Government Price Controls Produce Cancer Drug Shortage—Who Would Have Guessed?

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Government overreach

In the Sunday New York Times, bioethicist Ezekiel Emanuel describes how the federal government has created a cancer drug shortage. As he notes

RIGHT now cancer care is being rationed in the United States…

Of the 34 generic cancer drugs on the market, as of this month, 14 were in short supply. They include drugs that are the mainstay of treatment regimens used to cure leukemia, lymphoma and testicular cancer.

Why? Because of what are essentially government prices controls on generic cancer drugs. 

If the laws of supply and demand were working properly, a drug shortage would cause a price rise that would induce other manufacturers to fill the gap. But such laws do not really apply to cancer drugs.

The underlying reason for this is that cancer patients do not buy chemotherapy drugs from their local pharmacies the way they buy asthma inhalers or insulin. Instead, it is their oncologists who buy the drugs, administer them and then bill Medicare and insurance companies for the costs.

Historically, this "buy and bill" system was quite lucrative; drug companies charged Medicare and insurance companies inflated, essentially made-up "average wholesale prices." The Medicare Prescription Drug, Improvement and Modernization Act of 2003, signed by President George W. Bush, put an end to this arrangement. It required Medicare to pay the physicians who prescribed the drugs based on a drug's actual average selling price, plus 6 percent for handling. And indirectly — because of the time it takes drug companies to compile actual sales data and the government to revise the average selling price — it restricted the price from increasing by more than 6 percent every six months.

The act had an unintended consequence. In the first two or three years after a cancer drug goes generic, its price can drop by as much as 90 percent as manufacturers compete for market share. But if a shortage develops, the drug's price should be able to increase again to attract more manufacturers. Because the 2003 act effectively limits drug price increases, it prevents this from happening. The low profit margins mean that manufacturers face a hard choice: lose money producing a lifesaving drug or switch limited production capacity to a more lucrative drug.

The result is clear: in 2004 there were 58 new drug shortages, but by 2010 the number had steadily increased to 211. (These numbers include noncancer drugs as well.)

What's the solution? Emanuel recommends changing the government price controls so that drug companies might collect as much as 30 percent over the average selling price. At the end, however, he reaches the right conclusion—the market. 

A more radical approach would be to take Medicare out of the generic cancer drug business entirely. Once a drug becomes generic, Medicare should stop paying, and it should be covered by a private pharmacy plan. That way prices can better reflect the market, and market incentives can work to prevent shortages.

Radical? Not really.

But wait, the Democrats and President Obama are now suggesting that price controls should be extended to Medicare Part D. I suppose that way we can enjoy shortages of all pharmaceuticals instead of just singling out cancer drugs. 

NEXT: If Only Americans Weren't So Goddamned Stupid We Wouldn't Have to Send Them to Re-Education Camps

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  1. Let me be clear: these cancer patients will not have died in vain. The righteous cause of government controlling every-fucking-thing marches on.

    1. “America is a whorehouse… where the revolutionary ideals of your forefathers… are corrupted and sold in alleys by vendors of capitalism… “

      1. “They told the stories at times they had personally raped, cut off ears, cut off heads, taped wires from portable telephones to human genitals and turned up the power, cut off limbs, blown up bodies, randomly shot at civilians, razed villages in fashion reminiscent of Genghis Khan, shot cattle and dogs for fun, poisoned food stocks, and generally ravaged the countryside…”

      2. Not the vendors of capitalism, this was caused by the vendors of socialism. The story points out this was caused by removing the capitalist incentive to make more money by producing cancer curing drugs. Instead, the companies are limited to producing other drugs with higher profit. (Something every publicly traded company is required by law to do. Under the law they have a fiduciary responsibility to make as much money as possible for the stockholders, this ensures CEOs don’t do sweet heart deals, pursue their personal projects, causes or interests over the stockholders.)

        1. The economics of this post are sketchy at best. How would allowing drug companies to spike prices prevent drug shortages? At best, they would allow the companies to quickly ramp up production once shortages existed, but there would be no incentive to keep a steady supply on hand.

          If shortages are possible, allowing drug companies to spike prices actually INCREASES the moral hazard. Remember what happened in the deregulated California power market? Why would you provide an incentive for drug companies to ramp down production to restrict the supply, then ramp up as soon as shortage demand spiked the price?

  2. This is particularly important because not all cancer drugs are created equal.

    What works well for one person’s lymphoma, for instance, may have unacceptable side effects for someone else. …some of which may have permanent consequences for some people.

    Man-made catastrophe–and completely avoidable. It’s disgraceful what some people will do in the name of making healthcare more accessible.

    1. At least people can afford these drugs?

      What good are cancer drugs if people can not afford them?

      1. This is a joke, right? I can’t tell anymore.

      2. At least people can afford the drugs that don’t exist?

    2. Man-made catastrophe kinetic rationing action

  3. go to hell

    1. Great argument! I’m convinced!

    2. I believe that was the point of the post.

      1. We are in hell, thanks to you and the govt.

  4. “Dr. Emanuel’s analysis dovetails with Drew Westen’s, its neighbor in the Sunday Review. If the Democrats were coherent–and not in the pockets of the pharmaceutical companies–they would be adding this analysis to the story they need to tell (but don’t) of how the country has been hijacked by plutocrats. I’m happy to see two worthy articles in one section.”
    from the comments, I LOL’d

    1. Oooh and another gem:

      If ever there was an excuse to nationalize the pharmaceutical industry, a shortage of generic cancer drugs for cancer, including childhood, leukemia must be it. There must be a special place in hell reserved for the executives of these firms.
      I don’t want to hear another word from Congress about the immorality of leaving the deficit to our grandchildren: How about getting to work to make sure today’s children are fed, housed and. when they are sick, have the drugs available to cure them.

      As the sister and daughter of cancer patients, I have known a couple of oncologists: in terms of sheer intellectual brilliance and compassion, they beat any clergy or corporate executive I have known. This isn’t a doctor problem: it’s a problem caused by the relentless greed of American corporate culture.

      And, yeah, the NY Times ought to have the guts to name the companies involved.

      1. I wonder if the guy who wrote that drives a Trabant.

        1. No, a Yugo.

          1. Drive? No, the operative word is ‘push.’

            1. In Soviet Union, cancer drug shortage find you. Although sometimes can’t find you while you in line for bread.

      2. nationalize

        shortage

        Yes, those words do go together nicely.

      3. If ever there was an excuse to nationalize the pharmaceutical industry, a shortage of generic cancer drugs for cancer, including childhood, leukemia must be it

        Better solution: Kill all drug patents.

        1. What would be the motivation to spend countless millions of dollars to develop a drug that someone could reverse-engineer and sell without the R&D expense?

          1. What would be the motivation to spend countless millions of dollars to reverse engineer a drug when it makes razor-thin margins?

      4. I have known a couple of oncologists: in terms of sheer intellectual brilliance and compassion

        The oncologist that treated my adoptive jewish grandmother gave her the same drug that they gave her when she had Stage IV cancer (except it was candy-coated with a little bit of Human serum albumin to make the cancer cells take them up). I was like, uh, but aren’t the cells that are still around the resistant ones? I’m sure that the oncologist got a nice kickback for providing an incredibly expensive drug (HSA ain’t cheap).

      5. Love the way these always ignore that a publicly traded company has a fiduciary duty to the stockholders to make the highest profit possible. That is, ensure it as run as a business for the stockholder vice have resources diverted to causes, pet projects etc that stockholders, whose money is at risk, don’t have a chance to approve/disapprove. So, as I said above our laws force the CEO to act in the companies interest making the higher profit drug regardless of other considerations.

      6. “There must be a special place in hell reserved for the executives of these firms.”

        There must be a special place in hell reserved for people who think these drugs are magically wished into existence and not financed with other people’s money.

        1. Right, as well as those people who think it’s all corporate R&D that produces these drugs, rather than primarily research at public universities.

      7. I have known a couple of oncologists: in terms of sheer intellectual brilliance and compassion, they beat any clergy or corporate executive I have known. This isn’t a doctor problem: it’s a problem caused by the relentless greed of American corporate culture.

        I’m sure those oncologists donated their labor to the state out of their sense of patriotism.

        1. While we’re swapping anecdotes, the two oncologists I have been personally acquainted with have been (1) Fairly lazy with a serious case of personal entitlement delusion, and (2) Weird, lacking social skills, and not entirely hygienic.

          1. But… Wilson from House is so gallant, and has impeccable hygiene!

    2. Nipplemancer: My colleague Jesse Walker referenced the hideously authoritarian Drew Westen essay to which you refer in his well-titled blogpost, Creepy Quote of the Day.

  5. Nipplemancer: With due respect, do you have any examples of “nationalized pharmaceutical companies” anywhere in the world? Even in Europe and China, drugs are made by private companies.

    And if so, what new and innovative drugs have said “nationalized pharmaceutical companies” produced?

    1. Ron, I’m quoting retards from the NYT comments section.

      1. I probably should have blockquoted, but I’m being lazy today.

        1. It’s like your comment was nationalized.

          1. all your comments are belong to us!

          2. and then sensationalized

        2. Nipplemancer: Sorry about that – but I do wish you’d block quoted. That way I wouldn’t look so clueless about your real understanding.

          1. No problemo Ron. I still love you. (no homo)

            1. with a name like Nipplemancer, it is unclear

              1. Yeah, he should have block quoted the “I still love you.”

          2. It’s easy to misinterpret people these days–there’s so much that average people used to know that seems to have been forgotten. And it’s hard to be snarky–without being mistaken for the real thing. What a lot of people really think is so ridiculous now–that it’s hard to mimic their ridiculous stances without people assuming you’re being serious!

            When I was a kid in ’80s, we used to have to convince people of Econ 101 stuff–a lot of average people had never heard that stuff before Reagan. After Reagan, talking about Econ 101 stuff because a bit stigmatized, and it’s still that way to some extent.

            But I maintain that before people on the left and elsewhere make fun of people who quote Econ 101 stuff–they should at least have a basic understanding of what they’re mocking!

            And this seems like Econ 101 stuff to me. Anybody who doesn’t understand that price controls create shortages? Should be ridiculed by average people for being so ignorant. But it’s just the opposite right now! When we point out that price controls create shortages–average people are just as likely to ridicule us for knee-jerking Econ 101.

            The snark on both sides of that is thick enough to cut with a knife–and I think this happens a lot now. …where people take snark on these issues seriously and take serious opinions as snark.

            I know people have mistaken my serious criticism as if I were making fun of people who think economics matters! Its’ very frustrating. I guess that’s how Galileo felt!

            1. Hey, my price controls on oil had nothing to do with shortages of gasoline and the long lines of cars waiting to fill up at the gas station. They all just wanted to socialize, kind of like tailgating.

            2. A lot of people simply have never heard of such things, and never thought of it that way. I once explained to my cousin, “Hey, if there’s a minimum wage, if it does anything, it doesn’t increase people’s wages, it just gets some people who aren’t worth more money fired”

              And he’s like “Oh yeah…”

              Hell I MYSELF remember being surprised in econ class learning about that. That was one of the things I would have assumed is a good idea and I was like “wow, OK, I feel dumb that I never thought of that.”

              (of course, NOW, after all that, I know the libertarian reactionary stance that assumes that minimum wages can ONLY increase unemployment is also flawed – not every job is in a “competitive market”, especially not lower-paying ones. And in a society with unemployment benefits, food stamps, etc. , some people taking longer to get hired might be a better choice compared to more people being stuck in shitty low-paying jobs)

              1. Right!

                It’s like you gotta be able to understand the rule…before you can start talking about the exceptions.

                Somehow the exceptions and odd cases became what everybody understood! …and now the people who understand the rule are supposedly out of it?

                How do you formulate rational public policy when so many voters don’t really understand the most basic tenets of economics?

                I want to think the people who made an implemented this policy were really evil souls, who knew what they were doing would harm millions of cancer patients–but did it anyway for Machiavellian reasons, to dupe the idiot masses into thinking they were being especially well served…

                …but the sad reality is that the people who put these price controls in place–probably had no idea what they were doing. They probably STILL have no idea that shortages are the result of what they did!

                When I’ve had to deal with government agencies in my work, I’ve come across it regularly. It’s not that the people there are evil–they’re just clueless.

                That’s why I give money to Reason. I don’t think anybody’s doin’ a better job of spreading the gospel.

    2. I assume we’re putting aside Soviet developed steroids here?

  6. The problem won’t be solved until there’s a shortage of a drug treating one of the Ribbon Bully Diseases.

  7. *valiantly attempts to feign surprise*

  8. A more radical approach would be to take Medicare out of the generic cancer drug business entirely. Once a drug becomes generic, Medicare should stop paying, and it should be covered by a private pharmacy plan. That way prices can better reflect the market, and market incentives can work to prevent shortages.

    Prices, as indicators of scarcity and as signal to producers… Who would’va thunk it????

  9. And this seems like Econ 101 stuff to me. Anybody who doesn’t understand that price controls create shortages?

    Apparently, some significant portion of the people who have actually *seen* a “supply curve” have no real understanding of what it represents. And they really don’t get the real-world effect of an artificial shift of that curve imposed by government diktat.

    1. Most people are willfully stupid and do not desire to understand it. The stigmatization of the rational argument versus the emotional one has been responsible for this decline in the public’s intellect.

      1. The stigmatization of the rational argument versus the emotional one has been responsible for this decline in the public’s intellect.

        That’s just inherently paternalistic MBA-style thinking.

  10. Government price controls creating a shortage?

    What about government suppression of treatment and in many cases a cure!!!

    http://www.burzynskimovie.com

  11. “At the end, however, he reaches the right conclusion – the market. ”

    NO. The only way to bring abundant health care to everyone is single-payer. To say otherwise is to deny fact.

    1. what fact?
      Do you know what that word means?

    2. F.

      You suck at doing Fake Tony.

      1. You suck at doing Fake Tony.

        I KNOW! And he’s everywhere today. Can’t we get a breather?

    3. See Tony? You’re full of shit. You’re always for single-payer only.

      Last week I highlighted that it’s by far not the ideal system and France’s is better, and you eventually reluctantly agreed. Then you tried to cop out by saying “I don’t remember where I said only single payer is the only viable option” Well, here you arem sayingh it now.

      Society-wide coverage of health care is a laudable and achievablke goal, but you and the democrats are too fucking stupid to achieve it.

      Take some fucking accounting and econ classes.

      1. It’s because that’s not really their goal. Single-payer will achieve their real goals.

  12. NO. The only way to bring abundant health care to everyone is single-payer a monopoly.

    There, fixed it.

  13. You know what I love/hate? When someone tells me “you know, it only takes them a few cents per pill to produce”

    Yeah, except for the $1 fucking billion to R&D and get approved. Not to mention distribution costs (people also say the same thing about other stuff at stores)

    1. But if you ever bring up the fact that the FDA is killing people, they look at you like you’re a lunatic.

  14. The pharmaceutical companies make how much per pill and insurance companies are getting paid the most ridiculous premiums ever. Yet people who need the drug and in some cases, could even afford the drug treatment can’t get the care they need because the market share isn’t at its peak. Totally unacceptable.

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