Price Defines the Generic Drug Market
#Interventions
Kevin Schulman, MD, MBA, is a Stanford health economist dedicated to revealing the downside of the generic drug marketplace – one that has saved consumers billions of dollars in drug costs annually but that is still “deeply flawed.”
A shortage of cisplatin, a key cancer chemotherapy agent, resulted in a crisis for Stanford Medicine and many other healthcare systems in 2023. A Food and Drug Administration (FDA) inspection had found severe quality problems at one of the largest foreign manufacturers of this generic drug.
Guided by principles of ethics, potential impact on prognosis, and clinical judgment, a multidisciplinary committee helped determine the allocation of cisplatin to patients on a case-by-case basis. At that time, Neera Ahuja, MD, was medical director of pharmacy. She recalls that “all the patients at Stanford received the care they needed, and there were no negative impacts to clinical care.” Ahuja is currently associate chief medical officer, Inpatient Care Services.
Drug Detective Seeks Answers
While the Stanford bioethics committee was developing criteria for rationing the available supply of cisplatin for its cancer patients, Kevin Schulman, MD, MBA, was working to explain the economic factors that resulted in this crisis. Schulman is a health economist and professor of medicine at Stanford and is interim division co-chief for the Division of Hospital Medicine.
“There is a lot of focus in this country on the high cost of branded drugs,” says Schulman, whose research on generic drugs is carried out within the Stanford Department of Medicine’s Clinical Excellence Research Center (CERC). “However, 90% of all prescriptions are written for generic versions of formerly branded products – drugs whose patent protection has expired.” This process has saved billions of dollars for consumers. At the same time, the generic drug marketplace has become deeply flawed, according to Schulman.
“Generic drug shortages and generic drug quality are solvable problems. We need a new economic model that incorporates both price and quality into its infrastructure to deliver more for our patients.”
– Kevin Schulman, MD, MBA
The Generic Drug Market’s Sole Platform
In the branded drug market, manufacturers have the power to set prices. By contrast, in the generic market, distributors and other drug purchasers have consolidated into a limited number of purchasing coalitions that have the power to drive down prices. In fact, they can push prices so low that many generic drug manufacturers leave the market because they can no longer make a profit. And since the generic drug market is entirely based on price, there is no incentive for manufacturers to invest in quality – both product quality (its safety and efficacy) and supply chain quality (the assurance that high-quality products are always available).
“Unlike other industries,” notes Schulman, “the generic drug market is solely based on price. Drug distributors and purchasing groups claim the FDA oversees drug quality, but the FDA is struggling to police every transaction in a global market.”
Schulman has worked with Intermountain Healthcare (a large healthcare system based in Salt Lake City) to create Civica Rx, a not-for-profit generic drug company designed to change the incentives in the generic market for purchasers and health systems. Schulman is an unpaid member of the Scientific Advisory Board for Civica Rx, which offers stable, long-term procurement contracts that supply up to half of the needs for generic drugs for member health systems.
This model starts with a slightly higher but more stable price for generic drugs. Over time, the Civica model has resulted in reduced costs for generic drugs by eliminating the shortages and price swings that are typical of the generic market.
Product Recalls and Shortages
Schulman believes we can largely eliminate the challenge of generic drug quality and the larger issue of shortages if we force the purchasers in the market to consider both price and quality in contracting with generic drug manufacturers. “We have sophisticated purchasers buying millions of units of product, but not asking anything about product quality. I can’t imagine any other market in the world that functions this way.”
He argues that the FDA always lags behind purchasers’ procurement decisions. During the COVID-19 pandemic, the FDA fell way behind in its inspections. The Government Accountability Office reported that at the end of 2022, the FDA had not inspected 61% of critical overseas sites in five years. “And an FDA inspection merely reviews quality documents maintained by the manufacturer. They do not routinely test the medications themselves for quality,” Schulman says. In fact, he recently detected carcinogens in some generic drugs, even after FDA recalls, likely resulting from low-quality manufacturing processes.
“It’s been both exciting and frustrating to examine this market, which is a critical part of our healthcare system that has been largely neglected by the research community,” he says. “Generic drug shortages and generic drug quality are solvable problems. We need a new economic model that incorporates both price and quality into its infrastructure to deliver more for our patients.”
New Division to House Research Centers
In September 2023, a new administrative division was created for the Stanford Department of Medicine. CERC and five other research entities are now organized under one umbrella, called the Division for Research and Education in Academic Medicine (DREAM). “This is an exciting moment for the Department of Medicine. I am confident that DREAM will contribute great value to the department and to each of the programs and centers within this new division,” says Interim Chair of the Department of Medicine Bonnie Maldonado, MD. The six entities in this new division are as follows:
- Program for Bedside Medicine
- Center for Asian Health Research and Education
- Center for Digital Health
- Clinical Excellence Research Center
- Translational Research and Applied Medicine Center
- Translational Applications Service Center
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