The healthcare system of the U.S. is increasingly challenged by prescription drug shortages. But what are the root causes for this problem and how can these shortages be mitigated?
Which role plays effective supply chain management in that setting?
This paper addresses these questions and discusses possible approaches to strengthen the pharmaceutical supply chain in the U.S.
The healthcare system of the U.S. is increasingly challenged by prescription
drug shortages. But what are the root causes for this problem and
how can these shortages be mitigated?
Which role plays effective supply chain management in that setting? This paper addresses these questions and discusses possible approaches to strengthen the pharmaceutical supply chain in the U.S.
Introduction
The U.S. market for pharmaceutical products amounted to US$ 347.1 billion in 2011 and represented the largest share on the global market for drugs (IMS Health Market, 2012). Despite this market sophistication, shortages of prescription drugs have raised major concerns in the United States in recent years. Since 2005 the number of shortages has more than tripled, thereby considerably increasing the frequency and the adverse effect on patients (Premier, 2012). According to the American Society of Health-System Pharmacists (ASHP, 2013), as of beginning October 2013 there are currently 295 pharmaceutical products not deliverable. This is a new peak even by the end of the third quarter of this year. The range of affected products reaches from basic drugs to really important drugs for surgeries, emergency treatments and chemotherapy but concentrate in the disease areas of oncology, anti-infectives, cardiovascular, central nervous system and pain management. The major types of products which are declared in short supply are generic injectables (IMS, 2011).
Impact of drug shortages
The scarcity of pharmaceuticals affects patient care tremendously. A common method to avoid delays and cancellations in medical treatments is the use of substitutes. But this often leads to medication errors, less clinical effectiveness or even safety issues. Furthermore, drug shortages have also a huge financial impact on the healthcare system and hospitals (Kakeeh et al., 2011, p.1818). As pharmacists and others have to deal with the shortage and find ways to circumvent the problems, it causes additional labor costs. Finally, there are huge mark-ups on the prices of shortage drugs: hospitals pay on average 11% more for those drugs which cumulates at $415 million additional cost per year. These conditions also promote the emergence of gray markets on which an average of 650% has to be paid for scarce pharmaceuticals (Premier, 2012). Hence, the prevention of drug shortages remains a very critical issue.
Causes of drug shortages
The growing problem of drug shortages is determined by the interplay of various factors. On the one hand, it can be caused by natural disasters, epidemics or regulatory issues. But on the other hand, a large array of problems is caused by manufacturing and supply chain issues.
The pharmaceutical supply chain in the U.S. is very complex due to multiple independent actors (see Exhibit 1). Disruptions of the supply chain can therefore occur at various stages. The first actors in that chain are the suppliers of raw or bulk materials. Those deliver their goods to the pharmaceutical manufacturers, either brand-name or generic product manufacturers. At this stage, interruptions of the supply occur frequently as almost 80% of those raw materials come from outside the U.S. (Premier, 2012). Contamination problems, inadequate handling or just supply bottlenecks due to long lead times often lead to costly delays in manufacturing. These scarcities then ripple through the whole supply chain and can culminate in severe drug shortages.
The next key actors in the pharmaceutical supply chain are the drug manufacturers. In the last few years, a consolidation trend of the prescription drug manufacturers changed the industry. This involved foremost the market for generic, sterile injectable pharmaceuticals and as a result, this market is now largely represented by just seven manufacturers (Haninger et al., 2011). Additionally, IMS (2011) found out that two-thirds of the products affected by shortages had only three or even fewer suppliers and most sterile injectables even have one manufacturer that produces at least 90% of it. As a consequence, as there are fewer sites producing a certain drug, interruptions in manufacturing can be even more damaging. This risk is even further increased by the fact that many of those products require a certain type of line and can only be produced in specific facilities which limits the extent of substitution considerably (Haninger et al., 2011). Furthermore, there can be unpredictable problems in manufacturing which temporarily close down production such as safety problems or malfunction of machines. Another frequent problem is the limited manufacturing capacity (ISPE, 2013). On the one hand, manufacturers frequently introduce new products for special medication niches but on the other hand, they do not expand their capacities correspondingly due to financial or operational constraints (Haninger et al., 2011). The consolidation among the manufacturers trend aggravated this problem as well. As a consequence, just small disruptions in supply cannot be cushioned by capacity diversion and consequently lead to cascading shortages. A high level of capacity utilization also significantly prevents producers’ ability to adequately react to demand peaks and limits its ability to carry out routine maintenance. In this segment, just-in-time manufacturing is also very common but leaves little scope for error (Haninger et al., 2011; White House, 2011). A big part of these causes can be traced back to the difficulty of predicting demand (Muckstadt, 2012). The poor forecast accuracy is determined by various factors: it can come from new fields of indication, disease outbreaks or often a domino effect from a shortage of a related product aggravates the problem.
Following the supply chain downstream, wholesale distributors link the manufacturers with the pharmacies. In the past, this industry experienced a consolidation trend as well. Today the top three wholesalers (AmerisourceBergen Corporation, Cardinal Health and McKesson Corporation) cover about 85% of the wholesale market (MDM, 2013). Due to the consolidation, wholesalers focus strongly on economies of scale and operational efficiencies as they experience a huge pressure on profit margins. As their core business is to warehouse pharmaceuticals and to manage inventory, this represents a big challenge in the case of drugs because stockpiling is often not possible due to expiration dates (Muckstadt, 2012). But as the first signals of a shortage occur, manufacturers often engage in hoarding which exaggerates the shortage (Singh, 2005, p.42; Johnston, 2004). Hence, inadequate processes at this stage can also intensify drug shortages.
Further supply chain actors like pharmacy benefit managers, pharmacies and customers finally have to handle the consequences of upstream supply chain deficiencies which cause extra costs. Additionally, other key stakeholders like the FDA, research organizations, government agencies and Group Purchase Organizations further increase the complexity and make overall chain management more difficult. The latter are not engaged in supply chain management but hold long-term purchasing contracts with suppliers. Its members can profit from its purchasing service and expertise. But this also makes hospitals totally dependent from GPOs which in return capitalize on that by higher prices (Benton, 2013, p. 399). The aggregated buying power also narrows the pool of possible suppliers to those under contract. In return, this significantly lowers competition and contributes to the worsening of a shortage when some of the suppliers under contract run out of a certain drug and due to dependency the hospitals are then not able to obtain the product from another source.
From another point of view, shortages can be seen as a “function of the short run elasticity of demand and supply for a particular drug” (Haninger et al., 2011). The demand elasticity for the sterile injectable drugs is in general very low which has important consequences for capacity decisions and inventories as there will be no market for excess supply even at low prices. For manufacturers this setting of low price elasticity and no effective means to promote supply represents a big challenge due to asymmetric incentives: the costs of producing too little of a pharmaceutical are rather low but producing too much would be very costly (Haninger et al., 2011).
Hence, taking a closer look at the market for sterile injectable drugs, it becomes obvious that this market and its production have special characteristics which make it difficult to mitigate shortages.
Actions for improvement
It is very difficult to address a drug shortage effectively due to the complexity of the supply chain and the difficulty of demand prediction as there are often no obvious and early cues for a shortage (HDMA, 2013). However, in recent years there have been various attempts which addressed the worsening situation of drug shortages. The most important one was a governmental initiative in 2011 which established closer communication ties between the FDA and manufacturers through a notification obligation. Consequently, all manufacturers now have to report all interruptions of their production to the FDA as early as possible, whether they may come from production issues or pending legislations (FDA, 2013; White House, 2011). The agency then can take various actions: often they ask other manufacturers of the same drug to increase their production. But this is not always easy as most of these producers already operate on a maximum capacity level. However, the actions taken by the FDA, mostly center on certain means to circumvent the strict regulatory requirements. The initiative also pushed the agency to monitor whether any secondary wholesaler capitalizes on a shortage and engages in excess hoarding and afterwards in boosting prices (White House, 2011). Furthermore, the establishment of some private initiatives like the “Accelerated Recovery Initiative” of the Generic Pharmaceutical Association aimed at improving the data base by extensive information gathering about shortages to identify gaps in the pharmaceutical supply (Premier, 2012).
After looking at these recent actions it becomes obvious that the root causes of drug shortages which are mainly determined by supply chain issues have not been tackled yet. There is still a huge potential to further lower the occurrences of drug shortages by opposing the causes rather than just mitigating the symptoms.
Recommendations to mitigate prescription drug shortages
It becomes obvious that a vast part of the drug shortages can be traced back to general inventory management problems. Those problems are further complicated through the inaccuracy of demand forecasts and safety stocks. Finally, manufacturing issues could also be addressed by supply chain management and contribute to the prevention of drug shortages.
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