Sushane Gupta

LIM-553
June 3, 2014
The Economics of Drug Shortages in the United States
The U.S. health care system has experienced several difficulties in recent years, but one of them,
the problem of material shortages, has been an ongoing issue without a permanent fix.
Specifically, the issue of drug and IV fluid shortages has been a chronic issue, characterized by
both recurring shortages and single-instance shortages of drugs (“Economic Analysis,” 2011).
Data from the University of Utah shows that drug shortages have been prevalent for more than a
decade, with new shortages surfacing every year (Ventola, 2011). It is remarkable that despite
the recurrence of this issue hundreds of times in only the past decade, it continues to exist; this
suggests a lack of effective action directed towards resolving it, possibly caused by the various
other issues the health care industry has been facing. In the most basic sense, these shortages are
caused by disequilibrium in supply and demand; this paper will provide a synopsis of the
shortages, examine the economics behind them, and lastly propose solutions.
The U.S. has experienced an increase in annual drug shortages since 2001, with newly
identified shortages per annum nearly doubling from 120 in 2001 to 210 in 2011 (Ventola,
2011). This number rose to nearly 300 shortages by the end of Q1 2014 (Kuehn, 2014). The
types of drugs most prone to shortages are generic off-patent cancer drugs, but others such as
pain medications, intravenous (IV) electrolytes, and heart medications have all experienced
shortages, some of which have previously never been in short supply (Ventola, 2011). When
drugs go off-patent, they become eligible to be produced generically by third-party
manufacturers, thereby considerably lowering the potential profits to the original makers. This
lessens the economic motivation for the original producers to continue the drug’s production,
often leading to a shortage until other manufacturers take up production. Often times these drugs
will continue to face shortages, as the fierce market competition in the generic drug market is not
as attractive as the monopolies held by patented drug markets. The FDA reports that generic
drugs generally cost 80-85% less to the purchaser than the original brand product; these savings
arise from the absence of clinical trials and advertising, activities that the original producer was
required to undertake (“Facts about Generic,” 2012). Additional complications such as potential
manufacturing problems related to drugs that are difficult to produce, such as chemotherapy
sterile injectable medications, can also make some generic drugs less desirable for manufacturers
(Ventola, 2011). Together, these factors hinder generic drug production as only a few third-party
manufacturers end up producing them, thereby often failing to satisfy the quantities demanded by
the market.
However, generic drugs are not the only materials facing shortages. A recent study
highlighted an IV fluid shortage currently taking place, which has had doctors in both clinics and
hospitals rationing IV fluid to patients (Kuehn, 2014). The study shows that costs for IV fluid
have soared, as clinics are trying to secure it by nearly any means necessary and even using
alternatives when possible. A doctor dealing with these shortages reported that several suppliers,
recognizing this shortage, have tried to profit off of it by bullying practices into signing contracts
to obtain other supplies in addition to IV fluid from them, or risk facing more shortages in the
future (Kuehn, 2014). He compared this struggle, one that is essential to securing the fate of
human lives, to the petty haggling often done over a cell phone contract, thus raising a question
of ethics. The basic cause is unknown, but the shortage can be traced to a particularly aggressive
influenza season combined with a lack of adequate FDA approved suppliers in the market
(Kuehn, 2014). However, according to the study, there have been far worse flu seasons in
previous years that have not been associated with such shortages, so there are likely other
reasons as well for this particular shortage. One possibility, it suggests, has to do with the
increases in the number of sterile injectable drugs going off-patent, which has increased the
production of generic injectables. There are only a few manufacturers of sterile injectables in the
United States and of these, only three produce IV saline, the type of IV fluid experiencing a
shortage (Kuehn, 2014). As mentioned previously, the drug shortages have been increasing over
the years, with Q1 2014 showing some of the highest rates in over a decade. It is likely that with
a limited production capacity, the increases in off-patent drugs and the general rise of drug
shortages have reduced IV fluid production capacities, contributing to the shortage.
The consequences of these shortages can have detrimental effects on not just patient
health, but on the health care industry as a whole. According to a survey conducted by
McLaughlin et al. (2013), pharmacy directors reported that these shortages resulted in full-time
pharmaceutical employees being added to manage the shortages, which in turn increased costs.
Other problems cited included delayed and/or canceled care, increased patient monitoring,
increased length of hospitalizations, and medication errors such as incorrect dosage and
frequency. All of these consequences both harmed patient health and increased resource usage.
As a specific example, consider the case of cytarabine, a cancer drug that experienced a
shortage in early 2011 (Link et al., 2012). Cytarabine is given to patients immediately upon
diagnosis; failure of a patient to receive it in a timely manner can result in death (Ventola, 2011).
However, during the shortage, some health care facilities depleted their stocks of the drug while
others had to ration it by administering it to patients with the highest likelihood of recovery
(Ventola, 2011). In such situations, patients not receiving the drug are usually given a similar
treatment, but because it is not the normal course of treatment, the alternative can have
potentially negative side-effects or complications (Ventola, 2011). Another issue that stems
from alternative treatments is dosage requirements, which are difficult to determine since the
drug is being administered under unusual circumstances (Ventola, 2011). McLaughlin et al.
(2013) found, from its survey of pharmacy directors, that incorrect doses can be administered in
such cases, leading to potential health hazards. Furthermore, if the alternative treatment is relied
upon too heavily, there can be a shortage of that treatment as well; this is what occurred in the
furosemide shortage, which led to an increased demand for an alternative, bumetanide, causing it
to be in short supply (Ventola, 2011).
The economics of drug shortages lie in the relationships between the supply and demand.
Unlike traditional market demand curves, the demand for drugs is nearly price inelastic and very
steep since certain drugs are essential items without substitutes. When faced with life or death
decisions, individuals are unlikely to opt out of drug treatments because of their prices.
Similarly, as the IV fluid shortage case demonstrated, clinics were willing to pay significantly
higher prices for IV fluid since it was a necessity with no perfect substitutes. There are two
possible scenarios that can describe the shortages. In the first case, the demand and supply are
no longer at equilibrium because the cause of the shortage, an exogenous variable, causes the
demand to increase while keeping the supply static. This is graphically represented by a shift of
the demand curve upward to the right, creating a gap between the supply and demand curves
representing the shortage. The second case involves a decrease in supply as it is unable to keep
up with demand, represented by a shift of the supply curve upward to the left. In both cases,
quantities become limited and purchasers must pay higher prices to obtain the limited good.
 In the first case, an exogenous variable causes demand to increase; this is a possibility in
times with specific epidemics, but less likely otherwise in the long term. For example, an
increase in the instance of a specific disease could cause shortages in medications, especially if it
occurs unexpectedly without preparation. This occurred after the strike of Hurricane Katrina,
which created an unanticipated demand for particular drugs needed by victims (Ventola, 2011).
This type of shortage generally does not apply to infections with a regular seasonal occurrence,
such as influenza. Rather, shortages associated with them are related to the supply side of
medicine, as discussed next, and occur due to manufacturing problems, such as in the shortage of
liquid Tamiflu that occurred due to a manufacturing delay in one of its raw materials, oral
suspension (Rubin, 2014).
In the second case, reductions in supply account for the shortages; this can be explained
by a number of factors. As explained previously, when drugs go off-patent and are opened to
production by third-party drug makers, their production may decrease as a result of difficulties in
production and lower motivations to produce. Patented drugs hold a monopoly in the United
States, allowing the producers to act as price makers and charge high prices in order to recoup
the costs from the research and marketing of the drug. When the patents on drugs expire, the
monopolies no longer exist and other suppliers are attracted to the market, causing economic
profits to decline considerably as suppliers become price takers. This can decrease the desire to
produce the drug, both from the original producer’s perspective as well as the generic producer’s,
and results in other ways to increase profits.
One of these ways is through market consolidation following the patent expiration, which
involves merging of pharmaceutical companies to create economies of scale in production
(Schweitzer, 2013). Specifically, a pharmaceutical company with an expiring patent may
purchase generic producers capable of producing the drug of interest and halt generic drug
production while continuing to produce the branded product, thus maintaining profits and
lowering the competition and number of suppliers in the market, which decreases supply.
Another way is to selectively produce drugs to fetch the highest profits, which was described
previously as possibly contributing to the IV fluid shortage. In this case, the three IV fluid
producers only have limited production capacities, and to obtain the greatest profits, they will
produce the quantities of the products that yield them the greatest profits, which can possibly
mean reducing production of IV fluid.
Finally, supply may decrease as a result of price increases in raw materials for the drugs,
which can occur depending on other market factors. Heparin, a widely used anticoagulant,
experienced a contamination in 2007-2008 that led to many deaths in the United States; this
contamination can be traced to problems in supply (Usdin, 2009). In 2007, Chinese pig
populations were reduced considerably after an outbreak of the blue ear disease; this increased
the price of porcine viscera, a component used to produce heparin (Usdin, 2009). Since this was
threatening to the supply of heparin, Chinese suppliers substituted some of the heparin with a
substance having similar anticoagulant properties, oversulfated chondroitin sulfate (Usdin,
2009). This substitute is significantly cheaper to produce than heparin, particularly in the midst
of a porcine shortage, and thus allowed suppliers to continue to meet heparin demand. Thus, this
contamination exemplifies an extreme effect that that a shortage in raw materials can have on the
healthcare industry.
These shortages can be corrected fairly easily, provided changes to the FDA’s drug
regulations. The solutions discussed below attempt to minimize any significant spending such as
subsidies by the FDA, as this may cause solutions to be less attractive and therefore less feasible.
The FDA has a strict regulations process for screening drugs and in most cases, prohibits import
of drugs into the United States that it has not approved (“Is it legal,” 2014). This means that
even if a drug experiencing a shortage is available overseas in an identical generic form, its
consumption in the U.S. is prohibited. The FDA states that unapproved products, even if
approved overseas, constitute a safety hazard to the U.S., and therefore should not be used.
However, for some individuals, receipt of certain drugs can mean the difference between life and
death; in a shortage, this raises a possible ethics issue as to whether it would be in the patient’s
best interest to withhold unapproved foreign drugs or administer them. It is the physician’s duty
to act as a perfect agent to the patient and thus treat the patient in a way that the patient, if fully
informed, would treat himself. Given the choice of no drug or an unapproved drug, the latter is
definitely the more viable option, especially if the patient’s prognosis is poor. Thus, for severe
shortages in which availability of a drug is threatened in the near future, contingent upon the
patient’s approval, the administering of an unapproved drug should be sanctioned. In fact, such
importation has occurred in the past for certain cancer medications, but it is rare and should be
permitted more often in less severe cases, such as the flu (Ventola, 2011). Such a change would
help in shifting the supply curve back to equilibrium with demand, reducing the shortage.
A second solution, also contingent upon the FDA’s cooperation, is to permit more
suppliers of certain drugs or materials. In regards to the IV fluid shortage, Kuehn (2014) stated
that there are only three approved suppliers of saline IV fluid in the United States; this is clearly
a problem as they are not being able to meet current demand. Approving more suppliers would
entail slightly more work to ensure that quality standards are being met by the additional
producers, but it would prevent production capacity from being limited in times of need.
A third solution, though already in practice, is to improve communication between the
multiple parties in the health care market. As of now, drug manufacturers are legally required to
report shortages before they occur, but seeing as shortages are still occurring, it is likely that
these reporting measures are not comprehensive enough (“Frequently Asked,” 2014). The FDA
could remedy this by enforcing stricter reporting guidelines on manufacturers, as well as by
analyzing the markets themselves for signs of shortages, thus preventing disequilibrium between
supply and demand. In a nutshell, the FDA would need to increase regulation of the market to
catch the shortages before they occur.
Finally, an innovative solution proposed by Woodcock and Wosinska (2012) suggests
devising a quality-based grading scale for manufacturers’ drugs as an incentive to reduce
shortages. For example, hospitals are evaluated based on their effectiveness; these evaluations
often affect patients’ choices when choosing hospitals (Schweitzer, 2013). If consumers are
choosing hospitals based on published evaluations, there is motivation for hospitals to keep their
quality of services high. Similarly, a rating system for drugs should have the same effect,
leading consumers to choose higher quality drugs. This would motivate suppliers to produce
their drugs at higher qualities, which would reduce the likelihood of manufacturing errors or
delays caused by poor quality control (Woodcock and Wosinska, 2012). As mentioned
previously, manufacturing errors contribute to shortages in supply, and Woodcock and Wosinska
(2012) report it as being responsible for 56% of sterile injectable drug shortages in 2011. This
would require a reputed agency to release drug evaluations, but the driving motivation for
shortage reduction would ultimately come from the companies; it would therefore be a win-win-
win situation, helping consumers, suppliers, and the regulators.
Drug shortages are detrimental to the U.S. health care system and can result in increased
costs, less efficient care, and poor health care outcomes. In economic terms, the shortages arise
from a failure of supply to meet demand, whether this occurs from increases in demand or
decreases in supply. There are a number of steps that can be taken to prevent shortages,
including FDA law reform to allow importation of foreign drugs, increases in the number of
approved suppliers for drugs, better communication between the FDA and drug manufacturers,
and implementation of a drug quality system to motivate manufacturers. These solutions will all
help to increase supply to meet demand, thus reducing shortages and benefiting the health care
system tremendously.

References
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Frequently Asked Questions About Drug Shortages. (2014, May 16). U.S. Food and Drug
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