Drug shortages and Medicare’s price controls

In the US, there is currently a shortage of many injectable, generic drugs, and it is affecting patient care. There are many reasons why this might be happening, and I will focus on just one in this post.

Atop a post on this subject yesterday, Julian Pecquet’s headline read, “Hatch blames government price controls for shortages of medical drugs.”

“Experts contend that federal government pricing and rebate programs are a significant contributing factor to the current drug shortage crisis,” Sen. Orrin Hatch (R-Utah) said during a committee hearing on the issue. “Current pricing structures have been very effective at driving generic utilization. However, they may not fully capture or reward the costs associated with the complex development and manufacturing of injectables, as opposed to the more straightforward manufacturing process in the pill market.”

In what sense is this “price control” and not just garden variety low government payment rates? After all, if the government sets a low payment rate for a medical service or product, that does not mean that the provider or manufacturer can’t charge others a different and higher price. Where’s the “control”? Bruce Chabner, in NEJM, explains.

Currently, Medicare legislation resets reimbursement for injectable generics at no more than 6% above the average sales price (ASP) paid during the preceding quarter for any given agent.3 These limits affect price and reimbursement for all purchasers and providers, result in little profit for the manufacturer and the provider in the U.S. market, and greatly limit the ability of generic-drug manufacturers to increase their prices. Meanwhile, generic drugs manufactured in the United States can be sold abroad for a greater profit. (Emphasis mine.)

I followed the referenced link, but that didn’t provide much help in understanding why Medicare’s reimbursements “affect price and reimbursement for all purchasers and providers.” Here I plead ignorance and ask readers for help. It’s clear that Medicare’s low reimbursement rate could limit availability of drugs for Medicare beneficiaries. But that’s not how the problem is characterized. It’s characterized as a widespread shortage. If that’s due, in part, to Medicare “price controls” how does the low Medicare price “control” that of other insurers? Why can’t insurers pay whatever (higher) price is necessary to incentivize manufacture of the drugs? Medicare pays low prices for a lot of things, but that doesn’t cause a shortage of them for those of us not on Medicare. What am I missing?


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