Real Clear Health: Blame Washington for Drug Shortages

By Merrill Matthews

America is experiencing the worst shortage of prescription medicines in nearly a decade. Patients and their physicians are struggling to obtain more than 300 drugs, mostly generics. 

Those fighting cancer are particularly at risk. In September, the White House sounded the alarm on widespread shortages of 15 cancer drugs, including three crucial generic chemotherapies. 

The shortfall has gotten so serious that President Biden just invoked a Cold War-era law called the Defense Production Act to bolster domestic drug manufacturing. The Biden administration will require certain U.S. manufacturers to ramp up production of essential drugs and medical products, beginning with materials for sterile injectable medicines.

In congressional hearings, some Washington lawmakers correctly identified the root cause of the problem -- namely, margins in the generic drug industry have dropped so low that many companies are pulling out. In May, Teva Pharmaceutical Industries, one of the world's largest makers of generic drugs, announced plans to shrink its generics business due to profitability concerns. Several generic manufacturers have gone belly-up in recent years.

As a result, half of generic drugs are now sourced from only one or two manufacturers. The slightest quality-control mishap, shipping delay, or demand surge can easily leave patients without the medicines they need. 

Unfortunately, drug shortages are likely to get much worse in the years ahead due to the actions of some of the very same legislators expressing concern about the current shortfall. 

Washington seems bound and determined to undermine the incentives that spur companies to develop and manufacture medicines -- not just generic ones, but novel treatments, too. Unless policymakers reverse course, patients can expect more trouble accessing lifesaving treatments. 

Consider just a few of the ongoing efforts to weaken the intellectual property protections that drug companies rely on to make investments in the medicines they bring to market.

President Biden just announced that he intends to upend a 40-year-old law, known as the Bayh-Dole Act, that promoted the collaboration of publicly funded university and medical school researchers and drug companies, and has led to some of the most innovative, life-saving drugs now on the market. If bureaucrats don't like the price of these drugs, they will take control of their patents. 

On the world stage, the Biden administration is contemplating a petition before the World Trade Organization that would render useless intellectual property protections for Covid-19 treatments. 

Meanwhile, Medicare officials have started implementing 2022's Inflation Reduction Act, which subjects certain brand-name medicines to price controls after they've been on the market just nine years -- regardless of how much time is left on those drugs' patent terms. That's a de facto attack on intellectual property protections. 

And speaking of price controls, both brand name drugs and generics are required by law to pay state Medicaid programs a rebate (read: kickback) based on a drug's Average Manufacturer Price. In addition, most states demand a "supplemental rebate" on top of the federal rebate, if the company wants the drug on the state's "Preferred Drug List," meaning the drugs most likely to be prescribed. All these efforts shrink profits, which can hit the already thin margins of generic drugs especially hard.

Together, these efforts undermine the core promise of IP protections -- that companies will have a limited time to earn a return on their inventions without others stealing the fruits of their labor. Such private property rights are enshrined in the Constitution and form the foundation of our modern economy. 

By undermining these property rights, policymakers are dramatically reducing the opportunity for companies to earn a return on their investments. 

Companies, like individuals, respond to economic incentives. If firms have little chance of earning a return on their investments, they won't make those investments in the first place. Less investment means fewer branded drugs and fewer generics. Drugs that are never invented never go generic.

Washington is alarmed, and rightly so, about shortages of generic drugs. Yet policymakers keep working to undermine the intellectual property protections and profit motive that drive drug development. Unless that changes, patients should expect more shortages in the years to come, and Washington will be the one to blame.

Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas. Follow him on X @MerrillMatthews.