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Business and Markets

Hospitals Making Drugs?

This story from the New York Times got a lot of attention yesterday, and understandably so. It’s fundamentally about the shortage of some generic drugs, a problem that’s been with us for some years now in one form or another. My own belief is that much of this is a regulatory problem, and I note that Scott Gottleib, the current FDA commissioner, has said that he wants to do something about the situation (or these situations, more properly, since there are several factors). One way is to work through what still appears to be a backlog of generic application reviews, so that more companies can get into some of these markets.

But for now, let’s just stipulate that there’s a problem: it’s the solution proposed in the article that’s raised eyebrows:

Now, some of the country’s largest hospital systems are taking an aggressive step to combat the problem: They plan to go into the drug business themselves, in a move that appears to be the first on this scale.

“This is a shot across the bow of the bad guys,” said Dr. Marc Harrison, the chief executive of Intermountain Healthcare, the nonprofit Salt Lake City hospital group that is spearheading the effort. “We are not going to lay down. We are going to go ahead and try and fix it.”

But right off, that runs into the paragraph above: if you’re going to start your own generic manufacturing effort, you have to get in line for the FDA to review your application to sell the compound(s). And that’s one of the logjams – one that will not be fixed by jamming another log into it. The article, though, mixes several problems together. You have the not-enough-players-making-cheap-drugs problem (which can happen through several means, regulatory approval not least among them), and you also have the only-one-manufacturer-eat-my-dust problem, which also takes many forms.

In some cases of the latter, you have old, off-patent, formerly cheap compounds where one supplier has been granted market exclusivity (and the ability to raise prices and drive everyone else out of the market). How does this happen? Deliberately by design of the FDA: there are incentives to bring older drugs into the modern regulatory framework, and if you do the tests needed, you get a very, very nice reward. Too nice, from my point of view, but that’s how the law is written. In other one-manufacturer cases, people have bought up the only supplier of a small drug and then taken it into “restricted distribution”, which basically keeps any other potential competitor from running the comparison trials needed to even get in line at the FDA to sell the drug, too. That’s the Martin Shkreli playbook (although he’s not the only one), and it also takes advantage of FDA regulations about how and why distribution of a drug can be so restricted. Want to change these? Change the law.

The Times, though, doesn’t go into these details, and you have to read closely to even get the sense that there are several different problems here. This is probably the most overt statement:

“We’re seeing an acceleration of both shortages and escalation of prices,” said Dr. Richard Gilfillan, the chief executive of Trinity Health, a large Catholic system that operates in nearly two dozen states and is part of the group. “There’s not been any effective push back on either of these.”

That’s a key distinction. There’s no shortage at all of (say) daraprim (Shkreli’s notorious example) or colchicine, an old drug whose current owner got the modern-regulation reward. It’s just that their prices have gone through the roof. On the other hand, there are a number of other old compounds where there really isn’t enough to go around, because the lone manufacturer has run into sourcing or production problems at some point.

Intermountain executives would not discuss many details of the project, citing fears that competitors could shut them out of the market by quickly dropping the price of the drugs in question, then raising them again later. They said they would focus on drugs whose prices have risen sharply or that have been in short supply.

“We’re going to have to hold that very close to our vest,” Dr. Harrison said. The company will either rely on third-party manufacturers or decide to make the drugs themselves.

Now that’s a big distinction, though. That third-party manufacturer solution is the most straightforward, but in the case of plain-old-shortage drugs, you’re going to be asking them to make something that they’re not making now. They’ll have to get the process going, and everyone will have to get regulatory approval to give it to patients. In the case of expensive restricted drugs, though, this solution would seem to be impossible: the law says that the current manufacturer has exclusivity, or can force exclusivity by denying supplies to competitors. What then?

As far as making the drugs themselves, that’s an even bigger hill to climb. Making even a relatively simple old generic drug is a much different thing than a hospital does, and getting that going will not be simple. And there’s the matter of – yes, yet again – regulatory approval. This is not a process that will alleviate a shortage any time soon, although (as the article correctly notes), the FDA has said that it will give priority to facilities that are working to alleviate such shortages.

Here’s another key part:

Erin Fox, a drug shortage expert at the University of Utah, said the idea of creating a nonprofit drug company is promising. “I think anything that increases the number of suppliers will help,” she said. She added that the trick will be in selecting the right third-party manufacturer to ensure good quality.

Why yes, that will be the trick. And you’ll have to see if you’re actually increasing the number of suppliers when you do that, or just asking an existing one to supply you as well (which you will at least pass on at cost). In some of these cases, said manufacturer might wonder why they should supply you at all, depending on their own situation with the current customer. I’ll watch this proposal with interest, but some of it is on a collision course with reality (not that I’m defending reality, in this case!) A reader of the Times article might get the impression that “Hey guys, let’s just make the drugs!” is the obvious and easy solution, though, and that’s just not quite the case.

36 comments on “Hospitals Making Drugs?”

  1. Emjeff says:

    This is doomed to failure. These well-meaning but completely naive people will soon find themselves thigh-deep in regulatory paper-work, clean-room validation, source documentation, and site inspections,and will likely find out that they will have to charge at least as much, if not more, for these drugs as they would from the market-place.

    The shortage problem is a problem of economics. For many of these low-value generics, it costs more to make them than they can sell them for. This will not change because a few progressive do-gooders get into the marketplace.

  2. Hap says:

    If you don’t understand the problems with generic supply (and if making them yourself is a solution to the problems cited above, you probably don’t), then whatever you do isn’t going to be much use. They’d be much better off with lobbyists or campaign donations to get Congress to change the laws (to require sales for bioequivalence for FDA-approved drugs and to change the incentives for qualifying old drugs under the current regulatory framework).

    If this were to work, it’s hard to see why hospitals wouldn’t be captured by the profit motive – for patients and insurers, it would likely end up (at best) “Meet the old drug seller, same as the old drug seller.” And the money to start their own manufacturing system for drugs is coming from somewhere.

    1. Some idiot says:

      Good to see someone who is acquainted with The Who… 🙂

    2. Robert says:

      If this idea works at all it seems likely to work as an example of vertical integration. Basically all the hospital systems agree to support an unprofitable drug manufacturing company so that all of them can make more money providing treatments. It isn’t likely to be much better for patients or insurance companies.

  3. BK says:

    Seems like wishful thinking at a grandiose scale.

  4. Charlie Kilian says:

    They make it sound like pricing is part of the problem they’re working to fix: “For years, hospital executives have expressed frustration when essential drugs like heart medicines have become scarce, or when prices have skyrocketed because investors manipulated the market.” And: ““This is a shot across the bow of the bad guys,” said Dr. Marc Harrison, the chief executive of Intermountain Healthcare, the nonprofit Salt Lake City hospital group that is spearheading the effort. ”

    I’m skeptical of this moralistic language. Hospitals themselves have their own issues with pricing. There is very little standardization from hospital to hospital on pricing. Prices quoted on bills for the same service vary so widely from hospital to hospital that it leaves me with the impression that prices have little to do with the cost of the service provided. And look, I’m not trying to start an argument on the merits of value-based pricing here. I’m just saying, it’s not like they’re doing their work without a motive for financial gain.

    I wonder how much of this is an attempt to get a bigger slice of the healthcare money pie. Obviously some of it is. The question is, What do they plan on charging above cost?

    1. NMH says:

      That’s why you need health insurance in the USA. You need some kind of organization to get the lowest price possible, or else hospitals will charge you whatever they want.

      I think its funny how things that I thought were not negoitable (rent, hospital bills) are now negoitable.

      1. Lawrence says:


      2. Hospital bills have been negotiable for, at least, decades. When my mother ran up a five figure bill in the late 1970s my family responded, essentially, “we haven’t got it” (because we hadn’t got it) and the hospital immediately began to negotiate. Both the total price, and the payment schedule.

        While it didn’t go to zero, the numbers went down a lot, the schedule was reasonable, and my parents found better employment. It all worked out to everyone’s satisfaction over the next few years.

      3. Anonymous says:

        Only idiots pay list price at health care facilities. My dentist has two price lists. The far lower one is for anyone with any kind of dental plan. It doesn’t matter if the plan pays anything to him, you get the lower price.

  5. Moneyfordrugsorfood says:

    Why not just buy the USP API from China or India and the Hospital can do the rest in their “compounding pharmacy”?

    1. Robin says:

      Because they would have to register as a drug manufacturing facility under current compounding regulations. Same problem with sourcing, cleanroom validation, FDA inspections, accountability records, adverse event and complaint problems, etc., etc.

  6. Isidore says:

    So when will drug manufacturers start treating patients more cheaply than the hospitals?

    1. Isidore says:

      I mean, on the face of it, anyone should be able to remove a splinter form much less than the $2000 billed by the ER.

      1. Wes says:

        I think the conclusion we can reach from that example is to not go to the ER for splinter removal. And that’s one slice of the problem. ERs are staffed based on expected volume, and if they’re getting clogged with non-emergent cases that’s just going to raise the baseline costs for running the ER. In other words, you have to charge enough to cover the costs of the idle periods periods between peak usage. That ERs are the most expensive method of supplying care for non-emergent needs should be no surprise.

        1. Isidore says:

          I was giving “splinter” as an extreme example, there are ER-worthy situations, for which the bill comes out to at least an order of magnitude greater than what one would be charged for similar care at a doctor’s office if one were lucky to have the mishap occur immediately prior to the regularly scheduled appointment with one’s PCP. But your point is certainly valid, in that non-emergency events clog ERs, which many people use essentially as their primary care providers.

          1. Met says:

            A decade ago there was an urgent care designed to be like an ER but without a hospital attached, if that makes sense. They were able to give me IV medication, and had at least an x-ray machine. They were also open 24 hours. They seem to have closed at some point, and the local major health system that took over the building closes early on weekdays and isn’t open weekends.

            As far as I know, there is now no 24 hour urgent care in my city. Crime gets worse after dark and homeless people come into the level 1 trauma center seeking a warm place to sleep, even if that’s the waiting room chairs. If you’re not actively dying, the wait time can be 12+ hours.

            We desperately need comprehensive 24/7 urgent care clinics (and better homelessness outreach/prevention). I think the only reason they closed was, they didn’t advertise basically at all. No one knew they were there, or what insurances they took. I didn’t even know they closed until I started writing this comment.

          2. Anonymous says:

            I used to work near a big suburban hospital with a real 24/7 Emergency Service. That hospital has been bought, sold, renamed and repurposed several times over the years. The last time I was there, the ER wing was completely shut, dark, and vacant and another hospital area had become the Urgent Care area. I forget the hours, but it was something like 8 AM – 7 PM or so. Good luck if you have an emergency between 7 PM and 8 AM!! I’ve seen commercial (chain or franchise) Urgent Care storefront operations pop up in shopping malls and city streets. Same deal: bankers’ hours plus a few more, ~8 AM – 7 PM or so.

            ScienceMag IT: Please remove the avatar from this posting name and posting ip address. It isn’t me. Your computer algorithms messed up. Thank you.

  7. Radpharmchem says:

    It is a good motive by the hospital’s wanting to make drugs cheaper for the patient but there are many questions and problems that can arise from this.
    Where is the money going to come from to make the drugs as investors always want to make profit and the drug industry is very expensive. The FDA won’t give any exception to any organization even with the best motives and the hospitals must go through the normal regulatory approval process of starting up and getting drugs for approval.

  8. Anon says:

    I see nothing wrong. Anyway, the hospitals routinely asks the lab they are associated with for the supply of diagnostic agents for the cancer detection. These radio-pharmaceutical agents are prepared in-house in view of its short half life as a kit. Doable, but we have to deal with competing political lobbies and other interests.

    1. John Wayne says:

      The reason why hospitals can make contrasting agents with short half lives is because somebody made it possible with development and regulatory approval. If these agents were shelf stable, they’d have the same supply problem with generics. A lot of the companies that have made and developed imaging agents in the US have shut down in the last decade. We don’t have a lot of extra cyclotrons making F18; a disaster at one of those facilities could create exactly the same issue with these agents.

      It seems like the core issue is that making generic medicines isn’t profitable enough to justify the investment in development and risk of regulatory oversight. As a result, businesses have started to look elsewhere for opportunities, and this behavior has created short term monopolies and supply issues. Let’s fix the problem and not the blame.

  9. DevicesRus says:

    It isn’t clear to me what “make” means in the article. I personally don’t think that hospital chains are going to be in the synthesis market but rather in the compounding market. Most big hospitals (at least in Los Angeles area) already are able to compound all sorts of things (and are regulated for that) so moving from parenteral formulation to say tableting might not be such a big stretch.

    1. Hap says:

      Any of the drugs they’d be formulating, though, either can’t be (because they can’t legally do so – Celgene thalidomide variants, products of the Shrekli Gambit, or compounds with exclusivity from new regulatory filings) or they don’t have the generic to compound (presumably because generic producers can’t make enough money to make it worth their while). Formulating their own drugs doesn’t solve their biggest problems, and creates some new ones (though if they’ve been compounding, they might have competence to solve some of them).

  10. gippgig says:

    I believe FDA regulations do not apply if a drug doesn’t cross state lines (i.e., a hospital makes it on site).

  11. Barry says:

    Granting a period of market exclusivity is the proper power of the USPTO. Any other agency trespassing on that power is a problem. They’re not wholly independent, of course. But the USPTO routinely restores patent life that has been burned due to other agencies’ regulatory processes.
    What has happened, intentionally or unintentionally is that the FDA has effectively awarded a period of market exclusivity to a manufacturer for bringing an old public-domain drug up to current regulatory standards. That’s not a power it properly wields.

    1. Anonymous says:

      Market Exclusivity is an FDA issue. You may be thinking of Patent Term Adjustment which is a USPTO process for delays at the patent office only, not other government agencies. Examples triggering a PTA include taking more than one year for a first office action or taking more than two months to reply to Applicants response.

      1. Barry says:

        a “Patent Term Adjustment” is so named because it is a patent issue, granted by the patent office.

        1. Stephen says:

          Barry, I think you may be confusing patent term adjustment with patent term restoration. The latter enables the term of a patent for a human drug product to be extended by up to 5 years, provided the effective patent life of the extended patent (the period between regulatory approval and patent expiration) does not exceed 14 years. Its objective is to “compensate” the patent owner for time lost in marketing a drug due to regulatory review by the FDA. The patent owner must apply for an extension within 60 days of obtaining regulatory approval.

          Market exclusivity is another issue entirely. It is granted by the FDA and applies whether the NCE, moeity or biologic is patented or not.

  12. Major PI says:

    Govment shutdown…shit man…PIs may have to make their own way in the world, instead of having PHD students change their diapers ( fyi, Phd students who do all the work are funded by the government, while PIs startups are funded by private venture capitalists and/or pharmaceutical companies).

    1. racemics says:

      Unless you’re PI forces you and all the other NIH-funded students/postdocs to work for his startup because they got behind on an order. Reward for playing ball: new laptop or NFL tickets bought on unrestricted grants; punishment for pushing back: failed candidacy and withheld rec letter. Awesome.

  13. willie x gluck says:

    FDA Misconceptions
    Let me clear up a few FDA-related things:
    -FDA Exclusivity
    Congress passes FDA-related laws, FDA drafts CFR rules implementing these laws. The Hatch-Waxman Act included 3-year and 5-year exclusivity provisions that were not too clear. So exclusivity was not an FDA-invented concept. Furthermore IMHO it was entirely unnecessary and reasonably burdensome on FDA. The legislative history is clear that the intent was to incentive new uses for old drugs; but non-obvious new uses are patent-able. No one at FDA who has to deal with the exclusivity issue thinks this is good use of FDA’s time.

    -Why old drugs get exclusivity
    Generally a new indication for a previously approved drug, gets 3-year exclusivity. And there is NO inherent exclusivity for a generic drug, unless there is a successful “Paragraph IV” challenge, which typically involves a patent challenge.

    Robin’s comment relating to hospital compounding:
    “Same problem with sourcing, cleanroom validation, FDA inspections, accountability records, adverse event and complaint problems, etc., etc.”
    This is not entirely correct. There are two compounding regs, 503A and 503B. Generally 503A applies to hospital pharmacy compounding, under which the drug substance (active pharmaceutical ingredient) is not required to be from a source cited in an approved application. Also CGMPs do not apply, as they do for “outsourcing facilities” under 503B. Likewise adverse event reporting does not apply to 503A pharmacies.

  14. DrOcto says:

    Not to mention that no self respecting third party manufacturer would expose themselves to a lawsuit by selling the API when another company has exclusivity rights.

  15. Thomas says:

    Maybe a typically americocentric approach?
    Should it not be possible to advise patients to – personally, for private use – buy the needed drug from abroad (EU, India)?

  16. Scott Stewart says:

    So as a guy that proscribes a lot of generic drugs (veterinarian), and has seen certain old generics go beyond crazy at times (doxycycline, phenobarbital), what is happening? I have the impression that there is an oligopoly/monopoly at the manufacturer level allowing them unreasonable market control. (Drug drops below a threshold of manufacturers, remaining manufactures sense market signal to raise prices, inspires other entries to market after a long regulatory approval, prices drop, some manufactures elect to get out of a line, lather rinse repeat.) If this is the case, I could see this helping by minimizing the in and out and wild price swings we see. What am I missing?

  17. chris says:

    I don’t think this solution will work. That being said, I believe a slow FDA approval process is only one of several equally large problems in the US drug market. While I don’t fault any of your specific points, you also need to consider 1) pay-for-delay schemes where pharma companies pay generics not to produce their approved generics and 2) pharma companies who purposely increase the administrative burden (through citizen petitions).

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