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Hospitals are struggling for cost certainty

Fluctuations of pharma product prices a problem

Saline solution is among the products facing a shortage in the health care industry.-(PHOTO BY AARON HOUSTON)

Ten years ago, a health care facility struggling to maintain a supply of salt water (saline) or sugar water (dextrose) intravenous solutions may only have been found in a remote village in a developing country.

Five years ago, similar levels of rationing became the new norm at hospitals in New Jersey — largely because of a simple supply and demand issue for some of the most basic drugs and solutions found in emergency rooms. Low profits by vendors led to a sudden reduction or void of those products, and the few companies that still do make them have been able to hike prices.

It’s an issue that left health care providers scrambling for answers — and little has changed. But providers, experts and regulators today are now searching for more creative steps toward a solution.

The problem is multifold, said Robert Adamson, chief pharmacy officer at RWJBarnabas Health.

Almost like a game of chicken, it rewards the last man standing.

First, companies that produce a generic drug, or inexpensive solution like saline, may decide to leave the market because of low profit margins. This leaves a sudden shortage in the supply, and the remaining companies are unable to meet a sudden spike in demand.

Second, if there is only one remaining company producing a drug or solution, it can hike the price without warning. Following simple rules of economics: a high demand and no competition leads to higher prices.

As more pharmaceutical companies move toward finding profitability in niche markets — termed “high unmet needs”— the basic drug needs are cast aside.

Examples of the shortages include single-use epinephrine, normal saline, cancer drugs and fluids used to enhance cancer drugs or protect from noxious effects of those medications. 

But even before it reaches the supply of products stage, there are two additional issues exacerbating the drug shortage problem, said Richard Epstein, corporate director of pharmacy at Meridian Health.

The first is raw materials that are now mostly sourced from overseas, where they can be bought for cheaper in countries like India and China. The problem with this is then quality assurance issues arise. So recalls of a certain product can result in sudden shortages.

Secondly, the U.S. Food and Drug Administration has been closing down aging plants, mostly pre-World War I facilities, and the high cost of a new facility is not worthwhile for some companies, so they move out of the market.

All of these issues culminate in the ongoing drug shortage problem.

But you probably can’t tell by visiting your health care provider until the issue directly affects you, Epstein said.

“I don’t think the common public largely knows about the rationing that’s being done,” he said.

Additionally, the public doesn’t know which alternative medications are being used — which both increases the cost of health care and creates uncertainty around side effects.

But health care providers and executives spend a good amount of time on watching supplies, keeping track of which companies are leaving the market.

“Like anything else, the more you do something, the better you get at it,” Adamson said. “We are so used to dealing with shortages now, we are better at it. It’s become part of the DNA of running health systems.”

But will this trend continue forever?

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The situation only marginally improved last year, as the FDA’s list of drug shortages was reduced ever so slightly.

“In 2015, we didn’t pull our hair out as much as before,” Epstein said.

And the public and political outcry from recent drug price spikes — by Martin Shkreli and Valeant’s now-former CEO Michael Pearson — may reveal a light at the end of the tunnel.

“The good thing that came out of it is that Congress is engaged now,” Adamson said.

While the federal government is watching, a drug company is unlikely to get caught spiking prices, he said.

The solution to the shortage is to reinvent the wheel.

Innovation in manufacturing processes, and ebbing the profit-only focus of pharmaceutical companies will solve the problem, according to Stephen Spielberg, a pediatrician who started a nonprofit to pursue that mission.

Spielberg is a former deputy commissioner with the FDA and current CEO and president of SAQS Alliance, a social welfare organization, according to the website

He spoke at the recent pharmaceutical industry event, Interphex, in New York City in late April. He summarized the multifactor problem leading to the current shortages and higher prices of generics.

He told NJBIZ there is a litany of factors — aging manufacturing facilities, a “race to the bottom” on pricing without focus on quality, low profit margins that lead companies to switch portfolios, the abandonment of some products and the high costs of setting up new facilities — leading to the shortage in supply.

“The marketplace has not been able to respond, given all these factors.” he said. “There have been some companies that have markedly increased pricing of some older drugs, though this has obvious problems for overall health care costs.”

A socialist idea
Question: Why can’t the government require each profitable pharmaceutical company doing business in the U.S. to take up manufacturing a certain quantity to contribute to the supply pool?

Dr. Stephen Spielberg, SAQS Alliance president and CEO: There is no simple way to ‘require’ manufacture of given products, per se.  Incentives might help, including tax benefits, but this would require new legislation. It is important that critical medicines be manufactured for public health/national security concerns at least in part in the U.S., and that there needs to be redundancy in the system to avoid single source, which places availability at additional risk. 
We hope that SAQS will create a new model of U.S.-based manufacturing, as well as a training opportunity working together with universities to create the next generation of well trained, innovative manufacturing and business personnel to enhance the market and assure drug availability in the future.

Which is why he hopes to start the conversation on public-private partnerships to solve the issue.

So what’s the obstacle?

“(I’m) not really sure,” he said. “In part perhaps recognizing (the) issues and then realizing root causes requires cooperative, different approaches. We have seen public-private partnerships evolving in other biomedical areas, and growth of precompetitive cooperation in several spheres within the industry. … We at SAQS believe it now makes good sense in the manufacturing space as well.”

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At the height of the normal saline shortage in 2011, some older pharmacists turned to antiquated methods, making it in-house to meet the demand, Spielberg said. It was a lucky asset to hospitals at the time, but it showed a vulnerability, since younger pharmacists didn’t know how to make normal saline.

He shared a sample Medicare bill for a cancer patient. While normal saline was reimbursed at 34 cents, the patented cancer drugs were about $200, and chemotherapy was $3,000.

Some responded to anticipated shortages by stockpiling, but that is dangerous, since many products have expiration dates, Epstein said.

Third-party stockpiling has led to the emergence of a gray market, where stockpiled supplies are resold at increased prices, but that brings into question the integrity of the solution and its original source, Epstein said.

So the safest option is opting for quality, pricier alternative products, which trade associations and professional groups are keeping track of, Adamson said. The need to monitor for innovative practices at other facilities has become the norm.

“Traditionally, the most costly part of a health system’s medication profile was branded products,” Adamson said. “Because of the monopoly and pay for research, we understood that. It’s interesting now that the generic portfolio is just as expensive or even more than the branded product it is replacing.”

This means almost a 5 percent increase in costs for the hospital. But while that 5 percent may seems small, it is at least double the inflation rate, if not more, Adamson said. This means the increase in price is not matching inflation.

Sometimes the hikes, as seen in the Valeant case, can happen overnight, which means a sudden cost burden without a matching jump in reimbursements.

“How do you budget for that?” he said.

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The FDA now requires companies that plan to leave a certain market to give advanced notice so health systems can plan.

But shortages are still a very big problem, causing a disruption to care that isn’t visible to the outside world, Epstein said.

He added that shortage in production means having a hold on clients, for manufacturers.

With the example of saline, “it’s available, but allocated only to current customers. That’s a drastic change in demand and supply. (Hospitals are) held hostage to the IV solution company. The allocation of normal saline bags was just the epitome of how the situation can arise in the U.S.” rather than just remote areas of developing countries.

Epstein also cited single-use syringes for drugs like epinephrine, known commonly by its brand EpiPen.

The adrenaline compound is used for allergic reactions as well as for cardiac arrest. Not having a single-use syringe handy at a moment when time is of the essence is a clear danger to patient lives, Epstein said.

Another example the recent shortage in a bladder cancer treatment, he said. A treatable cancer is left untreated because there isn’t enough medication to go around.

“It’s quite alarming when we can’t get salt water in a bag in the United States of America,” Adamson said. “You say to yourself, we can transplant your kidneys, heart and lungs and do all these miraculous things, and when you look at some of the basic things … when you try to talk about manufacturing and processes, peoples’ eyes glaze over. What happens is people get bored with the things we take for granted.”

Both BioNJ and HINJ, which represent the pharmaceutical interests in the state, declined to comment.

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Anjalee Khemlani