Low drug prices cause drug shortages and rebound into higher drug prices.

In our study of commonly used outpatient generic drugs available between 2008 and 2014, we found that the prevalence of shortages decreased from its peak in 2011-2012 to less than 4% of the overall sample by the end of 2014. We also found that market competition levels and market sizes were not associated with the likelihood of drug shortages. Rather, generic drug prices were strongly predictive of drug shortages; compared with their high-priced generic counterparts, low-priced generic drugs were more likely to experience shortages. Drug shortages were associated with a modest increase in prices.

Our finding that low-priced generic drugs were at an increased risk for drug shortages could be due to many different factors. First, because low-priced generic drugs are generally less profitable than high-priced ones, manufacturers may prioritize continued production of more profitable drugs within their portfolios. Other experts have attributed the higher incidence of drug shortages in the United States—compared with other developed regions such as Europe—to the higher reimbursement rates for generic drugs outside the United States

Another possibility is that smaller margins in low-priced generic drugs may induce manufacturers to maximize profits by cutting corners in ways that compromise production quality, predisposing these agents to plant closures and production disruptions.

In an effort to increase the predictability of drug shortages, the Food and Drug Administration (FDA) Safety and Innovation Act of 2012 required manufacturers to report anticipated disruptions in supply to the FDA; however, the effect of this provision of the law is unknown

When the FDA is considering a plant closure, the agency routinely takes steps to avoid precipitating a drug shortage. For example, in part to avoid a shortage of a needed medication, the FDA recently decided to allow the continued distribution of a generic injectable drug containing glass fragments, advising health care professionals to use a filter before administering the drug

More innovative approaches that balance the safety risks of substandard drugs with the possibility of drug shortages such as changing the pass/fail system that the FDA currently uses to letter grades have also been proposed

Importation of generics approved in other countries with strong regulatory oversight has been allowed by the FDA in rare cases of a shortage

This latter approach could be expanded further if deflationary pressures on certain generic drugs lead to future US shortages.

Although drug shortages have been associated with some well-publicized examples of rising generic drug prices, the low prevalence of drug shortages in recent years coupled with their modest association with price increases in our study demonstrate that other factors such as market competition levels are more important contributors to this phenomenon

Although we found that drug prices do not rise substantially following a shortage, modest price increases may still happen. Because a drug in shortage may not have an appropriate therapeutic substitute, a patient cannot always change their medication regimen in an event of a shortage, allowing manufacturers to increase drug prices without risking substantial reductions in prescription numbers. In other cases, when the FDA has recommended a plant closure the resulting decrease in competition levels could allow the remaining manufacturers more leeway to increase drug prices.

The real costs of shortages to patients are likely higher than what we report because in addition to their impact on drug prices, drug shortages can increase health care costs in other ways. For example, the costs associated with switching patients to a more expensive therapy or the personnel costs associated with the management of drug shortages can be substantial.

The study combined disparate data sources to assess several pertinent drug-specific variables including drug shortage status, drug prices, and competition levels, and analyzed a recent and large commercial claims database to identify a representative cohort of more than a 1000 generic drugs. We were able to characterize for the first time the secular trends of drug shortages in generic drugs, identify the predictors of drug shortages, and link drug shortages to changes in generic drug prices. However, the findings are limited to drugs commonly used in an outpatient setting (mostly oral and topical formulations), and may not generalize to commonly used inpatient drugs (e.g., injectable formulations). Although the cohort inclusion criteria required drugs to be available as generics for the entirety of the study period, there is little reason to believe that these findings would not extrapolate to more recently approved generic drugs.

Drug shortages are challenging public health crises that contribute to patient mortality

In recent years, there has also been worry that drug shortages can lead to generic drug price increases, and we found that modest price increases were associated with the outpatient drug shortages in our cohort. Policymakers interested in avoiding spikes in certain generic drug prices should focus on the growing number of factors—such as market competition levels—that have been demonstrably linked to price changes