“FDA seeks to ease cancer drug shortage with China-made imports” was the headline on a USA Today article on June 5. Other media outlets covered the same story with similar headlines about the Food and Drug Administration’s move.

While the China angle and the cancer angle were the most attention-grabbing elements, the bigger story is the long-standing, and increasingly frequent, problem of prescription drug shortages.

As individual shortages pop up, the FDA works with manufacturers to try to resolve them. Yet collectively, the situation increasingly resembles a game of “whack-a-mole.”

One idea gaining traction, both inside and outside of Congress, is to help the FDA anticipate potential shortages by imposing additional reporting requirements on drugmakers. Yet, while that might identify some potential shortages, it wouldn’t address the underlying problems.

Devising effective solutions requires a better understanding of the root causes.

The first key point is that most instances of drug shortages involve generic drugs, not novel drugs with market exclusivity.  

The second key point is that most shortages are the result of production problems, not demand spikes. As one expert at the Johns Hopkins Business School succinctly put it, “This is a crisis not of quantity, but of quality.”

This latest example fits that pattern. The drug shortage in question is a generic chemotherapy treatment used against various cancers. About half the U.S. supply of the drug was being produced by one company in India. An FDA inspection of its plant found numerous problems. That resulted in production being taken offline, creating a shortage.

According to the news stories, the FDA is working with that company to fix the problems and resume production, and reached out to a Chinese company that manufactures the same drug, though not for the U.S. market, to secure an interim supply.

The key driver behind this, and other drug shortages, is basic economics.

Drug shortages rarely involve new drugs that still have market exclusivity. It is true that consumers and politicians often complain about the prices charged for those drugs. Yet, the ability to charge higher prices for novel drugs also means that their manufacturers have both the economic incentives and the revenues needed to invest in ensuring reliable production.

That’s why drugs with market exclusivity generally don’t experience shortages, and when they do, it’s usually the result of an unanticipated spike in demand.

In contrast, generic drugs have become low-margin commodity products.  Because of that, makers of generic drugss lack both the economic incentives and the resources to invest in more reliable manufacturing. One consequence is the greater propensity of makers of generic drugs to experience manufacturing quality problems that halt production, generating shortages.

The marginal economics of generic-drug manufacturing also explain why much of it has migrated to countries with lower cost structures, such as India and China. Yet, proposals to “re-shore” generic-drug manufacturing aren’t a complete solution either, as the same problems occur domestically because the same basic economics apply.

To effectively address the root causes, Congress and the FDA need to implement a set of reforms that identify, and publicly report, manufacturers that invest in more reliable production and that encourage wholesale purchasers to contract with more reliable manufacturers.

A review of government studies on drug shortages indicates that Congress and the FDA can ensure a more reliable drug supply by taking the following four, specific actions:

• First, replace the current pass/fail system for FDA inspections of drug-manufacturing sites with a grading system that encourages manufacturers to invest in improving production reliability.

The inherent limitation of the pass/fail approach is that it doesn’t distinguish between factories that barely pass and factories that excel.

Under a graded system, the minimum standards would be supplemented by a set of superior manufacturing management practices developed by the FDA and industry. FDA inspectors would not only check whether a manufacturing facility meets minimum standards, but also record the extent to which it exceeded the minimum by implementing best practices and having plans in place for responding to potential production disruptions caused by external factors, such as ingredient shortages, utility disruptions, or natural disasters.

Independent entities could then use that information to rate manufacturing facilities. That would enable wholesale drug purchasers to identify and give preference to contracting with more reliable manufacturers. Those manufacturers would, as a result, be able to charge a premium relative to their competitors, effectively rewarding them for making additional investments in manufacturing reliability.

The overall effect would be to incentivize competition among makers of generic drugs based on consistency and reliability, not just price.

• Second, require that drug packaging include both the FDA drug-identifier code and the FDA manufacturing-facility code and construct a searchable database that cross-references both codes. That way, for any given drug, wholesalers could identify the more reliable manufacturers and give preference to contracting with them. Also, in the case of a safety recall or production disruption, wholesalers, pharmacists, and clinicians could quickly determine which other drugs might be affected because they are made at the same factory.
• Third, Congress should exempt multisource generic drugs from laws requiring manufacturers to give rebates or discounts on drugs purchased through Medicaid and other government programs. Because of market competition, any generic drug with two or more manufacturers is already priced at just above the marginal cost of production. Government demanding deeper discounts or rebates for those drugs is not only unnecessary, but counterproductive, as it further exacerbates the pricing pressures, producing shortages of generic drugs.
• Fourth, Congress should provide the FDA with additional funding for manufacturing-facility inspections. The best way to prevent drug shortages is to find and fix manufacturing problems before they become critical. Yet to do that, the FDA needs the resources to conduct more, and more frequent, factory inspections.

Back in 1984, Congress enacted major reforms to the drug-approval process. Those reforms not only brought new drugs to market sooner, but also dramatically expanded the availability of cheap generic drugs. Since then, the U.S. has led the world in the use of generic drugs to the point that today 90% of prescriptions filled in this country are for generic medicines.

Even so, the politics of prescription drugs are still focused mainly on the prices charged for new drugs.

Congress also needs to address the more mundane, though equally important, problem of shortages of generic drugs. Effectively doing that would be neither difficult, nor costly.

This piece originally appeared in The Daily Signal