Governments are not especially skilled at thinking outside the box. It is quite remarkable then, that so many turn to the government to innovate and fix health care when it has already abundantly proven incapable of doing anything except making it worse. Luckily, those who work in the health care sector on a daily basis are taking the lead and innovating where they can. And the latest example of this comes from Utah, where one health care provider is working diligently to lower costs and eliminate shortages of generic prescription drugs.
A Problem and a Solution
Intermountain Healthcare is the largest health care provider in both Utah and its neighboring state of Idaho. Like many other health care systems around the country, it often struggles with drug shortages. But these shortages do not just impact over-the-counter drugs.
Many hospitals, for example, struggle to keep up with their need for routinely used supplies like IV bags as well as essential substances like folic acid and lidocaine. Not only are these shortages frustrating for medical professionals, they are also extremely burdensome for patients.
President and CEO of Intermountain Healthcare, Dr. Marc Harrison, commented:
Every day at Intermountain we manage more than 100 drug shortages, and most of them are generics. The impact on patient care, in terms of trying to find alternatives and scurrying around and trying to find necessary drugs, is incredibly time-consuming and disconcerting.
Shortages naturally lead to higher prices, which is why it is so important to have a variety of options available to health care consumers and medical professionals.
The government has made only feeble attempts to solve this problem. The FDA recently announced the formation of a task group dedicated to brainstorming solutions for skyrocketing prices. Additionally, the Justice Department, along with 45 states, have accused generic drug companies of price fixing. But as with most things the government does, the process of investigation either takes too long or the solution involves infringing on the rights of others and the market process—neither are good remedies to the problem.
Instead of looking to the government for answers, Intermountain decided to take matters into its own hands and create more viable options for both consumers and health care professionals. The health care provider, which has 22 hospitals in Utah alone, announced in January that it is joining forces with health care systems from around the country to launch their own generic prescription drug company.
The new company, Civica Rx, will be an independent nonprofit with board members from prestigious medical institutions like the Mayo Clinic. To begin with, Civica RX will seek to bring 14 commonly used generic drugs to market that are often hard to come by and that have experienced dramatic price increases over the years. As of now, the drugs to be included in this list have not been revealed. Though, Harrison has commented on the strategies that will be used to identify which drugs they will market in the near future.
He said:
As we decided on the drugs we were really practical. We looked for drugs that were now in short supply. We looked for drugs that were on the lists of essential medications, and we looked for drugs that have had huge spikes in their prices.
Of course, as great as the new nonprofit is, it will still have to endure the brutally long and expensive FDA approval process before it can really get off the ground. But once approved, Civica Rx plans to make use of existing manufacturers until it is able to open up facilities of its own.
It is hoped that once Civica Rx is up and running, it will inject more competition into the generic drug marketplace, giving consumers more choices at lower costs.
Creating Competition
Earlier this year, Health and Human Services Secretary Alex Azar placed lowering prescription drug costs at the top of his list of priorities. And while his heart is surely in the right place, using the government to lower the cost of prescription drugs is not the appropriate response to this problem. For starters, like any other product on the market, prescription drugs respond to consumer demand. When governments set price ceilings, it only makes shortages worse.
And in addition to distorting real market prices, allowing the government to regulate costs in this sector could also have serious implications when it comes to the introduction of new drugs. Since the FDA’s approval process for new drugs is so exorbitantly expensive, if manufacturers were then forced to sell it at an artificially low cost there would be a great deal of money lost. Profit is a powerful incentive and without it, it is likely that there would be fewer new drugs if doing so would result in losing money in the process.
However, like all things in the marketplace, the best way to lower costs and satisfy consumers is to provide competition by allowing the creation of more options for consumers. And this is what Civica Rx hopes to accomplish.
Currently, there are only a handful of manufacturers producing generic options for prescription drugs. And when, due to barriers to entry, these companies are the sole producers of essential drugs, like the EpiPen, for example, they are able to set artificially high prices. But instead of using a governmental law to rein in these companies and mandate certain prices, Civica Rx wants to provide patients and health care facilities with more options, thus creating new competition in the market.
Civica Rx will require hospitals to sign long-term contracts that specify that these facilities will keep using their generic drugs even if other companies start to lower their prices. However, this will benefit the hospitals as well, as these contracts will ensure that they will be paying a fixed cost for the medications obtained through Civica Rx.
All this is being done without any state mandates or government interference. And already, 120 health care institutions, representing about one-third of the hospitals in the country, have contacted Civica Rx and expressed interest in working with them moving forward.
You cannot fight intolerable practices with regulations, but you can combat them by providing the market with more options. Harrison commented:
There are a lot of very principled generic drug makers out there and who sell drugs at reasonable prices and make them in adequate supplies. They have nothing to worry about. They’re friends. They’re good colleagues.
He then went on to warn the competition, saying:
The folks who are gouging people and creating shortages, they know who they are. And they’re the ones who should be very concerned.
Harrison is expressing what many free marketeers already understand: competition makes the world go round, and as patients and consumers, we should be very excited about the precedent Civica Rx is setting.
