Managed Care Update: Hospitals Become Drugmakers in an Effort to Cut Prices—But Will it Work?

Four not-for-profit health care systems recently announced that they are uniting to form a generic drug making company in order to alleviate high generic drug prices and shortages throughout hospitals.

The health care systems included in the collation are Ascension, Intermountain Healthcare, SSM Health, and Trinity Health. These hospitals work closely with the US Department of Veterans Affairs (VA), and represent more than 450 hospitals combined.

They plan to form an FDA-approved manufacturing company that will also subcontract manufacturing of generic drugs to other manufacturing companies.

The companies noted that the plan is a response to frustrations over high drug prices that have caused decreased access and drug shortages in hospitals.

“This initiative has the potential to greatly expand the availability and affordability of critically needed medications for millions of Americans, especially for people living in poverty and those most vulnerable,” Anthony R Tersigni, EdD, FACHE, president and CEO of Ascension, said in a press release. “Rather than waiting and hoping for generic drug companies to address this need, we are taking this bold step on behalf of those we are privileged to serve.”

Regulatory Hurdles

We spoke with managed care and health policy experts, Melissa Andel, MPP, Health Policy Director, at Applied Policy; S Russell Spjut, PharmD, formulary management pharmacist, at MagellanRx Management; and Robert W Dubois, MD, PhD, executive vice president and chief science officer, at the National Pharmaceutical Council, to see if this strategy is a viable options for hospitals looking to reduce high drug prices.

“I think that this has the potential to offer another option for health care providers and introduce additional competition into the marketplace,” Ms Andel told First Report Managed Care. “That is generally a good thing from a competitive standpoint, but I question whether this is a viable long-term solution to the complex drug shortage and drug pricing issues,”

Dr Dubois was also skeptical of the ability for hospitals to easily jump into the regulatory minefield that is drug manufacturing. However; he did note that this effort highlights a need for incentivizing innovative solutions—like the one proposed by these health systems.

“We need to look seriously – but carefully – at solutions that might allow us to get better outcomes from our investment in health care,” Dr Dubois said. “It’s hard to know if this coalition of hospitals producing or contracting for the production of generic medications will be able to overcome a variety of hurdles and make it work. This new endeavor does, however, point to the need for research on ways to incentivize new solutions to some of the problems identified by the hospitals, such as drug shortages and the regulatory structures that reward further development of older therapies.”

Ms Andel agreed that regulatory hurdles could be a major problem for this process—and that may be why it is not already popular among large hospital systems.

“There are barriers to entry in the drug manufacturing industry,” she said. “In addition to the actual manufacturing process, manufacturers must receive FDA approval and clearance of their products. I suspect that there is a reason why the market does not already self-correct with established generic manufacturers quickly moving to produce products that go on shortage, or enter specific markets when products see a large price increase.”  

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Alleviating Shortages

Dr Spjut explained that this effort may be more about reducing drug shortages and less about bringing prices down.

“In reading between the lines and knowing a bit about the challenges some health systems have faced with drug shortages, I do not think this initiative is really about fixing problems with generic drug pricing,” he said. “My guess is that this is mostly driven by a desire to find a way to minimize those shortages. By having increased control over more of the supply chain, I think that they hope to have fewer shortages and be able to plan earlier for any shortages to come.”

However, Ms Andel noted that manufacturing more generic drugs may not be the best solution to drug shortages.

“Drug shortages are caused by several factors, and not all of those factors can be addressed by simply having another competitor enter the marketplace,” she said. “For example, it is not clear whether a shortage or problem with the supply of bulk materials would be addressed by this partnership.”

Reducing Generic Drug Prices

Dr Spjut added that if price reduction is the goal, then it may be an unrealistic one.

“If I am wrong and price is really a big component of this initiative, I just do not see how they will have enough production capacity to make most generic drugs at a competitive price,” he said. “There are generics that are higher priced because there are only one or two manufacturers that in theory could be made less expensive by adding more competition, but if there really was room for a competitor to come in and make that drug at a lower cost then I ask myself why hasn’t one of the other large generic manufacturers already stepped in to make that drug? There may be good reasons that only a few manufacturers exist for a particular product and I don’t know that this initiative would be able to overcome those potential barriers any better than the manufacturers already in the market.”

Dr Spjut also suspected that if the effort does prove beneficial for the hospital groups involved, then it will likely only have a positive impact within those health systems—and not effect generic drug prices as a whole.

“The last thought I have about any potential decrease in the cost of generic drugs this initiative may drive is that it will likely only help the bottom line of the health systems and won’t help the nation’s generic price problem as a whole,” he said. “I don’t foresee that the partners in this initiative will charge payers less for these drugs if they are able to drive cost down rather it will just provide a greater profit margin for the organization.”

However, Ms Andel said that this effort could potential spark other entities to follow suit, or may even pressure current manufacturers into lowering their prices.

“That being said, this venture has formidable health care industry support and represents over 450 hospitals, so there is definitely potential,” she said. “At the least, it should challenge the existing paradigm, which could lead to more competition and lower prices for some products. But I don’t necessarily think that this model will be a “cure-all” for the complex issues facing the prescription drug manufacturing industry.”  

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