Published in: The Health Care Blog
COVID-19 has focused the nation’s attention on the risks associated with complex, global supply chains, particularly related to healthcare products and prescription drugs. While supply disruptions of personal protective equipment (PPE) captured headlines, the pandemic also compromised the drug supply chain. With much of the United States’ generic drugs manufactured overseas, exportation bans coupled with increased global demand created significant challenges for U.S.-based providers to secure basic, life-sustaining and life-saving therapies.
As an “easy” solution, many are now calling for manufacturers to produce medications domestically. While expanding investment in U.S. drug-making capacity is a vital component of a reliable supply strategy, moving the majority of production onshore is unrealistic.
Creating a dependable drug supply chain is a multi-faceted issue that requires a thoughtful, diversified strategy.
Repairing the Market is Job #1
Drug shortages have been pervasive for more than a decade – well before COVID-19’s onset. While shortages are triggered in a number of ways, a recent Food and Drug Administration (FDA) report says economics are a main causative factor.
Almost all shortage drugs are older, low-cost generics costing less than $9/dose. Because these products don’t generate blockbuster profits, manufacturers are less willing to invest capital to improve quality, build redundant capacity or source safety stock. Over time, market competition continues to erode price and further compress profits, leading to a war of attrition where competitive players exit the market – leaving behind as few as one or two manufacturers in many important categories.
Relocating production to the United States will not address generic drugs’ inherent profitability problem. Increased regulations, environmental and otherwise, could lead to higher production costs, which begs the question: will healthcare providers trade the potential for higher costs for predictability in supply?
A more appropriate first-step in drug market stabilization is to focus on identifying new supplier competitors and rewarding contingency planning.
To accomplish this, provider-led organizations are aggregating demand and approaching manufacturers with a guaranteed buyer base if they enter a new market or increase production of shortage products. This creates predictable manufacturer revenue, as well as the capital inflow necessary to increase contingency supply.
One of these programs, ProvideGx, uses long-term, aggregated contracts to establish both consensus demand forecasting as well as minimum requirements on manufacturers to retain an average of three to six months of active pharmaceutical ingredients (APIs) and finished dose products. With this vital safety stock, it was possible to weather surge demand of more than 150% during COVID-19’s first wave peak and avoid shortages of 10 critical drugs that ordinarily would have been susceptible during a public health emergency.
Extending this model to other drugs – regardless of their country of origin – is the most productive step we can take to increase the number of competitors making drugs, as well as their ability to accommodate surge demand.
Diverse – Not Just Domestic – Sourcing
The lack of profitability for older, generic drugs sent manufacturers overseas in search of cheap access to raw materials and labor. Over time, this concentrated upwards of 80% of offshore manufacturing in China and India ─ and 10% of all drugs consumed by Americans are manufactured in Puerto Rico.
Geographically diverse and U.S.-based manufacturing will help reduce overreliance on any single country or region for healthcare supplies and medications, including our own.
For critical supplies, including raw materials, pharmaceutical ingredients and finished drugs, there should be three or more global suppliers and at least one U.S.-based source readily available to serve the American people. This diverse and balanced approach is not just a better contingency plan for emergencies, but it also recognizes the need for global sourcing to keep costs in check and help alleviate U.S. national security concerns.
Supply chain leaders should contract with a variety of manufacturers and consider the geographic diversity of their supply chains. Incentives can be coupled with requirements for sharing vital information across the industry, including redundancy and contingency protocols, to minimize disruptions. When added incentives are required, providers should consider unconventional approaches.
For instance, after learning that 90% of all face masks were produced in China and highly susceptible to shortages, Premier and 15 leading health systems pooled resources to secure a minority stake in Prestige Ameritech, one of the nation’s only domestic producers of face masks and other PPE. In exchange for the cash infusion and long-term purchase commitment, the company is now making 5 million masks per month that it ordinarily would have little incentive to make.
Such a model could easily be extended to incent other ventures for drug supply diversity – for raw materials, ingredients or finished goods. But outcomes should promote diversity, not necessarily domestic concentration.
Overall, Transparency is Key
Global supply chains are a complex labyrinth of manufacturers, raw material suppliers, subcontractors and more. In many cases, companies selling finished goods know their immediate suppliers, but have limited knowledge on the locations where American drugs and their components are manufactured – and in what quantities.
According to the FDA, 31 percent of all API production facilities are located in either China or India. What the FDA can’t say for certain, however, is the API volume derived from these facilities. Even less is known about where API raw materials are produced.
The only answer to this problem is greater upstream visibility, requiring manufacturers and supply chain partners to disclose where each component of finished product is made, and in what quantities. At a minimum, the FDA should expeditiously implement new authorities granted by the CARES Act, requiring manufacturers to disclose API sources and finished-drug manufacturing locations. This will allow the FDA and other federal agencies to understand risk potential and work with private sector partners to make adjustments long before a crisis occurs.
We also need greater adoption of technology, including blockchain, that enables comprehensive supply chain visibility as well as secure and readily accessible data on every supply chain transaction. Until recently, U.S. hospitals have been largely on their own to translate local COVID-19 surges into meaningful information regarding pharmaceutical capacity and supplies. But now, providers are leveraging new technology to better track an outbreak and the supplies and medicines needed at any given point. While a good first step, these technologies that leverage real-time surveillance capabilities ultimately need scale to reach providers nationwide.
Drug shortages are complex issues that require a broad array of measures to remediate. As Americans, we must move past politics and old debates toward holistic and progressive solutions that address the safety and resilience of our drug supply.
With added diversity, domestic investments and capacity, as well as a new focus on supply chain visibility, the U.S. can take steps now to ensure greater preparedness, protect patients and healthcare workers and insulate us from drug shortages in the future.
This article ran in The Health Care Blog on March 4, 2021.