Jumping through loopholes

An investigation by The Times newspaper in the UK has uncovered the latest in what is now quite a long line of stories about ‘opportunistic’ business moguls ‘extorting’ money from healthcare systems by taking control of supplies of obscure drugs and then jacking up the prices – entirely legally – to take advantage of flaws in complex pricing regulations.

This time, the regulatory loophole exploited involves drugs whose patents have expired, but which are still sold to the UK National Health Service (NHS) under their original brand names. Brand-named drugs are subject to profit caps under UK regulations, which limit their prices. But if an enterprising company decides to drop the brand name and start selling the drug under its generic name, it can avoid the profit cap and raise the price significantly – cue outrage from journalists, politicians and the twittersphere.

Once off-patent, the only real barrier to price rises becomes competition from other generic suppliers. However, by choosing drugs where there are few (if any) competing suppliers, companies can effectively corner the market and extract large profits.

And therein lies the issue. Relying on competition to kerb price-hikes is predicated on the idea that there will generally be more than one company supplying them. Having multiple suppliers is not only important for moderating prices, it protects the system against supply shortages caused by plant shutdowns, quality issues, or suppliers simply deciding to discontinue a product.

But drug shortages are rife across the industry, and significant consolidation in the generic drug industry has reduced the diversity of suppliers for many products, contributing to further price rises. The necessary levels of regulation and quality control in pharmaceuticals also provide reasonably high barriers to entry for competing suppliers. Of course, if the price gets high enough, it becomes worthwhile for competitors to start making a drug, but the lengthy registration process gives the existing suppliers a window to rake in the cash in the meantime.

So how could the situation be rectified? Introducing incentives for companies to start making critical drugs that often suffer shortages, or which are at risk of price abuse, is one possible avenue – already being explored by the US Food and Drug Administration. But that is effectively adding further layers to an already complex system. How high would prices need to get to trigger a radical overhaul of the whole regulator process for generic medicines?