Generic drugs currently account for more than 90% of prescriptions and have saved the country almost three trillion dollars over the last decade. Here’s how a brand-name drug typically becomes a generic drug.
This story is part of "Out of Stock: Investigating America's Drug Shortage Crisis," a series exploring the causes and possible solutions of a problem plaguing America's health care system.
In hindsight, Darcy Filus said she realizes she was naive. She knew there were prescription drug shortages, but not that they were drugs used to treat cancer.
Her cancer.
Last year, when she was 59, she was diagnosed with breast cancer.
She and her husband, Pete, sat down with her doctor, Kari Wisinski, an oncologist with University of Wisconsin Health who specializes in treating breast cancer.
Because the commonly-used chemotherapy drug carboplatin was in short supply, her oncologist gave her choices about her treatment. She could opt for carboplatin, with the caveat that she could need to switch to another option mid-regimen, or she could elect for an alternative.
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Filus, who lives about an hour northwest of Madison, Wisconsin, chose to go with a substitute that had more serious side effects but was readily available. She is not a gambler, she said.
"When it comes to chemotherapy, I think that's a very important drug that should never fall into a shortage," she said. "It’s scary. It’s really gambling with someone’s life."
For generic injectable drugs like Filus’, shortages are all too common. And recent industry consolidation has made an already untenable situation worse.
A complex and fragile supply chain
At the root of many shortages lies a harsh economic reality: these life-saving drugs just aren’t profitable to make.
And they are becoming even less profitable.
Media coverage has highlighted high prescription drug costs, but, conversely, low costs for certain drugs are also jeopardizing their market viability.
Due to intense competition, the generic drug industry operates on razor-thin margins.
It takes a crisis sometimes for people to pay attention.
David Gaugh, the Association for Accessible Medicines
"Most generic sterile drugs are off-patent, and there are so many organizations making them that the prices have been driven down essentially to the marginal cost to manufacture the drug," said Mark Fleury, policy researcher at the American Cancer Society.
The pharmaceutical supply chain is both complex and brittle. Even the slightest disruption, such as a single plant's closure, can trigger shortages that last for years.
“Every single vial generated has to be optimally distributed,” said Fleury. “Any disruptions in that tight supply chain can immediately manifest in patients not receiving their drugs."
Key players
The supply chain involves several key players. Manufacturers research and develop drugs. After securing FDA approval, they produce and sell these drugs to distributors, who supply smaller quantities to pharmacies and health care facilities based on predetermined pricing.
This pricing negotiation is handled by two powerful intermediary players you may not have heard of: Group Purchasing Organizations (GPOs), which negotiate drug prices on behalf of hospitals, and Pharmacy Benefit Managers (PBMs), which negotiate on behalf of insurers and employers.
Over the past few decades, there has been a wave of mergers and acquisitions in the PBM and GPO industries. This rapid consolidation has whittled down a once competitive market into an arena dominated by just a handful of players.
According to the Federal Trade Commission (FTC), the three largest PBMs -- CVS Caremark, Express Scripts and OptumRx -- processed nearly 80% of the 6.6 billion prescriptions dispensed by U.S. pharmacies in 2023. The top six PBMs handled over 90% of all prescriptions.
Similarly, three of the largest GPOs -- Vizient, Premier Inc. and HealthTrust Performance Group -- together control at least 80% of the hospital purchasing market, according to the Association of Accessible Medicines.
These intermediaries play crucial roles in negotiating drug prices and managing supply chains. However, their growing influence has sparked debate about potential ramifications for the cost and accessibility of medications -- and has not gone unnoticed by regulators.
In June of 2022, the FTC launched an inquiry into the prescription drug middleman industry, scrutinizing the impact of PBMs on drug accessibility and affordability. The agency compelled the six largest PBMs in the US to provide more transparency about their business practices. This investigation was expanded in May of 2023 to include GPOs.
Group Purchasing Organizations (GPOs)
GPOs play a significant role in the health care supply chain, negotiating medication discounts for hospitals.
According to a Government Accountability Office (GAO) report, GPOs primarily generate revenue through administrative fees paid by vendors, typically ranging from 1.22% to 3% of the purchase price for medical supplies and equipment.
In its report the GAO noted that this fee structure could create misaligned incentives, as GPOs might be motivated to negotiate higher prices to increase their fee revenue. Conclusive evidence supporting or refuting these concerns remains limited, however.
GPOs offer manufacturers access to extensive networks of hospitals, often through exclusive contracts. These agreements frequently include terms requiring manufacturers to provide drugs at significantly discounted prices. One such provision, known as "right of first refusal," allows GPOs to terminate contracts if lower prices are found elsewhere.
“They control the price very tightly with their most favored nation clauses, failure to supply clauses, and right of first refusal clauses,” David Gaugh of the Association for Accessible Medicines told NBC.
Gaugh explains that these clauses can effectively turn long-term agreements into day-to-day price competitions.
“If I get a contract and the contract says I am offering up a million doses for you to bid on, and I bid on a million doses with a $10 price and my contract is for three years, the very next day after I sign that contract, if somebody comes along and offers $9.50 I have only one right. And that one right is right of first refusal to match $9.50 or they'll cancel the contract on me. It’s basically a one-day contract,” he said.
This presents challenges for manufacturers, which must weigh the benefits of access to large hospital networks against the potential risks of agreeing to terms that may impact their profit margins.
Recent legislative efforts have targeted GPOs. A bill proposed by Senators Mike Crapo (R-ID) and Ron Wyden (D-OR) would offer GPOs bonus payments from Medicare for taking steps to prevent drug shortages, such as signing longer-term contracts with manufacturers and increasing transparency around purchasing practices.
“It's just indefensible that these group purchasing organizations would stonewall and put their own interests in front of making sure we deal with these drug shortages by having reasonable terms for hospitals, generic drug manufacturers, and others,” Wyden told NBC.
The Healthcare Supply Chain Association (HSCA), representing GPOs, maintains that there is no credible link between GPOs and drug shortages. They attribute such issues to manufacturing problems and barriers to new suppliers entering the market.
Additionally, the HSCA’s website says that GPOs are required to disclose administrative fees to their members and adhere to transparency measures under "safe harbor" provisions established by Congress. These provisions mandate annual independent audits and ethics reviews for GPOs.
Pharmacy Benefit Managers (PBMs)
A similar dynamic plays out in the realm of pharmacy benefit management.
Health insurers and employers hire Pharmacy Benefit Managers (PBMs) to handle their prescription drug plans. PBMs create formularies, which are lists of covered prescription drugs divided into tiers that determine out-of-pocket costs for patients.
In a process known as vertical integration, PBMs have expanded their operations across various parts of the health care industry, including health insurance and pharmaceutical services. Critics argue that this integration gives them outsized control over patients’ access to medications and their associated costs -- and raises additional doubts over whether the PBMs can truly operate as impartial intermediaries aligned with patient interests.
A report for the National Academy for State Health Policy explains formulary creation -- “While PBMs do not buy drugs directly from manufacturers (wholesalers or distributors perform that task), when they create drug formularies for their health plan clients, they designate which ‘preferred’ drugs the insurance plans will cover, which puts them in a powerful bargaining position.”
For drug manufacturers, securing favorable tier placement on a PBM’s formulary is highly coveted. This preferred status can significantly impact a drug's market access and sales.
While PBMs were initially designed to lower drug costs, their rebate systems have come under scrutiny for potentially impacting drug pricing and accessibility in unexpected ways.
Compounding these concerns is a lack of transparency in how PBMs do business, making it difficult to assess whether PBMs consistently pursue the lowest net cost options for patients or favor more expensive drugs that earn them bigger rebates.
A report by the U.S. Department of Health and Human Services (HHS) highlights this worry: "Since rebate procedures, levels, and associated incentives to produce market share are considered proprietary, large scale, systematic evaluations are not common, and only general notions instead of specific amounts and reports tend to be available."
In its report, HHS noted that there is potential for “false economies,” where PBMs might favor higher-priced drugs that offer larger rebates over lower-priced alternatives that could be more cost-effective for patients.
Evidence suggests that these concerns could be warranted:
Recent investigations have found that influential PBMs often place manufacturers' drugs in more favorable tiers within formularies in exchange for deeper rebates.
In a 71-page interim report published in July, the FTC stated that PBMs “wield enormous power over patients' ability to access and afford their prescription drugs, allowing PBMs to significantly influence what drugs are available and at what price." It noted “several troubling rebating practices and report evidence raising concerns that brand manufacturers and PBMs may be entering into rebate contracts designed to cut off access to generic and biosimilar competitors.”
A 2022 JAMA study found that from 2015 to 2019, pre rebate prescription drug costs grew faster than post rebate costs across all commercial plan types, suggesting that while PBMs negotiated larger rebates, these savings were not proportionally passed on to patients, whose out-of-pocket expenses are often based on pre rebate prices.
A recent report from The Commonwealth Fund found that manufacturer rebates to PBMs increased from $39.7 billion in 2012 to $89.5 billion in 2016, partially offsetting list price increases, suggesting a complex relationship between list prices and the actual costs of prescription drugs. “Because they often receive rebates that are calculated as a percentage of the manufacturer's list price, PBMs receive a larger rebate for expensive drugs than they do for ones that may provide better value at lower cost,” its authors note.
The pressure on manufacturers to provide large rebates can lead to slim profit margins, especially for lower-priced drugs. This financial pressure may result in manufacturers discontinuing unprofitable drugs, reducing market availability.
“PBMs, through a variety of ‘spread pricing’ programs, have historically driven pharmacy reimbursement for dispensed generic medications in all payer segments – commercial, employer and government programs – to extremely low levels, sometimes below a pharmacy’s acquisition cost, thereby limiting what community pharmacies are able to pay to acquire these medications from drug wholesalers,” said David Gaugh. “This has a downstream impact on manufacturers, ultimately pushing the prices that generic manufacturers can sell their products at to unsustainable levels and creating a market susceptible to shortages.”
The Pharmaceutical Care Management Association, a PBM trade group, has refuted claims that PBMs contribute to drug shortages. Representatives for the association stated that "when drug shortages happen due to manufacturing and supply chain challenges, PBMs manage demand for those who need drugs, as they did for hydroxychloroquine during the COVID-19 pandemic, broaden coverage for alternative drugs, and empower providers with real-time alerts about supply chain shortages."
Reforms face an uphill battle
Lawmakers have long proposed various reforms to address the issue of drug shortages. In recent years, they’ve set their sights on pharmaceutical intermediaries in particular.
Two notable legislative proposals have emerged, each targeting a different aspect of the supply chain.
Wyden and Crapo’s bill targeting GPOs would create incentives to nudge drug purchasing toward valuing reliability and quality -- by making it worthwhile for purchasers to care about stable drug supplies, not just low prices.
“When you're spending $4.5 trillion in America on health care, and a big fraction of that is Medicare and Medicaid … I think it's the responsibility of the Congress to do everything we can to ensure accountability and transparency in the public interest. That's what our bill does,” Wyden told NBC.
"The real enforcement trigger here is that we assume that those who want to do business with Medicare are going to be attracted to the bill, and if they're associated with group purchasing organizations, they have to meet our criteria."
Senator Maria Cantwell (D-WA) introduced the Pharmacy Benefit Manager Transparency Act of 2023 in September of last year. Cantwell’s bill aims to reform PBM practices by imposing changes such as banning PBMs from receiving payment based on the list price of a drug in Medicare and requiring PBMs to report their revenue sources and fees charged.
Some stakeholders doubt the bills’ prospects against powerful interests. According to data from Open Secrets, from 2022 to 2023, the leading trade group representing PBMs increased their spending for lobbying from 8.7 million to 15.4 million, a 78% increase. The leading trade group representing GPOs increased their spending from $480,000 to $690,000, a 44% increase.
While reform efforts have gained traction, some health care professionals are wary that meaningful change is possible. Monied industry lobbyists fiercely oppose measures that could disrupt the lucrative status quo.
"It takes a crisis sometimes for people to pay attention," said David Gaugh of the Association for Accessible Medicines, recalling testifying before Congress over a decade ago to solve shortages. “This is 12 years later, we're still dealing with it.”
"You just don't get your medication"
The human cost of inaction is severe. “What if the generic industry was to go away?” Gaugh asked. “The brands are long gone after generics hit the market. Their portfolio for that product has dried up and they won't be coming back. You just don't get your medication."
At the heart of the crisis is a fundamental question of how to properly value and ensure access to essential, irreplaceable drugs.
“We know what the demand is,” said Wasinski, cancer patient Darcy Filus’ oncologist. “We know how many people are diagnosed with cancer each year in the US, we know what type of regimens are given. How do we ensure that supply meets that demand? When we think about using just market-driven forces for pricing of medications, I think we're losing a little bit of this big picture view of ensuring that there is enough available.”
After dealing with shortages for the entirety of her 16 years in practice, Wisinski shares some of Gaugh’s weariness. “I'm hopeful that I see momentum and yet I'm also worried that if it's been going on for this long, will there be enough momentum to overcome this and really make changes?”
Some stakeholders see reasons for cautious optimism that this latest reform push could finally break the cycle of shortages. “For the first time we've seen an openness from policymakers to look at this in a longer term way,” said Mark Fleury of the American Cancer Society. “In that regard, I am more optimistic than I have been in years past. It's not a done deal yet. But it does give me hope that there is a deeper recognition of some of these root causes and that we're not just going to be fighting fires, but getting to a place where we can get out of these cyclical shortages.”
While policymakers work toward solutions, patients like Filus continue to face not only the devastation of a cancer diagnosis but also the added burden of treatment shortages.
Filus’ alternative treatment was a drug called Taxol, which carried the risk of affecting her heart.
Her chemotherapy caused hair loss and exhaustion, though Filus did make it to work every day. She and her husband run a glazing company for residential, commercial and automotive glass in Baraboo, Wisconsin, home of the Ringling brothers.
“There were a couple of days that I went home because I was really tired,” she said. “There were a couple I just sat here and stared at my computer and I don’t think I moved a single piece of paper, but was able to answer the phone.”
In the end, she had frequent echocardiograms, but no heart damage, she said.
“I came out OK,” she said. “I’m cancer free.”
