, that does happen. The price might go up a little. But as we have discussed, something is still clearly messed up because these shortages

are happening over and over. So why doesn't the price settle at a sustainable level that prevents them from happening in the first place? The price mechanism seems to be broken here. So let's take a look at what's going on. Okay, idea number one. Healthcare is not an entirely free market. There are some rules in place that make it hard

for manufacturers to raise prices too much. The reason for that is simple. Politicians want to find ways to keep healthcare costs down. We asked Marta Wschinska about this. What are the good reasons to set things up to bring cost down? What are the good reasons to set things up to bring cost down? What are the good reasons? You know, we spend a lot of money on health care and I don't even know how to talk about

this. Marta struggled to even answer this question because like, duh, people want lower health care costs. And so the government does have some rules that try to keep drug prices low. Like, one that she thinks is important is a rule meant to prevent manufacturers from raising their prices more than inflation. Marge says if the government got rid of this kind of rule, it might help, but that alone would not solve the problem. In part because there is another major factor here that is keeping prices down. And it has to do with the people who are buying

these drugs. The hospitals. Yeah, this is idea number two about how the price mechanism is getting messed up here. Hospitals have combined their purchasing power. The vast majority of them have banded together into these things called group purchasing organizations, or GPOs. The top three GPOs in the country represent more than 80% of hospital beds. They negotiate contracts on behalf of hospitals, not just for drugs, but for gloves and beds and just anything that a hospital buys. Okay, kind of makes sense. I mean, hospitals need like a lot of socks and sheets and like all those things.

That's right. I mean, just imagine the number of things that they buy. They basically outsource it to group purchasing organizations who then use the combined buying power to negotiate with vendors, including drug vendors. By combining their power like this, hospitals can get really good terms with these drug manufacturers. A lot of these contracts have provisions that basically say,

if somebody else offers me a better price, unless you match it, basically this contract ends. Okay. So I can see how in that situation, I mean, you could raise your price, but you just like lose all your business if you did. That's right. This is tough for manufacturers. They don't have long-term commitments from hospitals on how much they'll buy.

So hospitals have combined forces, pooled their buying power, and that has been driving prices down, maybe to unsustainable levels. We did reach out to the Healthcare Supply Chain Association, a group that represents GPOs. They said, of course, they don't want shortages. And they pointed to that price competition we've talked about among drug manufacturers. They said, that's a big part of driving the price down.

Now, of course, hospitals do have a lot of incentives to keep their costs low. And one important factor here is that once these generics are approved by the FDA, the idea is that they all treat disease equally well. In econ terms, that makes them basically perfect substitutes. You can use any of them, right? And the payers, Medicare, Medicaid, commercial payers, are incentivizing me to really choose the cheapest. Yeah. Hospitals get paid by insurance, and for these generic sterile injectables in particular, there are a lot of ways that insurance is pushing them to choose the cheapest option.

For example, sometimes they'll reimburse hospitals based on the average price of that drug across everyone who makes it. So hospitals don't want to choose one that costs more than average. So in general, hospitals are trying to get these drugs just as cheap as they can. Meanwhile, manufacturers are slashing costs left and right, maybe making their factories worse in the process, or maybe they're just dropping out of these markets altogether. And all of that makes the entire system more vulnerable to shortage.

Which brings us to a third idea about how the price mechanism might be broken. And this is really Marta's big theory. It is all about incentives. There's just not enough incentive for either manufacturers or hospitals to pay to make these drug supply chains more resilient. So basically, again, this is a system that tries to drive prices down. And again, we're doing this for good reasons, but the whole idea of reliability of supply

is not at all built into these systems. Right, like in a dream world, we would have tons of redundancy in the system. We would have like whole backup factories we could tap if we needed them. We would have tons of smart people doing quality control, catching problems before they happen. But all of that is expensive.

And it is somehow not getting baked into the price of these drugs. Which is a little weird, because you would think that hospitals have an incentive to pay for this. After all, these shortages hurt patients, and hospitals are taking care of patients. But Marta says, like, of course, hospitals are full of nice people who want to help, but it's actually not that simple. When you look at the actual financial implications

for hospitals and you compare it to the life and death consequences that it could have for patients, you know, I would argue that there is a gap, that hospitals could be doing more, paying attention to it more. Now, shortages do cost hospitals money, cold hard cash, but by some measures not a ton. Shortages hurt patients, but it's not like the hospital fully stops functioning, in part because nurses like Jared Sibbitt are scrambling for an alternate solution,

like using cake frosting instead of IV sugar water, or doing that complicated math to dilute the big bottle of epinephrine. And Marta says patients don't really seem to fault hospitals for shortages. Like you can imagine if this was a car company or something and they were constantly running out of some important part, customers would stop buying those cars. The company would get punished. But that doesn't seem to happen here. Maybe because these shortages

affect basically all hospitals. Maybe because patients don't really choose hospitals based on whether they have the right medicine in stock. And maybe because it's really easy for everyone in this situation to just point the finger somewhere else. So,

what is to be done? Well, remember Ned, our nonprofit dreamer? Nonprofit Ned. His company's solution is basically, obviously, ditch profit and try to get hospitals to sign onto a new system meant to prevent shortages. They do things like sign longer contracts, where they commit to buying a certain volume of these drugs

to try and make all this more sustainable. There's also been some proposed legislation on this, which has some similar solutions. Yeah, and you can imagine that the government could intervene here, help the manufacturers upgrade their facilities, or the government itself could maintain a bigger stockpile of important drugs.

Marta's solution has to do with government too, but it would focus on hospitals and changing their incentives. Because right now, you know, hospitals do think about shortages to some degree when they're buying these drugs, but Marta says the balance is off. We need to incentivize hospitals to pay attention to which manufacturers are reliable and put much more weight on that rather than just price. They can differentiate themselves on that.

Those manufacturers can carry a higher price point and also the fact that they're going to be getting larger market share. So when one of those less reliable manufacturers has a problem, by that time they actually have a smaller market share, not the largest one, right? To summarize, the government would give hospitals some money if they showed that they were taking steps to prevent shortages, like by working with a good quality, highly rated manufacturer. Then hospitals would have more incentive to buy from those higher quality manufacturers, so those manufacturers could charge a higher price.

And maybe the other manufacturers would even want to clean up their act. Cut it out with a urine bucket. Exactly. In an ideal world, this could lead to like a cascade of positive effects because we have changed hospital incentives. A key ingredient of this whole plan is good information. Hospitals need to know which manufacturers are reliable, and they need to be able to trust that. Another key ingredient is money. The government would have to be willing to spend some money here,

and this supply chain resilience could get expensive. I guess the way I would put it is that there is a value to resilience, and I think the value of resilience to patients is much higher than the willingness to pay for resilience by all the other stakeholders that make decisions on behalf of patients. So that is our long and complicated answer to Jared Sibbit's question about why these shortages are happening. Somehow no one seems to be ponying up the money to make this whole drug supply chain

better. It's just hard to get people to prioritize the long-term health of the system. And as Marta is saying, the people who are really hurt by that are the patients, all of us. But Alexi, since my interview with Marta, I have been wondering, if it were up to us, the patients, would we actually pay more for the promise of fewer shortages in the future? I'm not totally sure that we would. Yeah, I mean, in general, it does feel pretty easy to ignore the supply chain behind whatever

it is you're buying. Totally. We're all susceptible to that. Just get it cheap while you can and hope that it will be there the next time you need it. [♪ Music playing. [♪ Music playing. Today's episode was produced by Willa Rubin with help from James Snead and Sam Yellowhorse Kessler. It was edited by Martina Castro, fact-checking by Danya Suleiman, engineering by Valentino Rodriguez-Sanchez. Planet Money's executive producer is Alex Goldmark.

Special thanks to the many experts who spoke to me for this story. There was a lot to understand here. I also listened to a great recent series on this topic from the healthcare podcast, Trade-Offs. Check them out. The series is called Race to the Bottom. I'm Sally Helm.

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