Wednesday, November 02, 2011

What happens when we ignore price in medical decisions

We've had a mini-preview of what happens when Medicare sets the price too low on important medical decisions. As any economics student could tell us, when the price is too low, shortages will develop. This is what has happened with prescriptions drugs, as the WSJ tells us.
Most sterile injectables have been off-patent for decades, but unlike other cheap generic drugs with low profit margins, production is complex and requires special facilities. Nonetheless, George W. Bush and the Republican majority decided that Medicare was "overpaying" for these cancer drugs and included a 6% cap on price increases every six months in the 2003 prescription drug bill. These new price controls (which apply to the providers that purchase the drugs) took effect in 2005, when the shortages began.

In a rational market, sterile injectable prices would now be rising to encourage more supply, since the demand for cancer drugs is inelastic. The old reimbursement system, called "buy and bill," was imperfect, but at least it allowed prices to float and wasn't producing the scarcity that central planning always does. The sterile injectables that are in short supply currently sell for $37.88 a dose on average, and modest price increases could make the market economic.

The problem is compounded because Food and Drug Administration rules cause pointless delays. It takes as long as two and a half years to receive FDA manufacturing approval for a generic, so other drug makers can't ramp up production if a company cancels a product line due to these disincentives or even if the fragile supply chain for sterile injectables is contaminated and manufacture is delayed.
And thus we're at the situation we're facing today with big shortages of these drugs that many people need in their treatments for cancer.
Shortages have more than tripled since 2005, according to the University of Utah's Drug Information Service, and by the end of the year more than 300 products are likely to be back-ordered, in short supply or totally unavailable. Some are anesthetics and pain therapies, others emergency room "crash cart" drugs. But most—about 70% in 2010—belong to the class of drugs known as "sterile injectables" that are mainstays of the chemotherapy arsenal, such as paclitaxel or cytarabine.
So President Obama had a press moment to pump up his signing an executive order. He pretended that this was part of his jobs "we can't wait" program to paint the Republicans as blocking needed programs. But this shortage isn't the Republicans' fault. It's a bipartisan disaster. And it is a disaster that will literally cause some people to die.
Mr. Obama's executive order will do little if any good since it doesn't address or even mention this underlying distortion that Medicare has created. Instead, it merely expands the FDA reporting requirements about production interruptions or terminations. This is supposed to be an early warning system, but the scandal is that the availability of basic medicines could be allowed to become an emergency.

The order also tells the Justice Department to crack down on the "grey markets" that have sprung up to deliver supplies to doctors and hospitals, albeit with the inevitable markups. So rather than allow price signals to govern supply and demand, Mr. Obama wants to suppress them further.

The larger danger apart from the risks to the patients forced to receive compromised treatment is to the future of cancer progress. The common chemotherapy drugs are critical in clinical trials as the standard regimen or in combination with new options, and the Coalition of Cancer Cooperative Groups reports that as many as half of all ongoing trials require the drugs that are vanishing. This is a delay that really is killing people.
What do you think will be the effect of further price controls that Medicare and Obamacare will demand of the medical industry? There will be shortages. It is inevitable. What we are seeing today with these cancer drugs, we will see on a larger scale in the future.