During the last few years of recession, the brand-name drug industry has continued to charge higher and higher prices. In 2009, brand-name drug prices rose an average of 9%, while the recession kept prices in  nearly every other sector from rising, according to an AARP study. On the other hand, generic drugs, which cost between one-third and one tenth as much as brand-name drugs, have been dropping in price, including an 8% drop, on average, for the most widely used generics in 2009, according to AARP. Generics have been a life-saver for many patients, while saving the US health system an estimated $824 billion since 2001.  

But recently, some shortages of certain generic drugs have started to develop. A op-ed in this Sunday’s NY Times warns that over a third of  “the 34 generic cancer drugs on the market” were “in short supply . . . as of this month . . . .” The author, oncologist Ezekiel Emanuel, attributes a tenth of these shortages “to a lack of raw materials and essential ingredients” but then notes that  

“[most of the shortages] appear … to  be the  consequence of corporate decisions to cease production, or interruptions in production caused by money or quality problems, which manufacturers do not appear to be in a rush to fix.”
Dr. Emanuel speculates that a 2003 law regulating physician reimbursement for drug costs is the key obstacle a new generic drugmaker responding to a shortage by launching their own competing drug. But what’s missing is any explanation of how this a US drug pricing law, which affects primarily US seniors covered Medicare Part-B, has such a broad, market-wide, or even global effect upon the global manufacturing and supply of these essential cancer drugs. Don’t patients covered by health systems in Europe, Japan, and other countries, need, and pay for these drugs too?

We should also not overlook the benefits of the 2003 law that Dr. Emanuel cites. This law, the Medicare Prescription Drug, Improvement and Modernization Act of 2003, was passed to move Medicare Part-B reimbursement from the fictitious industry-created list price, called the “average wholesale price” to a realistic, evidence-based price benchmark based on average sales prices, plus 6%.  Dr.  Emanuel asserts that linking reimbursement to an average-plus-6% in effect limits the  growth of a generic drug’s price to only 6% every 6 months, because that’s how frequently the average sales prices are currently calculated.

While there may be some merit to this  critique, let’s not forget that Congress enacted this law in response to the multi-billion dollar AWP drug-pricing fraud by dozens of drug makers upon Medicare Part-B and private insurers. From the early 1990s until at least 2001, drug makers promoted hundreds of  their doctor-administered drugs by inflating the drug’s list price, called the ‘average wholesale price’ which was used by Medicare and private insurers to reimburse the doctor. Drug companies pitched to  doctors that their practices would reap far higher profits using a drug with an inflated price. This was called ‘marketing the spread.’ For years, doctors bought the drugs at a much lower price, and then kept the profits, costing our health system billions. At the same time, many cancer patients, struggling with their serious illness, were forced to pay higher and co-payments if they had insurance, and high out-of-pocket costs if they were uninsured. And patients’ medical care was subverted by the inappropriate financial incentives which amounted to hundreds of thousands of dollars a year for some doctors.

The 2001 PAL Average Wholesale Price lawsuit, following on federal government investigative reports, helped to highlight this problem, and led Congress to enact  the Medicare Prescription Drug, Improvement and Modernization Act of 2003. This law changed Medicare Part-B reimbursement from the fictitious industry-created “average wholesale price” to a more evidence-based price benchmark based on average sales prices.

Over 28 drug makers agreed to settle the litigation by the private sector for $125 million. Other lawsuits with other defendants for the same type of AWP-related pricing fraud upon consumers and the private sector have also been settled. But even the combined $860 million in total settlements of AWP fraud cases cannot protect consumers from the costs of increased premiums, and reduced quality of care as this 2003 law continues to do.

While the system for Medicare’s reimbursement of generic cancer drugs may need some corrections, such as a more rapid monthly or quarterly reporting of price data to incentivize new generics to fill any supply gaps, we should not remove the 2003 law’s common-sense protection that prevents drugmakers from gaming the system of government reimbursement.

Along these lines, some state Medicaid programs have started to move to similar evidence-based “average sales price” systems for pharmacy reimbursement as well.  Our health system should pay doctors and pharmacies prices that are closer to their actual costs, and not fictitious amounts cooked up by drugmakers for their own duplicitous ends.