

How a Cabal Keeps Generics Scarce - dopkew
http://www.nytimes.com/2013/09/03/opinion/how-a-cabal-keeps-generics-scarce.html

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refurb
No offense, but this is a very weird article.

A little background on group purchasing organizations: GPOs represent their
member hospitals. They "buy in bulk" and extract discounts from manufacturers
and take "administration fees" to cover theirs costs.

Who owns the GPOs? The hospitals do! The largest GPO, Novation, is _owned_ by
VHA and UHC, two of the largest healthcare alliances that is comprised of US
hospitals.

Margaret Clapp, the first author of this article used to work for Mass General
who is a member of VHA, who thus owns the GPO Novation.

These GPOs _exist_ because the hospitals themselves created them.

And it's ridiculous to say that GPO discounts are responsibly for drug
shortages. GPOs don't want drug shortages because (1) their member hospitals
don't get the drugs they want (2) because the GPO loses money every time a
hospital can't order a drug.

The current drug shortages are actually due to a number of different factors:

(1) Margins on generic drugs are razor thin, they are basically commodities.
The purchasers of these drugs don't care who makes them, since they are all
deemed equivalent by the FDA; the result is that whoever has the lowest price
gets to sell their drug

(2) The generic drug market looks like a commodity marketplace, but in fact it
isn't. There are a number of costs associated with manufacturing a drug to FDA
standards. If the FDA comes in and says "you can't ship that drug", you've
probably just lost all of your profits for an entire year.

(3) Drug prices are "sticky" due to the way that Medicare and Medicaid pays
for drugs. If you suddenly have a manufacturing problem and need to raise the
price of your drug to cover costs, you're out of luck since it means the
purchasers of your drug will lose money.

(4) Because of the low profit margins, companies are simply getting out of the
business. There are other products they could sell that are lower-risk and
higher margin.

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humanrebar
If generic drugs are too cheap, it seems (3) is the real issue here. (2) can
be accounted for by large companies if they are allowed to raise the costs of
their products.

(4) wouldn't be a concern if there was room to innovate on the business model
of pharmaceutical manufacturing. It seems like this sort of thing would be a
great opportunity for disruption in other industries. I'm assuming that the
regulatory burden makes this difficult? Car dealerships, restaurants, and
grocery stores all have razor thin margins as well.

~~~
refurb
I don't disagree with your assessment. (3) is a major factor in drug
shortages.

There is room to innovate in the generic drug industry. Most generic drug
manufacturers have R&D budgets aimed at reducing the cost of manufacturing.

However, the generic drug market is an odd one. It all comes down to price and
some companies price certain generics at below cost (i.e. loss leaders) in
order to gain other business.

The most interesting quote I've read was from Barry Sherman who runs Apotex,
one of the biggest generic drug makers. I don't have the quote in front of me,
but to sum it up: "I rarely make any profit on any of my drugs. Most of my
profit comes from patent settlements and court cases I win again the branded
drug makers."

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Symmetry
_How could this happen in a free-market economy?_

I don't think you can reasonably call our system of medical drug production
"free-market". Heck, I'm not even convinced that our drug production system is
freer than the Soviet Union's was, though it's clearly still quite capitalist.

~~~
jerf
Look at a fuller quote:

"Policy makers apparently failed to ask the important question: How could this
happen in a free-market economy? That would have steered them to the giant
purchasing organizations that control the procurement of up to $300 billion in
drugs, devices and supplies annually for some 5,000 health care facilities.
These cartels have undermined the laws of supply and demand."

I'm pretty sure the question is meant to be a question you ask to lead you to
where the free market is indeed being broken, not a claim that we have a free
market.

This is solid logic; if the free market can do anything, it's match supply and
demand via price signals. (If you're having a political reaction to that
statement, I mean this in a simple microeconomics sense; it is indeed what
free markets _do_.) In the absence of raw material problems, pervasive
shortages are effectively proof that somewhere in the system, someone's fixing
prices to below production costs. Sounds like they might be combining that
with some good ol' fashioned corruption.

(This is why I'm a "libertarian" and not an "anarchist"; the free market needs
defenders, because as beautiful as the theory is, in the real world, stuff
like this happens, and it needs to be stopped by somebody with the power to
stop it.)

~~~
Symmetry
Yes, you're right that I was being unfair there. But I'd argue that the
biggest ways the drug production system fails are related to the legal
controls that prohibit companies from legally ramping up production to meet
shortfalls in production from other producers without lengthy negotiations
with regulators first.

~~~
mcguire
As mentioned in the article, the New England Compounding Center and Ameridose
did just that.

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mschuster91
Well, for all those who say "a free market does exist": I don't consider a
market as strictly regulated in terms of manufacturing (FDA) as well as in
pricing (at least in Germany, and IIRC in the US anywhere Medicare/Medicaid is
involved) as a truly free market.

That being said, the medical sector needs extreme regulation for obvious
purposes (eg. to give _all_ people access to adequate health care, not only
the rich, and to make sure that the products do what advertised and do not
kill the patients). What has been missing in the US is a compulsory insurance
scheme...

~~~
chongli
_Well, for all those who say "a free market does exist": I don't consider a
market as strictly regulated in terms of manufacturing (FDA) as well as in
pricing (at least in Germany, and IIRC in the US anywhere Medicare/Medicaid is
involved) as a truly free market._

Not only that, but sick people are making choices that, while technically free
choices, are typically dilemmas, Catch-22s, Hobson's choices or worse: _Sophie
's choice_.

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jotm
Opening a drug manufacturing business nowadays is ridiculously hard - the
regulations are insane, the costs for getting everything _right_ are insane,
and the clients are also insane (you think a hospital with shortages will
gladly buy your stuff? Ha, dream on, they've already got their arrangements).

And so there are shortages. Or you get stuff from China, where manufacturers
can ship you 1 or 1000 KGs of stuff with a month's notice.

~~~
toomuchtodo
So why doesn't the VA, Medicare, and Medicaid fund two GSEs (similar to Fannie
Mae and Freddie Mac on the housing/lending side) who are non-profits, and
their only role is to provide generics and other non-patented medical/surgical
devices at cost? Non-profit to remove the profit motive, two for redundancy,
and sponsored by the government because sometimes healthcare shouldn't have a
profit motive when the free market has failed.

~~~
jotm
Non-profit in health care by the largest insurance companies in America? You
gotta be crazy, son...

~~~
toomuchtodo
I'm optimistic. I also want to deploy Plan B vending machines, and eventually
3D printers for pharmaceuticals.

I have first hand experience with the brutal realities of the disgustingly low
standard of healthcare in the US.

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codygman
Did anyone else think this was about Haskell and get disappointed?

When I saw nytimes.com I thought of the Haskell project they did with the
supermodels.

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efnx
I actually thought this article would be about Haskell, lol.

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zhemao
It took me a few seconds to realize that this was about the pharmaceutical
industry and not the Haskell programming language.

~~~
JonnieCache
I thought it was a rant against golang until I saw the domain.

~~~
RBerenguel
Thought the same. I should stop reading the go-nuts email digest for a few
days

