[House Hearing, 112 Congress]
[From the U.S. Government Publishing Office]


 
             DRUG SHORTAGE CRISIS: LIVES ARE IN THE BALANCE 

=======================================================================

                                HEARING

                               before the

                SUBCOMMITTEE ON HEALTH CARE, DISTRICT OF
               COLUMBIA, CENSUS AND THE NATIONAL ARCHIVES

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED TWELFTH CONGRESS

                             FIRST SESSION

                               __________

                           NOVEMBER 30, 2011

                               __________

                           Serial No. 112-102

                               __________

Printed for the use of the Committee on Oversight and Government Reform


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                      http://www.house.gov/reform


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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 DARRELL E. ISSA, California, Chairman
DAN BURTON, Indiana                  ELIJAH E. CUMMINGS, Maryland, 
JOHN L. MICA, Florida                    Ranking Minority Member
TODD RUSSELL PLATTS, Pennsylvania    EDOLPHUS TOWNS, New York
MICHAEL R. TURNER, Ohio              CAROLYN B. MALONEY, New York
PATRICK T. McHENRY, North Carolina   ELEANOR HOLMES NORTON, District of 
JIM JORDAN, Ohio                         Columbia
JASON CHAFFETZ, Utah                 DENNIS J. KUCINICH, Ohio
CONNIE MACK, Florida                 JOHN F. TIERNEY, Massachusetts
TIM WALBERG, Michigan                WM. LACY CLAY, Missouri
JAMES LANKFORD, Oklahoma             STEPHEN F. LYNCH, Massachusetts
JUSTIN AMASH, Michigan               JIM COOPER, Tennessee
ANN MARIE BUERKLE, New York          GERALD E. CONNOLLY, Virginia
PAUL A. GOSAR, Arizona               MIKE QUIGLEY, Illinois
RAUL R. LABRADOR, Idaho              DANNY K. DAVIS, Illinois
PATRICK MEEHAN, Pennsylvania         BRUCE L. BRALEY, Iowa
SCOTT DesJARLAIS, Tennessee          PETER WELCH, Vermont
JOE WALSH, Illinois                  JOHN A. YARMUTH, Kentucky
TREY GOWDY, South Carolina           CHRISTOPHER S. MURPHY, Connecticut
DENNIS A. ROSS, Florida              JACKIE SPEIER, California
FRANK C. GUINTA, New Hampshire
BLAKE FARENTHOLD, Texas
MIKE KELLY, Pennsylvania

                   Lawrence J. Brady, Staff Director
                John D. Cuaderes, Deputy Staff Director
                     Robert Borden, General Counsel
                       Linda A. Good, Chief Clerk
                 David Rapallo, Minority Staff Director

   Subcommittee on Health Care, District of Columbia, Census and the 
                           National Archives

                  TREY GOWDY, South Carolina, Chairman
PAUL A. GOSAR, Arizona, Vice         DANNY K. DAVIS, Illinois, Ranking 
    Chairman                             Minority Member
DAN BURTON, Indiana                  ELEANOR HOLMES NORTON, District of 
JOHN L. MICA, Florida                    Columbia
PATRICK T. McHENRY, North Carolina   WM. LACY CLAY, Missouri
SCOTT DesJARLAIS, Tennessee          CHRISTOPHER S. MURPHY, Connecticut
JOE WALSH, Illinois
























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on November 30, 2011................................     1
Statement of:
    Hudspeth, Michelle, M.D., division director of pediatric 
      hematology/oncology, Medical University of South Carolina; 
      Walter Kalmans, vice president of New Ventures, Whiteglove 
      Health; Ted Okon, executive director, Community Oncology 
      Alliance; Scott Gottlieb, M.D., resident fellow, American 
      Enterprise Institute; and Kasey K. Thompson, Pharm.D., vice 
      president, Office of Policy, Planning and Communications, 
      American Society of Health-System Pharmacists..............    11
        Gottlieb, Scott, M.D.....................................    25
        Hudspeth, Michelle, M.D..................................    11
        Kalmans, Walter..........................................    17
        Thompson, Kasey K., Pharm.D..............................    35
        Okon, Ted................................................    21
Letters, statements, etc., submitted for the record by:
    Cummings, Hon. Elijah E., a Representative in Congress from 
      the State of Maryland, prepared statement of...............     9
    Gosar, Hon. Paul A., a Representative in Congress from the 
      State of Arizona, prepared statement of....................    53
    Gottlieb, Scott, M.D., resident fellow, American Enterprise 
      Institute, prepared statement of...........................    27
    Gowdy, Hon. Trey, a Representative in Congress from the State 
      of South Carolina, prepared statement of...................     4
    Hudspeth, Michelle, M.D., division director of pediatric 
      hematology/oncology, Medical University of South Carolina, 
      prepared statement of......................................    14
    Kalmans, Walter, vice president of New Ventures, Whiteglove 
      Health, prepared statement of..............................    19
    Okon, Ted, executive director, Community Oncology Alliance, 
      prepared statement of......................................    23
    Thompson, Kasey K., Pharm.D., vice president, Office of 
      Policy, Planning and Communications, American Society of 
      Health-System Pharmacists, prepared statement of...........    37


             DRUG SHORTAGE CRISIS: LIVES ARE IN THE BALANCE

                              ----------                              


                      WEDNESDAY, NOVEMBER 30, 2011

                  House of Representatives,
Subcommittee on Health Care, District of Columbia, 
                  Census and the National Archives,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:01 a.m., in 
room 2247, Rayburn House Office Building, Hon. Trey Gowdy 
(chairman of the subcommittee) presiding.
    Present: Representatives Gowdy, Gosar, McHenry, Davis, 
Murphy, and Cummings.
    Staff present: Brian Blase, professional staff member; Will 
L. Boyington and Noelle Turbitt, staff assistants; Molly Boyl, 
parliamentarian; Christopher Hixon, deputy chief counsel; 
Christine Martin, counsel; Jaron Bourke, minority director of 
administration; Yvette Cravins, minority counsel; Devon Hill, 
minority staff assistant; Jennifer Hoffman, minority press 
secretary; Chris Knauer, minority senior investigator; Leah 
Perry, minority chief oversight counsel; and Pam Dooley, 
minority GAO detailee.
    Mr. Gowdy. I want to welcome everyone to our hearing, Drug 
Shortage Crisis: Lives Are In the Balance.
    Mr. Davis will be with us shortly and I will recognize him 
for his opening statement at that time. I will now recognize 
myself for an opening statement and then the ranking member of 
the full committee, the gentleman from Maryland, Mr. Cummings.
    The drug shortage crisis in America has all the makings of 
a national crisis. Doctors are frustrated; patients and loved 
ones are worried. Lives are truly in the balance. Drugs are 
being rationed. Doctors are forced to sometimes look for less 
efficacious drugs. Clinical trials are being disrupted and, 
perhaps unbelievably, doctors are sometimes asked to pick 
between patients as to who will receive a drug.
    For all those reasons and more, it is vital Congress 
conduct oversight of the drug shortage to understand why the 
problem exists and what can be done to remedy it. In order to 
find solutions, we must have a clear understanding as to why 
the drug shortages exist in the first instance.
    Over the last decade, there were around 70 new drug 
shortages identified each year between 2003 and 2006. And then 
the number of drugs in shortage began to dramatically increase. 
In both 2010 and 2011, there have been over 200 new drug 
shortages identified. Typically, these drugs are used to treat 
cancer, heart disease, and complicated infections. Dr. Michelle 
Hudspeth, testifying before us today, will discuss how these 
shortages affect the care plan she establishes for pediatric 
patients.
    The shortage shortages will also affect clinical trials and 
whether or not the trials will actually go forward with 
participating patients. If there is a drug shortage that 
prevents participation, there will still be a cost associated 
with the trial. Considering the importance of drug trials for 
research, this is another reason identifying the cause or 
causes of the drug shortages is so very vital. If the money has 
been approved for trials, it is important to ensure the needed 
drugs are available.
    Let me say nearly at the outset if there is anything for 
which there is no shortage of in this town, it is politics, and 
I suppose every issue can theoretically be turned into a 
political football if the notion strikes. One reason I enjoy 
this committee and the Members on it is that we are, from time 
to time, able to set aside politics and look for the root 
causes of an issue and have a good faith conversation about the 
remedy. And when it comes to sick patients, when it comes to 
children, and when it comes to research for the diseases that 
are or will impact very nearly every family here, my hope is 
that politics will go away, and we can earnestly and honestly 
identify the issues and suggest the remedies.
    Several explanations for this crisis have been offered, but 
a recent report issued by the Department of Health and Human 
Services highlights pricing problems that limit the supply of 
these drugs. Part of this problem could be changes made to the 
Medicare Modernization Act in 2007 regarding the reimbursement 
of injectable drugs. One of the provisions of this law sought 
to increase price transparency and reduce the profit that 
providers make from delivering intravenous drugs in their 
offices.
    In The New York Times recently, Dr. Ezekiel Emanuel, 
Oncologist and Professor of Health Policy at the University of 
Pennsylvania, discussed the issue thusly: ``In the first two or 
three years after a cancer drug goes generic, its price can 
drop by as much as 90 percent as manufacturers compete for 
market share. But if a shortage develops, the drug's price 
should be able to increase again to attract more manufacturers. 
Because the 2003 act effectively limits drug price increases, 
it prevents this from happening. The low profit margins mean 
that manufacturers face a hard choice: lose money producing a 
life-saving drug or switch limited production capacity to a 
more lucrative drug.''
    Another potential cause of the increasing number of 
shortages could be the expansion of the 340(b) program. The 
340(b) rebate program is a pricing program that requires drug 
companies to provide rebates to hospitals and clinics serving 
indigent communities. Although the 340(b) program is essential 
for providers of indigent care, the 340(b) program could be 
affecting the ability of manufacturers and suppliers to provide 
required drugs because the rebates may reduce the price of 
drugs to well below the cost it takes to manufacture them.
    There have been proposals which would require drug 
manufactures to alert the FDA of manufacturing problems or the 
discontinuation of a drug. Although this has superficial 
appeal, perhaps, simply knowing that a shortage is coming does 
little to correct the situation. Merely having more time to 
worry about whether the drug your doctor wants to prescribe for 
you may or may not be available provides little comfort. Thus, 
it is important to dig deeper into the actual causes of these 
shortages. Again, quoting Dr. Emanuel, ``The FDA isn't able to 
force manufacturers to produce a drug. And learning about 
impending shortages, with little authority to alleviate them is 
of limited benefit. Indeed, early warning could exacerbate the 
problem. The moment oncologists or cancer centers hear there is 
going to be a shortage of a critical drug, their response could 
well be to start hoarding.''
    In talking with folks like Dr. Hudspeth, and let me say at 
the outset she is from South Carolina, but I do not represent 
the district where she lives or works. Two of my colleagues, 
Tim Scott and Jim Clyburn, have been very active in the Medical 
University at South Carolina and have done many wonderful 
things there, but I had the privilege of visiting the Medical 
University recently and I was struck by the passion with which 
Dr. Hudspeth laid out for me this crisis.
    So I want to make sure that we have a full understanding of 
what the challenges are and that we can equip ourselves with 
the tools so perhaps we can do as the Good Book teaches and 
take care of the sick, the poor, and the children. I am 
concerned to hear that drug shortage is affecting the care and 
ultimately the health of patients, especially pediatric cancer 
patients.
    If there is anything that can get the attention of every 
member of this committee, it is to hear stories of children 
with medical needs, and I have heard colleagues on both sides 
of this committee speak with great eloquence and passion about 
issues involving children and their health. So I look forward 
to having a clear understanding of the issues surrounding the 
drug shortages and what we can do to remedy it.
    With that I would recognize the gentleman from Illinois, 
the ranking member of the subcommittee, Mr. Davis.
    [The prepared statement of Hon. Trey Gowdy follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Davis. Thank you very much, Chairman Gowdy, for holding 
this hearing. I want to thank all of the witnesses who have 
come to share with us.
    The drug shortage is a major concern to me, as it should be 
to all who serve in this body. I happen to represent a 
congressional district that has 21 hospitals, 4 large medical 
center complexes, a number of research institutes, and we are 
building a brand new Children's Hospital now. So there is 
nothing more important to us than the provision and delivery of 
health care.
    Our constituents, mothers, fathers, and children, depend on 
these drugs to survive and flourish daily. This body has 
successfully increased access to health care for millions. It 
would be a cruel irony for Members to now sit on our hands as 
lifesaving drugs are becoming unavailable. We must take the 
necessary steps and exhaust all available avenues to alleviate 
these shortages. This hearing is a good initial first step.
    It is important to hear from physicians about the barriers 
they face in providing care and treatment. These doctors can 
certainly testify and illustrate the impact drug shortages are 
having on their patients. Their stories and, in particular, the 
work-arounds in providing alternative medicines when shortages 
occur illustrate not only the difficulty this problem poses to 
patients, but also the cost involved to our health care 
industry. Their stories are similar to those that have been 
expressed by a host of health care providers interviewed in the 
course of a lengthy investigation Mr. Cummings launched into 
the issue of drug shortages and the impact they are having, and 
illuminating those who seek to profit from these shortages. Our 
ranking member had the foresight to open that investigation 
several months ago.
    Given our expertise, Mr. Chairman, I hope that this hearing 
and subsequent ones are an opportunity for us to work together 
to solve this problem, and I believe that we can. As I prepared 
for the hearing today, I must say that I was disappointed and 
puzzled by the absence of the Food and Drug Administration. 
They are a critical piece of the puzzle. Their knowledge and 
insight would have been invaluable today. Further, if we truly 
seeking to delve into this issue, we must have all the relevant 
players at the table. The drug manufacturers, the distributors, 
and health care economists should all be here before us under 
oath.
    Mr. Chairman, again, I thank you for this hearing, but this 
is a very complicated and complex issue and requires a broader 
panel of witnesses than what we have here today. Therefore, I 
am requesting that a followup hearing with the manufacturers of 
these drugs, and I think we should strike while the iron is 
hot, and I hope that we could schedule that hearing for maybe 2 
weeks from now. I have alist of several drug manufactures that 
should be requested to testify about the drug shortages and, 
with your indulgence, I would like to share this list with you 
and your staff. And I would say let's get these manufacturers 
here so we can understand the nature of this problem and move 
toward solutions to it, and I hope that you could accommodate 
this request. And I would like to give you this list of 
manufacturers and ask that we seriously look at asking them to 
come before us.
    So with that, Mr. Chairman, and I will say who they are. 
They are Bedford Laboratories, APP Pharmaceuticals, Hospira, 
Teva Pharmaceuticals, Sandoz, the Generic Pharmaceuticals 
Division of Novartis, Abbot, Takeda, Baxter Oncology, and 
Johnson & Johnson. And with that, Mr. Chairman, I thank you and 
yield back the balance of my time.
    Mr. Gowdy. I thank the gentleman from Illinois and would 
let the gentleman from Illinois know what he may already know. 
If he doesn't, the Energy and Commerce Committee had a hearing 
in September on drug shortages with the FDA and drug 
manufacturers present. And the gentleman from Illinois' point 
is well taken with respect to single committee hearings and 
then letting issues drop, and I will commit to him that that 
will not be the case with this.
    I would recognize the distinguished gentleman from 
Maryland, the ranking member of the full committee, Mr. 
Cummings.
    Mr. Cummings. Thank you very much, Chairman Gowdy and 
Ranking Member Davis. I want to thank you for holding today's 
hearing. Given the impact that the ongoing drug shortage is 
having on patients and health care providers, this is exactly 
the type of issue this committee should be examining.
    In 2010, the FDA reported 178 drug shortages, and that 
number has increased in 2011. In October, President Obama 
issued an Executive order urging manufacturers to notify FDA of 
potential drug shortages so they could work with health care 
providers and patients to prevent or mitigate shortages before 
they become a crisis.
    It is unclear exactly what is causing the drug shortages. 
Experts believe there may be a number of causes, ranging from 
inadequate financial incentives for manufacturers, problems 
with production lines, and challenges in obtaining needed 
supplies. I look forward to hearing the perspective of today's 
witnesses on these very significant issues.
    Although today's hearing is a step in the right direction, 
unfortunately, we do not have the benefit of hearing testimony 
from any of the drug manufacturers, and I echo what Mr. Davis 
said: these folks are the ones that produce these critical 
drugs that are now in short supply. If we had them here, we 
could have asked what they believe are the causes of the crisis 
and we could have asked their opinion about specific factors 
that contribute to the insufficient supply of these drugs.
    Mr. Chairman, I was very pleased to hear what you just said 
with regard to looking forward to future hearings where perhaps 
we could call some of those folks so we might do what you said 
even earlier, and that was that we would lay our political hats 
down at the door and attack this crisis with everything that we 
have, and on a bipartisan basis.
    Finally, let me note that I began my own investigation this 
summer into a related issue, which is the sale of gray market 
drugs. When hospitals and other providers cannot obtain drugs 
on the shortage list from their authorized distributors, they 
sometimes turn to so-called gray market distributors. These 
companies mysteriously always seem to have the product 
available, but at wildly exorbitant prices. We are still in the 
initial stages of this investigation, so I will withhold 
comment for now, but I think we can all agree that nobody 
should be allowed to profiteer at the expense of cancer victims 
or other patients who are in dire need of these lifesaving 
medications.
    So, Mr. Chairman, I hope that we will be able to address 
some of these issues at a later hearing as well. With that, I 
thank you for your indulgence and I yield back.
    [The prepared statement of Hon. Elijah E. Cummings 
follows:]

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Mr. Gowdy. I thank the gentleman from Maryland.
    We are pleased and delighted to have such a wonderful panel 
of experts.
    There are other Members who may wish to submit their 
opening statements or other extraneous material for the record.
    It is my pleasure now to introduce our panel. I will 
introduce you from my left to right. I will introduce you en 
banc and then you will individually give your opening 
statements. The lights in front of you, I hope they are 
visible, mean what they traditionally mean in society: green is 
go; yellow means speed up, try to get under the light as quick 
as you can; and red mean start putting on the brakes.
    Dr. Michelle Hudspeth is the division director of pediatric 
hematology/oncology at the Medical University of South 
Carolina. And, as a point of personal privilege, the first 
person to bring the issue to my attention on a recent tour of 
MUSC. Dr. Walter Kalmans is vice president of New Ventures at 
White Glove Health; Mr. Ted Okon is executive director of the 
Community Oncology Alliance; Dr. Scott Gottlieb is resident 
fellow at American Enterprise Institute; Dr. Kasey Thompson is 
vice president of policy, planning and communications for the 
American Society of Health System Pharmacists.
    Pursuant to committee rules, all witnesses will be sworn in 
before they testify, so I would respectfully ask you to stand 
and raise your right hands.
    [Witnesses sworn.]
    Mr. Gowdy. May the record reflect all witnesses answered in 
the affirmative.
    You may be seated.
    With that, I would recognize Dr. Hudspeth.

  STATEMENTS OF MICHELLE HUDSPETH, M.D., DIVISION DIRECTOR OF 
  PEDIATRIC HEMATOLOGY/ONCOLOGY, MEDICAL UNIVERSITY OF SOUTH 
   CAROLINA; WALTER KALMANS, VICE PRESIDENT OF NEW VENTURES, 
  WHITEGLOVE HEALTH; TED OKON, EXECUTIVE DIRECTOR, COMMUNITY 
   ONCOLOGY ALLIANCE; SCOTT GOTTLIEB, M.D., RESIDENT FELLOW, 
AMERICAN ENTERPRISE INSTITUTE; AND KASEY K. THOMPSON, PHARM.D., 
VICE PRESIDENT, OFFICE OF POLICY, PLANNING AND COMMUNICATIONS, 
         AMERICAN SOCIETY OF HEALTH-SYSTEM PHARMACISTS

              STATEMENT OF MICHELLE HUDSPETH, M.D.

    Dr. Hudspeth. Chairman and members of the subcommittee, 
thank you for inviting me to testify today. I am the Chief of 
the division of pediatric hematology/oncology and the director 
of pediatric blood and marrow transplantation at the Medical 
University of South Carolina in Charleston, South Carolina. I 
care for close to 75 newly diagnosed cancer patients each year 
who are children, as well as 30 patients who undergo bone 
marrow transplant for the best chance of survival from 
childhood cancer.
    The National Cancer Act in 1971 officially declared the war 
on cancer. Since that time, the overall survival rate of 
childhood cancer has dramatically improved from 10 percent to 
almost 80 percent. However, the incidence of childhood cancer 
has continued to increase over the past 20 years, and cancer 
remains the leading cause of death from disease in children. In 
23 days, we will mark the 40th anniversary of the National 
Cancer Act being signed into law. Today, unfortunately, we mark 
the largest number of chemotherapy drugs ever in shortage. The 
war on cancer has been reduced to a mere skirmish with no 
weapons and no clear battle plan.
    Just a few days ago, I was with a family in crisis in our 
pediatric emergency room. I had to tell the parents of a 2-
year-old little boy that he has high risk acute lymphoblastic 
leukemia. This type of leukemia is the most common childhood 
cancer. For his first month of treatment, he needs four drugs 
plus another two chemotherapy drugs injected into his spinal 
fluid. Five of these six drugs are in shortage. Each of these 
drugs in shortage is a generic drug. Mercifully, we have the 
drugs right now. I held his mother's hand and told her that we 
will do everything humanly possible to cure her son. He needs 
3\1/2\ years of chemotherapy treatments. Will I be able to tell 
her the same thing next month, in 6 months, or even in a year?
    The scope of the problem continues to intensify. Between 
2005 and 2010, the number of prescription drug shortages nearly 
tripled in the United States. Currently, 21 chemotherapy drugs 
are in shortage, as well as 2 essential chemoprotectant drugs. 
The vast majority of drugs in shortage are generic and are used 
to treat curable childhood cancers. Clearly, the most critical 
problem is a child being denied curative cancer treatment 
because of a drug shortage.
    Furthermore, the additional downstream effects of 
chemotherapy shortages have significant ramifications as well. 
Research cures cancer. The major advancements in pediatric 
cancer have occurred through the Clinical Trials Cooperative 
Group funded by the NCI. The majority of clinical trials 
incorporate elements of standard treatments into one or more 
treatment groups in the trial. Clinical trial enrollment is not 
currently allowed if you do not have access to the standard 
treatment.
    As a result, clinical trial enrollment is declining. Not 
only does this undermine the advancement of cancer treatment, 
but it comes with a significant financial cost as well. 
Cooperative group clinical trials have regulatory costs that 
add up. Consequently, up to $1.2 million could be spent in 1 
year alone for pediatric cancer clinical trials that are not 
able to enroll a single patient.
    A recent study published in the American Journal of Health-
System Pharmacy reported the overall personnel costs associated 
with managing these drug shortages costs an estimate of $216 
million each year. Regrettably, most institutions have had to 
institute a review board, often with an ethics committee, to 
develop harrowing plans of how to ration chemotherapy drugs, 
most of which are generic drugs that have been available for 30 
years or more. How do you decide who should be given a chance 
to live?
    In an effort to maintain some semblance of adequate 
chemotherapy treatment, drug substitutions are being made with 
less familiar products. Additionally, pharmacies are stocking 
multiple concentrations of the same drug. This can easily lead 
to dosing errors, either underdosing or overdosing, when one 
concentration of the drug is mixed as if it is the other 
concentration. Chemotherapy agents are high-alert drugs. They 
have a very narrow therapeutic index, meaning there is a very 
small difference in the amount that gives benefit and the 
amount that causes death. Over a year ago, a national survey by 
the Institute for Safe Medication Practices noted that 35 
percent of respondents reported a near miss error due to drug 
shortages. Twenty-five percent reported actual errors that 
reached the patient. One-third of physicians reported an 
adverse patient outcome due to drug shortages.
    As with any issue, there are multiple reasons for the 
current drug shortage. However, the timing is notable. In 2003, 
the Medicare Modernization Act was put into place. In 2004, the 
FDA reported 58 drug shortages; in 2011, the number skyrocketed 
to over 200. The intent of the MMA was to create more 
transparency in pricing. However, generic prices are driven 
down by market competition and the current model under the MMA 
makes it difficult for companies to raise prices more than 6 
percent per year. Product margins have fallen significantly for 
many generic drugs, leaving companies with no incentive to 
continue manufacturing the drug or to increase production.
    The current situation is nothing short of a massive 
national emergency. The burden is on us to resolve the crisis 
to protect our children. None of my patients' families ever 
thought they would be faced with a diagnosis of childhood 
cancer. Today alone, in the United States, the parents of 36 
children will be told your child has cancer. Let's act to 
ensure these parents can also be told we have drugs available 
to cure your child.
    Thank you.
    [The prepared statement of Dr. Hudspeth follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Gowdy. Thank you, Dr. Hudspeth.
    Mr. Kalmans.

                  STATEMENT OF WALTER KALMANS

    Mr. Kalmans. Chairman and members of the subcommittee, good 
morning. My name is Walter Kalmans, and I am currently employed 
as vice president of New Ventures at WhiteGlove Health, a 
venture-backed company in Austin, TX. This testimony is not 
related in any way to my current employer. Rather, it is based 
on work independently developed as a result of 20 years of 
experience working as a consultant and commercial operations 
executive in the pharmaceutical industry.
    Of particular relevance to this hearing is experience 
gained while serving as vice president of business development 
for Oncology Therapeutics Network [OTN], from 2003 to 2008. OTN 
was the 2nd largest specialty drug distributor in the United 
States until its acquisition by McKesson Corp. in 2007. The 
popular press, as well as recently publications by ASPE, FDA, 
and IMS Health, do a good job characterizing the generic drug 
shortage and tend to cite manufacturing and supply chain issues 
as chief culprits. As citizens, we are led to believe that over 
time, industry will fix the problem by investing in additional 
capacity, improving quality control, and identifying more high-
quality suppliers of raw materials.
    However, there is much more to this issue. Why, all of a 
sudden, would the pharmaceutical industry, one of the most 
sophisticated industries on earth, be experiencing an 
unprecedented growth of shortages, and why, in particular, 
shortages of generic injectable drugs? Manufacturing and supply 
chain issues certainly play a role, but it is my opinion that 
the Medicare Modernization Act of 2003, MMA, is the core 
culprit as to why generic injectable drugs are in growing 
shortage.
    To most Americans, MMA is known as the act that expanded 
the prescription drug coverage for Medicare patients; however, 
another part of this legislation drastically altered how 
Medicare reimburses community-based oncologists who administer 
drugs in their offices, under Medicare Part B, B as in boy. 
Oncologists are one of the few specialists who make a margin on 
buying a drug for price X and receive Medicare reimbursement of 
price X plus Y.
    Prior to MMA, Medicare reimbursed community-based 
oncologists based on a price called AWP, average wholesale 
price. MMA introduced a new price called ASP, average selling 
price. Calculating ASP required significant pricing 
transparency from pharmaceutical manufacturers and resulted in 
lower Medicare reimbursement payments to community oncologists 
and, notably, a more rapid price decline for many generic 
injectable drugs.
    In addition, because the legislation set Medicare 
reimbursement for Part B drugs at ASP plus 6 percent, it 
established thinly veiled price controls, making it unpalatable 
for a pharmaceutical manufacturer to raise price more than 6 
percent a year. For example, if a manufacturer were to raise 
the price on a $100 drug by more than 6 percent during a year, 
an oncologist would likely be faced with the scenario of buying 
the drug for $106 and receiving Medicare reimbursement of $104.
    Now fast-forward to today. If you were a generic injectable 
manufacturer with finite capacity, would you focus your 
capacity on manufacturing generics for products that have just 
lost patent protection, reaping high profits for the next few 
quarters, or would you manufacture lower priced generics, drugs 
whose patents expired long ago? Under normal economic 
circumstances, if there are shortages, prices adjust upward to 
reach a new equilibrium until additional product comes online, 
basic supply and demand economics. However, because MMA limits 
price increases to 6 percent annually, prices do not reach an 
equilibrium; even worse, because the profit potential of these 
drugs is so low, new entrants decide to stand on the sidelines 
or focus on more profitable products.
    In conclusion, it is my opinion that we will experience 
generic drug shortages until legislation is passed to change 
the way generic injectable drugs are reimbursed by Medicare. 
Like any piece of legislation, MMA provided many citizens with 
benefits, but also like any piece of legislation, it had flaws. 
Unfortunately, these flaws took several years to become exposed 
and, for a variety of reasons, it may take quite some time to 
fix them.
    Thank you.
    [The prepared statement of Mr. Kalmans follows:]

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    Mr. Gowdy. Thank you, Mr. Kalmans.
    Mr. Okon.

                     STATEMENT OF TED OKON

    Mr. Okon. Chairman Gowdy, Ranking Member Davis, and members 
of the committee, I thank you for the opportunity to share my 
views on the drug shortages crisis relating to cancer care.
    I am not a medical oncologist but serve as executive 
director of the Community Oncology Alliance, a non-profit 
organization dedicated to community cancer care. In my 
position, I hear from cancer patients and their providers how 
treatment has to be delayed, changed, and in cases stopped 
because low-cost, but potentially life-saving, generic 
infusible drugs are not available. Unfortunately, escaping the 
crisis is next to impossible for me as my wife is an oncology 
nurse who voices the frustrations of all cancer care providers 
when she asks, how can this be happening in the United States?
    The drug shortage situation is very complicated; however, 
the root cause is not. The problem is grounded in economics and 
goes back to the way that Medicare reimbursement for cancer 
care was changed in the Medicare Modernization Act of 2003. The 
reason for the change was well intended: better balance 
Medicare payment for drugs and services to market rates. 
However, the policy change, exacerbated by poor implementation, 
has had unintended consequences. The first consequence has been 
a consolidation of oncology providers, including clinic 
closings and mergers into large hospital systems. The second is 
a severe reduction in the number of manufacturers supplying 
low-cost, generic cancer drugs.
    Let me briefly explain the evolution of drug shortages.
    The MMA changed Medicare Part B drug reimbursement from 
average wholesale price set by the manufacturer to average 
sales price, a market-based price. Oncology clinics 
administering chemotherapy are reimbursed by Medicare at ASP 
plus 6, which is intended to cover drug cost, overhead, staff, 
and materials. In actuality, reimbursement is lower than ASP 
plus 6 due to manufacturer-to-distributor prompt pay discounts 
included in the ASP calculation. It is also important to 
understand there is a perpetual lag of 6 months in updating 
ASPs each quarter, which results in providers subsidizing 
Medicare for drug price increases.
    There are two key points to note about ASP reimbursement.
    First, the system substantially reduced Medicare provider 
payments for cancer drugs. However, CMS never balanced this 
shortfall by increasing payment for non-reimbursed, essential 
services such as treatment planning. Instead, CMS put into 
place two demonstration projects in 2005 and 2006 to provide 
stopgap funding for the shortfall in services payments. A study 
by Avalere Health found that by 2008 Medicare covered only 57 
percent of the cost of just the services associated with 
chemotherapy infusion. The overall shortfall in Medicare 
reimbursement has forced community cancer clinics to close, 199 
over a 3\1/2\ year period, and an increase in mergers of 
clinics into hospitals, 315 over the same time period.
    Second, the AWP reimbursement system allowed generic 
manufacturers to compete on the margins they established by 
setting a drug's AWP and then selling the drug at a discounted 
price. The ASP system changed the generic manufacturers' means 
of competing to solely on actual sales price. That and the 6-
month lag in updating Medicare reimbursement has resulted in a 
system that is effectively price capped.
    There has been a steady downward pricing pressure on most 
generics since 2005, the year ASP was first implemented. For 
some of the top cancer drugs in short supply the ASPs have 
dropped approximately 50 percent since 2005. You should also 
understand that ASP masks the true decline in prices for 
manufacturers because they do not reflect discounts and rebates 
exempt from the calculation of ASP.
    Generic manufacturers have felt additional pricing pressure 
from an increasing volume of 340(b) discounts, which they are 
required to extend to 340(b)-eligible hospitals and other 
institutions treating a disproportionate share of low-income 
and uninsured patients. As more oncology practices under 
reimbursement pressures have been acquired by hospitals 
eligible for 340(b) pricing, the volume of these discounts have 
increased. Furthermore, Medicaid rebates exert further downward 
pricing pressure on manufacturers.
    Although, on the surface, declining prices are a positive 
for both payers and patients, the problem is that many generics 
have reached severely low prices. Consider if manufacturing a 
$1 sterile infusible cancer drug is economically viable in the 
long run. In a market that is highly regulated, both in terms 
of pricing and manufacturing, normal market forces are not in 
effect.
    Faced with the prospect of diminishing returns from low-
priced, discounted, and rebated drugs, the incentive to stay in 
the market is reduced. This has led to fewer manufacturers 
producing these products. As a result, any manufacturing, 
regulatory, or quality problem that shuts down a production 
line has significant impact on the supply of product.
    In closing, I implore the Congress to work with the cancer 
community in fixing this crisis. Next month will mark the 40th 
anniversary of when our Nation declared war on cancer. We have 
evolved our cancer care delivery system into the best in the 
world, as documented by survival rates. Americans battling 
cancer today and for generations to come should have access to 
quality, accessible, and affordable cancer care. We stand ready 
to provide you with supporting data and to work on immediate 
solutions.
    Thank you for listening.
    [The prepared statement of Mr. Okon follows:]

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    Mr. Gowdy. Thank you, Mr. Okon.
    Dr. Gottlieb.

               STATEMENT OF SCOTT GOTTLIEB, M.D.

    Dr. Gottlieb. Mr. Chairman, Mr. Ranking Member, thank you 
for the opportunity to testify today before the committee. I am 
a practicing hospital-based physician and a resident fellow at 
the American Enterprise Institute. Previously, I served as 
Deputy Commissioner at the Food and Drug Administration and as 
a senior official at CMS during implementation of MMA.
    The causes for these scarcities can be complex and 
multifactor. Each episode typically has unique characteristics 
that make it distinct from other drug shortages. There are, 
however, some common problems that are, to a varying degree, 
threaded through each of these episodes. I believe these common 
factors should be the focus of our attention.
    I group these common factors into three categories. The 
first are regulatory challenges that have made the 
manufacturing of these products safer and more reliable, but 
also, in some cases, more challenging and expensive The second 
are mechanisms that make the prices sticky, limiting 
profitability and precluding new investment in additional 
supply and better and more efficient manufacturing. And the 
third and final category is market structures that prevent 
firms from branding their products and reflecting by how they 
price them legitimate improvements in manufacturing that allow 
drugs to be produced more reliably and in scalable facilities.
    The first challenge is the way the manufacturers of these 
drugs are being regulated. In recent years, the Food and Drug 
Administration has gotten tough on potentially dangerous snafus 
that have long plagued the production of some injectable 
generic drugs. These include problems with sterility and 
particulate matter getting into the solutions.
    The FDA has real concerns, but if we want to maintain high 
standards, we need policy measures to accommodate the economic 
impacts. This begins with making sure regulations governing 
drug manufacturing, FDA's good manufacturing practices, are as 
efficient as possible. Manufacturers have long complained that 
these policies are outdated and at times inflexible.
    Another regulatory issue that plays in these shortages 
relates to the backlog that FDA currently has for generic drug 
manufacturing supplements. The backlog in reviewing 
manufacturing supplements can add as much as a several-year 
delay to the approval of manufacturing changes. Because of 
remediation now taking place at many plants, FDA is about to 
get hit with a deluge of supplements related to the manufacture 
of these shortage drugs.
    The increased regulatory scrutiny presents a more immediate 
challenge also because of the way these generic parenteral 
drugs are being reimbursed by Medicare and private payers. The 
current system prevents manufacturers from adjusting prices to 
reflect the higher cost of goods as a result of the 
manufacturing upgrades that they are required to undertake.
    A 2003 law sets the price Medicare will pay for physician-
administered drugs to the average sales price that is at least 
6 months old at any given time. This means even if a generic 
raises its price to reflect increased production cost, Medicare 
won't pay the new price for about 6 months later, so purchasers 
lose money on these drugs for months at a time.
    In order to make long-term capital intensive investments 
needed to bring on new manufacturing capacity for these 
parenteral drugs, generic firms would need to know that they 
can take and sustain price increases over a reasonable period 
of time.
    The bigger issue with the way Medicare reimburses these 
drugs, however, is the way it sets a single flat price for each 
broad category of medicines, rather than paying for these drugs 
individually. Medicare assigns a single billing code to each 
category of medicines.
    Since FDA's enforcement of facilities is often uneven, one 
firm might be facing significantly higher manufacturing and 
regulatory costs while others are getting by with older and 
perhaps less safe facilities. Lumping all the drugs in the same 
billing code creates a race to the bottom on the costs of 
goods, with the price reflecting the lowest cost producer.
    The result is that prices can't rise to reflect change in 
demand or the need for investments in manufacturing. Any 
capital requirements are hard to recoup given the way Medicare 
pays for these drugs. When higher costs of goods erode slim 
profit margins, more manufacturers are choosing to exit product 
lines entirely rather than invest to meet higher standards.
    To fix these problems, we should lift existing price 
controls when it comes to critical injectable drugs that are 
generic.
    These drugs should also get a holiday from other price 
control schemes that serve to distort market prices and reduce 
incentives to invest in new product, such as the 340(b) 
discount program.
    Medicare can also allow these drugs to have individual 
billing codes rather than paying for each class of drug 
according to the same billing code. This would allow 
manufacturers to price their drugs individually, eliminating 
the race to the bottom on the cost of goods.
    Finally, we should consider policy constructs that would 
give manufacturers a financial incentive to develop 
intellectual property that improve the manufacturing 
characteristics of generic medicines, even if these changes 
didn't change the clinical properties of the drug. Recent 
policies have systematically eroded the ability of firms to 
earn returns on these products and make investments. The only 
way to mitigate these shortages is to make it profitable for 
firms to invest in manufacturing that enables safe, stable, and 
more scalable supply.
    Thank you.
    [The prepared statement of Dr. Gottlieb follows:]

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    Mr. Gowdy. Thank you, Dr. Gottlieb.
    Dr. Thompson.

            STATEMENT OF KASEY K. THOMPSON, PHARM.D.

    Dr. Thompson. Good morning and thank you, Chairman Gowdy, 
Ranking Member Davis, and distinguished members of the 
subcommittee for holding this hearing. My name is Kasey 
Thompson and I am vice president of policy, planning and 
communications for the American Society of Health System 
Pharmacists. I am here today to talk about the problem of drug 
shortages and the impact shortages are having on the ability of 
health care providers to care for our patients.
    For the last 10 years, ASHP, in collaboration with the 
University of Utah Drug Information Program, has been tracking 
and studying drug shortages and making that information 
available free to the public on our Web site. Since that time 
we have seen the number of shortages increase, almost tripling 
since 2006. As a result, hospital pharmacists and other health 
care providers have had to go to heroic lengths to find needed 
medications, spending time tracking down the product rather 
than caring for patients. In some cases we are told why there 
is a shortage. For example, there may be a quality issue with 
the production of the product. In other cases we simply have no 
idea.
    Our analysis of shortages over the last 10 years has shown 
that most drug shortages are the result of quality issues in 
the manufacturing process. However, we recognize that there is 
no one cause to this problem, nor is there one solution. For 
example, it has been suggested that Medicare reimbursement 
policies may be partially to blame for drug shortages. While we 
believe this is an area that should be explored further, we do 
not currently have the data to confirm that this is in fact the 
case. We do know that drug shortages are not confined to 
oncology medications.
    Other significant shortages affect anesthesia, pain 
management, nutrition support medications as well. These other 
drug classes have experienced increases since 2006, in addition 
to oncology drugs. This suggests multiple reasons for drug 
shortages, both quality assurance and economic. We are pleased, 
however, to see that other facets of drug shortages, including 
economic factors, are being considered, but would warn against 
rushing to any conclusions, given the limited data at this 
time. It will be important to learn from other stakeholders in 
the supply chain, including pharmaceutical manufacturers, in 
order to fully assess the causes and solutions to this public 
health crisis.
    Fortunately, the Food and Drug Administration has been able 
to take steps to address drug shortages when they had access to 
certain information from drug manufacturers. For example, in 
2010, FDA was able to prevent 38 shortages when drug 
manufacturers notified the agency when a product was 
discontinued or a manufacturing problem occurred. That number 
has increased to 101 shortages averted for 2011.
    For this reason, ASHP supports bipartisan legislation in 
both the House and Senate that would require manufacturers to 
confidentially notify the agency when they experience 
production problems or discontinue a product. We know that 
confidential notification by drug manufacturers to the FDA is 
not a complete solution, nor does it prevent drug shortages 
from occurring, but it is a proven solution based on FDA's 
experience that can be implemented immediately while we look to 
examine other potential causes of drug shortages, including 
economic factors.
    Hospital and health system pharmacists have been 
collaborating with other clinicians and members of the supply 
chain to work with FDA to address the problem. For example, we 
believe FDA should have the necessary resources to speed up the 
regulatory process to help resolve drug shortages. Other 
alternatives include improved communication between FDA field 
personnel in the drug shortages program to assess the risk of 
public harm when potential enforcement action may worsen a drug 
shortage; exploring incentives for manufacturers to continue or 
reenter the market; a generic user fee program to speed 
approvals; and, last, ensuring the agency has the funding it 
needs to carry out its mission.
    In conclusion, drug shortages continue to be a very serious 
public health threat not just for oncology drugs, but also for 
pain medications, anesthesia drugs, and nutrition products. 
While some causes are known, others are not as clear. ASHP 
supports more examination of these other factors to help 
identify causes of drug shortages currently plaguing our health 
care system.
    Again, thank you, Mr. Chairman, Mr. Ranking Member, and all 
members of the committee, for this opportunity to provide input 
on this urgent public health crisis.
    [The prepared statement of Dr. Thompson follows:]

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    Mr. Gowdy. Thank you, Dr. Thompson.
    I will recognize myself for questioning.
    Dr. Hudspeth, what percentage of drugs used to treat 
childhood cancer are generic?
    Dr. Hudspeth. Over 90 percent of the drugs that we use to 
treat and cure childhood cancer are generics. And I understand 
we have to be good stewards, just like you all, of the budget, 
and I can imagine your concerns. We are talking about our 
concern about prices and increasing costs. But you have to 
understand if you look at generic injectable cancer drugs, they 
represent only 2 percent of the entire budget spent each year 
on cancer chemotherapy drugs. So even by improving this, you 
are only looking at a very small overall increase. They make up 
0.5 percent of the total cost for cancer care each year.
    I have a young man who is an honors college student whose 
leukemia has relapsed. He needs a drug to start tomorrow. But 
we have an adult in our institution who is also due to start a 
regimen that needs the same drug. I don't know who we are going 
to be able to treat tomorrow. And that is real. That is me 
getting off the plane yesterday calling, emailing back with my 
home institution. So this is real.
    Mr. Gowdy. Are there particular types of incentives that 
would encourage manufacturers to enter the market and stay in 
the market?
    Dr. Hudspeth. There have to be incentives, I believe, for 
production capacity. If you notice, the drugs primarily in 
shortage are injectable drugs. They are typically more complex 
to produce than a pill and typically, in a company, they have 
to dedicate an entire production line to, say, that one drug. 
So there are some real things about injectables that are 
different.
    So I think there has to, at the end of the day, be some 
form of incentive for the companies to be able to run 24/7 
production lines. Have a contingency plan. That is a current 
problem, they really do not have contingency plans, and there 
are some measures in H.R. 2245 that do recommend that the FDA 
require contingency plans for single makers of critical drugs.
    Mr. Gowdy. Dr. Hudspeth, you were good enough this morning, 
and again in response to a question, to mention the untenable 
choice that a physician would have to pick among patients. 
Without violating the confidences of any of your patients, has 
the drug shortage caused you to change the way you practice 
medicine in any other regards?
    Dr. Hudspeth. Yes. We have had to start chemotherapy 
regimens sooner than normal. Typically, we require that a 
patient recover from their prior chemotherapy regimen to a 
certain level to be safe enough to start the next cycle. We 
start a patient sooner than normal just out of fear that if we 
wait another week there simply won't be drugs available. And 
this has come up. Cytarabine has been a drug that is mentioned 
a lot in the press. There is absolutely no substitution for 
Cytarabine. It is in every single regimen in order to cure AML.
    The other issue is medical errors. When the pharmacists--a 
cardinal rule of pharmacy safety is you stock one concentration 
of a drug. That way everybody that makes that drug day in and 
day out, they understand this is what we are working with. 
Well, now people are scrambling. We are just happy to have the 
drug. So you have five different concentrations. People are 
unfamiliar. You are going to absolutely increase the amount of 
errors.
    Mr. Gowdy. If the pricing problems are not remedied, what 
do you see the future of drug crises being? Drug shortages. 
Will they be exacerbated?
    Dr. Hudspeth. Absolutely. Right now it feels like 
practicing medicine in a Third World country. I never dreamed 
of a day where I would have to spend hours on end that I should 
be at the bedside talking to the families or with the kids, but 
now I am on the phone with our pharmacists and the other 
oncologists trying to figure out alternative treatment plans 
and who gets what. It is taking up time that could be used in 
so many other ways. And at the end of the day, if it is your 
family member being treated for cancer, do you want me worrying 
about if we have drug or not, or do you want me thinking about 
taking care of you?
    The other drug shortages that are mentioned are 
antibiotics, antivirals, nutrition solutions. Well, my patients 
all need those too, right? So one of the consequences of 
chemotherapy is you can't eat and you get a heck of a lot of 
infections. So we have had significant issues, too, where we 
simply haven't even had the support of care drugs to treat 
them, to support them through the therapy when we do have the 
therapy.
    Mr. Gowdy. I want to ask a question, and I will give the 
other four gentlemen a chance to answer with respect to 
negatively impacting clinical trials. I only have 30 seconds, 
so if you could give a quick response if this is an area that 
you feel comfortable talking about. Dr. Hudspeth already told 
us in the actual practice, with respect to research, the drug 
shortage, how is it impacting clinical trials?
    Mr. Okon. Mr. Chairman, I can just say that, hearing from 
oncologists all across the country, it is a real problem 
because the problem is the trials in many cases, and I 
understand in talking to some of the manufacturers trials have 
actually had to be stopped because of the unavailability of a 
particular drug.
    Mr. Gowdy. My time is up. I would now recognize the 
gentleman from Illinois, the ranking member of the 
subcommittee, Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman. With your indulgence, I 
know that the ranking member of the full committee has another 
assignment that he needs to be engaged in. I would like to 
switch places with him.
    Mr. Gowdy. Of course. The ranking member of the full 
committee, Mr. Cummings.
    Mr. Cummings. Thank you very much. I want to thank the 
gentleman for yielding.
    As most of you know, since this summer I have been looking 
into the role of so-called gray market during drug shortages. 
My investigation has focused on determining where some of the 
companies obtain drugs in critically short supply and how much 
they mark up the drugs that they sell to hospitals and other 
health care facilities.
    My staff has heard from countless health care providers 
about the constant unsolicited offers for drugs on the shortage 
list, but at prices that are nothing short of price gouging. 
For example, one company offered to sell a cancer drug for over 
$990 per vial, more than 80 times the price a hospital normally 
pays for it. I recognize the incredible predicament that this 
puts our health care providers in. I do not envy their choices 
of either delaying or denying treatment until drugs become 
available from a reputable distributor or paying huge markups 
on the drugs.
    Dr. Hudspeth, by the way, I really appreciate your passion; 
I feel it. When your hospital no longer has a needed drug 
available, what steps does your hospital undertake to obtain a 
needed drug? I am very familiar with chemotherapy. It is done 
in cycles. So I guess you might have enough to start a cycle 
but not enough to finish a cycle, so I guess you don't start 
it, is that how that works?
    Dr. Hudspeth. That is correct. And basically part of our 
committee meetings each week is looking at who, throughout the 
institution, is due for what and how much that will entail and 
how much supply is on hand. Our institution does not deal with 
the gray market. We have certainly been approached. Our policy 
is we do not deal with them. And I am continually indebted to 
the wonderful pharmacists at our institution that have spent an 
amazing amount of time speaking with manufacturers, trying to 
get drug. It has really been an all-out effort.
    Mr. Cummings. Do you think there are a lot of other health 
care facilities in, say, South Carolina that refuse to deal 
with the gray market folks?
    Dr. Hudspeth. It is hard to say. I could see how the 
pressures could get to you. It is very easy to say, sure, we 
don't want to deal with the gray market, but at the end of day, 
when you know there is a patient on the other end, you can see 
where that temptation could come along. So I don't know of any 
instances for sure, but I know that the threat is out there.
    Mr. Cummings. To all of our witnesses, can you explain to 
me how it would be potentially harmful for a patient to be 
given a drug that has changed hands many times?
    Mr. Okon. I can just say, Mr. Cummings, that the amazing 
thing about the distribution system, it is very regulated and 
you understand the pedigree of the drug, which is very 
important. So the problem is when you have some distributor 
that you don't know at all that basically sends a fax, I hear 
from practices all the time that they get faxes about drugs, 
they get emails about drugs, and you don't understand the 
pedigree of that, again, I am not an oncologist, but I think 
the problem is administering that drug, which I don't think my 
wife would be in favor of, as an oncology nurse, administering 
that drug without a set pedigree is very dangerous because you 
are talking about extremely, extremely potentially toxic 
medication.
    Mr. Cummings. I was just thinking, going back to you, Dr. 
Hudspeth, if you have somebody with cancer and they face life 
or death, and the patient knows, people begin to research.
    Dr. Hudspeth. Absolutely.
    Mr. Cummings. Have you ever come into a situation where 
somebody says, wait a minute, doc, we know you don't have the 
drug, but we have done some discovery here and learned that XYZ 
Gray Market Co. has it. We don't care what it costs, we will 
pay. Do you run into those kinds of situations?
    Dr. Hudspeth. It is getting to that point, and 85 percent 
of the children I take care of are Medicaid funded. I am a 
native South Carolinian, but we are a poor State, and part of 
my passion is that these kids have to have treatment no matter 
what background or circumstances they come from.
    So what I am afraid of is you are going to set a hierarchy 
of treatment. If you have the money to obtain some drug, travel 
to Canada, you can get treatment, but the folks who don't have 
the finances to do that are left behind. And who is that going 
to be? It is going to be the kids.
    Mr. Cummings. Dr. Thompson, are your members concerned with 
the safety of such drugs that circulate in the gray market?
    Dr. Thompson. Yes, sir, they are, and this has been a 
phenomena that they have dealt with for a very long time. The 
notion of receiving faxes came up and this does happen. When 
there is a shortage, our members get contacted with offers to 
provide these drugs at exorbitant prices.
    But it is really not the price issue so much. Not that that 
is not a factor. It is the safety issue. When everybody knows 
that there is a profound shortage of a drug, they are asking 
the question, Where did these distributors get the product? Is 
it safe? How was it stored? What is the pedigree? So it raises 
real concerns.
    Many pharmacy departments in hospitals will not buy from 
the secondary market at all. But, as others have mentioned, 
sometimes there is no other option.
    Mr. Cummings. Thank you, Mr. Chairman.
    Mr. Gowdy. I thank the gentleman from Illinois.
    The Chair would now recognize the gentleman from Arizona, 
the vice chairman of the subcommittee, Dr. Gosar.
    Mr. Gosar. As a health care professional, I look at 
symptoms, and I don't treat symptoms, I am looking at what the 
disease process is. So I want to ask you yes or no down the 
road, is the gray market a symptom or is it the disease?
    Dr. Hudspeth. It is a symptom.
    Mr. Kalmans. It is a symptom.
    Mr. Okon. Symptom.
    Dr. Gottlieb. It is a consequence, it is a symptom.
    Dr. Thompson. Symptom.
    Mr. Gosar. Thank you. So what we really need to do is 
concentrate back on the cure back to the disease process. So it 
seems to me like we have something going wrong here and we need 
to get back down to it.
    There are some clear problems in the way that we are 
addressing the drugs themselves. Very quickly, can you give me 
an idea on how we can do this? Because it seems like 
arbitrarily isn't allowing bureaucrats to set, it seems 
anywhere the Federal Government is involved we have problems, 
and when we have somebody outside the business of medicine 
dictating to medicine, we tend to get bigger problems.
    So, real quickly, is there a way that you can see that we 
can simplify this and let the markets work, but also have some 
control, very simple, but also allow the patients to have skin 
in the game? Doctor, what do you think?
    Dr. Hudspeth. I think there is going to have to be an 
allowance for the market to work, for the prices to reach 
market value. There are clearly still some drugs that would 
benefit from regulation that will allow us to treat the 
greatest number of patients overall. So it may not be that we 
abandon some of the tenets of the MMA altogether, but I think 
it is clear that in the generic injectable industry it is a 
very different beast, so probably there need to be allowances 
made differently for these types of drugs.
    So is it that we grant exclusivity, even though it is a 
generic drug, for a certain period of time? Do we offer 
financial incentives for the production? So is it maybe 
focusing on incentives for production and good manufacturing 
process, which helps everything, perhaps maybe even over just 
the price of the drug itself? And that may be able to be better 
controlled when focusing on overall incentives to the company.
    Mr. Kalmans. There are several different kinds of solutions 
to look at. I will give an example of one. We know there is a 
rapid price decline when drugs go generic, and right now they 
are limited from price increases to a maximum of 6 percent 
based on the ASP legislation. One idea might be to look at 
changing for drugs that have been generic for a couple of 
years, changing the ASP to be ASP plus 20, to allow prices to 
have greater fluctuation to make sure that the profits can 
continue to be earned and generics are priced at a market price 
that is palatable.
    Mr. Gosar. I know we are going to put up a slide before Mr. 
Okon does, but this actually shows just one drug, Carboplatin, 
that you can see how much it has decreased. So this gives you 
an example of one idea.
    Mr. Okon.
    Mr. Okon. I think, Dr. Gosar, that what has to happen is I 
think on the manufacturing side there has to be some clear 
incentives, whether we look at tax credits or something else 
that basically incents not only manufacturer coming into the 
market, a manufacturer staying in the market over a period of 
time. And I think that it is very clear on the reimbursement 
side we need to do something differently and we need to do 
something immediately with these drugs.
    You have to realize that some of these drugs are what we 
talk about as being even underwater, that their cost is higher 
than the reimbursement for Medicare right now. And because 
Medicare and cancer care basically accounts for 50 percent of 
the cost, it has an inordinate influence on private payers as 
well, too.
    So this is having a consolidation factor. We are seeing 
consolidation on the provider side; we are seeing consolidation 
on the manufacturing side. So I think we need to do something. 
And one of the things is when a new product comes into market 
and there is not an established ASP, it is basically WAC plus 
3, wholesale acquisition cost plus 3. Maybe we need to do 
something like that in terms of on an immediate basis.
    But I have to say this. Whatever we do, we have to put the 
politics aside right away. We have to get in a room and come up 
with some solutions because this is really a crisis.
    Mr. Gosar. Dr. Gottlieb.
    Dr. Gottlieb. Yes, I think we need to go to a different 
pricing scheme, and I advocate my written testimony, looking at 
the wholesale acquisition cost, which might allow producers to 
take and sustain price increases that would allow them 
investment facilities. I think the regulation of the facilities 
needs to be uniform so you don't have the cost of goods going 
up for one manufacturer but not up for others. I think there 
are schemes we can think of that would allow some limited 
rebranding of these products so that manufacturers could make 
representations about the manufacturing quality that might 
allow them to either sustain higher prices in the market or get 
automatic government purchasing for programs like VA or others.
    The other thing that I think this committee might think 
about is the fact that there is a significant portion of the 
manufacturing capacity that is offline right now, that has been 
taken offline by the Food and Drug Administration. If you look 
at just the first five companies that the ranking member 
mentioned, APP, Bedford, Hospira, Teva, Sandoz, that is 
probably 80 percent of the parenteral market, and you might 
have upwards of almost 20 percent of the manufacturing capacity 
of those companies offline right now, if I am just thinking of 
a couple of those companies. Those manufacturing facilities are 
going to be coming back online, and as they do they are going 
to hit FDA with literally hundreds, if not thousands, of 
supplements, and the question is is the regulatory agency 
prepared to approve those and evaluate them in an efficient 
fashion.
    Dr. Thompson. Mr. Davis mentioned involving manufacturers 
in this process. My organization has been researching drug 
shortages for 10 years now, and one thing we do is we conduct a 
root cause analysis and we ask every stakeholder in the supply 
chain what is causing this, what would help, what is the issue. 
Getting insights from pharmaceutical manufacturers is a 
challenge in terms of what are the issues, what would the 
incentives be, and we would really like to get some answers to 
those questions from the manufacturers' standpoint.
    What specific incentives could be provided to you by the 
Federal Government to help you stay in this business, get in 
this business, ramp up supply. I would strongly encourage this 
committee and others to have a discussion with pharmaceutical 
manufacturers and see if you can get some better sense from 
their perspective what the incentives would be that would help 
them be in these businesses that are so critical to our 
patients.
    [The prepared statement of Hon. Paul A. Gosar follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Gowdy. I thank the gentleman from Arizona.
    The Chair would now recognize the gentleman from Illinois, 
Mr. Davis.
    Mr. Davis. Thank you very much, Mr. Chairman. And again I 
want to thank you for your indulgence relative to Mr. Cummings' 
need.
    As a member that represents over a dozen safety net 
hospitals in the 340(b) drug discount program, I am extremely 
concerned about the unsubstantiated suggestions linking 340(b) 
and drug shortages. It is hard to believe that this small, but 
critically important program is of the magnitude to affect the 
drug market in this way.
    Dr. Thompson, can you cite any specific evidence that the 
drug shortage is significantly affected by the 340(b) program?
    Dr. Thompson. Sir, in our research we have seen no evidence 
to support that claim and I personally don't find it to be 
highly likely. The 340(b) program is a very small program, it 
makes up about 2 percent of the national drug market, so it 
just doesn't seem that likely.
    Mr. Davis. Let me ask if any of the other witnesses have 
any evidence that you have come into contact with or unearthed 
that would suggest any difference.
    Dr. Gottlieb. Manufacturers feel otherwise. I mean, the 
340(b) program has been significantly expanded and drugs are 
started to get diverted into that program and sold at a much 
lower cost, and to the extent that the program that you now see 
arbitraged in the marketplace, where hospitals are literally 
buying out community oncologists and other providers to try to 
capture the drug revenue and move it toward the hospital 
environment, where they could earn the money on the spread for 
what they are buying the drugs for versus what they are billing 
Medicare for, you are seeing a growing proportion of the 
overall drug utilization start to shift to that program. I 
think it creates a lot of uncertainty in the marketplace and 
just more impediments to people making investment decisions.
    I sympathize with the idea that we need to subsidize these 
hospitals. I have worked at some of these hospitals that are 
beneficiaries of this program. I wish we could find ways from a 
policy construct to subsidize them directly, rather than doing 
it indirectly by this sort of arbitrage on the drug revenue.
    Mr. Okon. I think, Mr. Davis, first of all, the 340(b) 
program, the intent of it is a wonderful program. What it is 
meant to do and taking care of indigent patients and patients 
who can't afford care is absolutely right-minded. I think we 
just have to keep in mind, though, that ASP, because 340(b) 
discounts and Medicaid rebates as well, too, are not included 
in the calculation of average sales price, that when we look at 
ASPs going down, that is not reflective of what the 
manufacturers are actually paying.
    So in no way, shape, or form, knocking either, obviously, 
340(b) or Medicaid, but I think we have to be aware that there 
are other pressures downwards on the manufacturer to give up-
front discounts and rebates that we just have to be aware of 
are actually increasing. If you look at the number of DSH 
hospitals that are qualified for 340(b), it has expanded from 
about 519 in 2004 or 2005 to the estimate is close to 3,700 
next year. So we just have to be aware of the impact that these 
discount and rebate programs are also having on ASP. That is my 
point.
    Dr. Hudspeth. I think it is important to note, though, for 
children's hospitals, essentially everyone is going to be part 
of a DSH program. Children's hospitals historically always 
serve a tremendous portion of patients who are funded by the 
Government, so it is important to realize the impact on kids. I 
agree with the representative from the HSP. As I was reviewing 
it, I see the rule of twos, 2 percent. It only concludes 2 
percent of all drugs. The other thing is that if you look over 
the past 2 years, any of the drugs that have been on shortage, 
none of those have been on the so-called penny pricing list for 
the 340(b) program.
    Mr. Davis. Thank you all.
    Dr. Hudspeth, let me ask you, you mentioned earlier that 
your institution does not deal with gray markets.
    Dr. Hudspeth. That is correct.
    Mr. Davis. Could you tell us why and what dangers there 
might be inherent in that kind of transaction?
    Dr. Hudspeth. Absolutely. It has been well outlined by the 
other folks that you simply don't know what you are getting. 
You really have no idea how to really know, has the drug been 
stored properly, has it expired, does it really contain what 
you think it contains? And with that type of uncertainty, 
patients undergoing chemotherapy treatments are fragile; we 
push them to the limit. Then if you then expose them to 
something that may be a completely different drug altogether, 
and maybe it is not even drug at all, there could be real 
inherent dangers in that. You simply don't know what you are 
getting.
    Mr. Davis. So the risks simply are not worth the costs.
    Dr. Hudspeth. Absolutely.
    Mr. Davis. Thank you very much, Mr. Chairman.
    Mr. Gowdy. I thank the gentleman from Illinois.
    The Chair will now recognize the gentleman from 
Connecticut, Mr. Murphy.
    Mr. Murphy. Thank you, Mr. Chair, and thank you very much 
for this incredibly important hearing.
    According to probably the most comprehensive FDA study that 
we have, the leading cause of these drug shortages are quality 
problems during manufacturing. I think the study showed that 
about 54 percent of the shortages studied were due to 
manufacturing problems.
    I will pose the question to you, Dr. Thompson. You 
mentioned that there is a multitude of causes here, but while 
we spend most of the time here talking about pricing, the data 
at least coming out of the FDA suggests that the biggest 
problem is manufacturing. The information that you have 
collected thus far, does that back up the idea that the biggest 
cause here is manufacturing problems?
    Dr. Thompson. Yes, sir, the 54 percent number is the one 
that you know has been backed up by the research we have done 
over the years on the issue.
    Mr. Murphy. That study goes on to further say that outside 
of that 54 percent that is due to product quality and 
manufacturing issues, 21 percent is due to delays in capacity 
issues, 11 percent is due to discontinuations, 5 percent are 
due to raw material issues, 4 percent are increased demand 
because of another shortage, etc.
    None of the reasons that the FDA cites are due to pricing 
issues, and certainly none of them are related to 340(b), so 
maybe, Mr. Okon, I will ask you the question, and I would be 
glad to hear comments from others. Is this study wrong? And if 
it is not, how do you square the focus that we have heard on 
this panel on pricing when the FDA suggests that it is much 
more due to underlying manufacturing issues?
    Mr. Okon. No, I think that is absolutely right. But I think 
what you have to understand, Mr. Murphy, is that what we have 
done is we have consolidated the manufacturing market. So we 
have looked at, and actually I have a couple of charts looking 
at ANDAs. That is an abbreviated new drug application that a 
manufacturer of a generic has to file. It is an abbreviated 
process.
    If you look at those numbers of new ANDAs, I think we put 
up Carboplatin before, I can show you that 17 have been filed 
for most form strains. There are only three or four 
manufacturers in the market now. So you can look at double 
digit number of ANDAs have been filed, but if you look at the 
number of available manufacturers now for any type of product, 
it is usually one, two, or three.
    So what happens is that, as a result of that, any 
manufacturing glitch, any quality glitch, anything that the FDA 
said, which is absolutely right, it is happening on a much 
smaller base. And what happens, typically, is you take the 
whole production line, other products off cycle. So that is our 
problem. The problem is that it is economic and it is not using 
reimbursement as an excuse. It was driven by that, that is the 
root cause, but because we have consolidated the manufacturing 
market down now, any kind of a glitch, regulatory, quality, 
supply glitch, is going to be magnified.
    Dr. Gottlieb. The other issue is, it is true that the 
agency has gotten more vigilant in recent years around the 
manufacturing of parenteral, the injected products, 
particularly looking at foreign sites. After years of criticism 
that it wasn't doing enough to look at the overseas 
manufacturing facilities, it has gotten more aggressive, so it 
has stepped it, it has brought regulatory actions against a lot 
of the manufacturers in this space, and that has prompted them 
to have to take remediation that has increased the 
manufacturing cost, increased the cost of goods. I think the 
pricing issue comes into play when they can't take price 
increases to reflect their higher cost of goods. So rather than 
continue to market the products at a loss, more manufacturers 
are choosing to get out of certain lines of business.
    Mr. Murphy. So let's take the pricing issue, because there 
has been an incredible benefit of generic drugs coming onto the 
market and the very justifiable incredible decrease in cost 
that comes along with it. So if you believe that pricing is the 
cause here, how do you adjust upwards for shortage areas 
without adjusting upwards for drugs that aren't shortage drugs? 
And then, secondarily, how do you do that in a way that doesn't 
create an incentive for shortages? How do you create an 
incentive to make the stuff that you really need without 
creating a reason for people to declare a shortage in order to 
get a little extra benefit?
    Mr. Kalmans. A couple of comments. One is the FDA paper I 
think is accurate, but the FDA regulates manufacturing, so the 
FDA is commenting on its mandate, not commenting on pricing 
because it is outside of their mandate. I would like that 
noted.
    Second, if you look at the data, the drugs that are in 
shortage tend to be the lower priced generic drugs, not the 
higher priced generic drugs. They aren't manufacturing 
shortages cited for many high priced generic drugs, just the 
low priced ones. So I think that is evidence that points in the 
direction that pricing is a factor.
    Third, I mentioned earlier and I will mention briefly 
again, I think that after a drug has gone generic and you have 
taken a price decline over a period of time, there needs to be 
a rebalancing so that drugs, rather than having the bottom fall 
out, are able to move back up. So I think after the drug has 
been generic for 12 to 24 months, then there needs to be 
something put in legislatively to allow that price to float 
more freely.
    Mr. Murphy. Thank you very much.
    Thank you, Mr. Chairman.
    Mr. Gowdy. I thank the gentleman.
    Given the wonderful resources we have and the five 
witnesses, we are going to have a second round of questioning. 
It will be quicker, if your schedules can accommodate it. If 
they cannot, we understand, but this is a rare opportunity for 
us to talk to people who are experts in the field. So, with 
that, I would recognize the gentleman from Arizona, Dr. Gosar, 
if he has any followup questions.
    Mr. Gosar. I do.
    Dr. Hudspeth, you really brought this to a tee, that there 
is this oncology, these drugs that are a problem right now. But 
there are also anesthetics and antibiotics. So this is a 
multifaceted problem. And it seems to me that we have a number 
of problems. It was just alluded to here that instead of having 
a wider variety of manufacturers, we are down to several, two 
or three. So when there is a glitch we have a problem.
    Number two is we have problems with the FDA. And I want to 
get back to you, Dr. Gottlieb, in making the FDA being a little 
bit more nimble. You know, instead of being antiquated to shut 
everything down, they are starting to work with industry. But 
it seems like it is the rules regulations that have really--and 
we need them, don't get me wrong. We need them, okay? But we 
need to have a constant vigilance about applicability and how 
things fluctuate and work. Nothing follows an equation all the 
way across the board, just like every cancer patient isn't 
treated the same way.
    So to me it seems like the system itself is all out of 
whack. And not just reimbursement rates are not the key here. 
And I am tired, I like going for the surgery, okay? Go right to 
the point. We have to do something different than what we are 
doing. It is not working. It is definitely not working and we 
need to revamp this.
    And we need to openly talk about the business of medicine, 
frankly. I am great at this because I am a dentist, okay? I am 
one of those people who can talk to you. There is nothing wrong 
about making a profit. You have to make a profit in keeping 
your doors open. It, frankly, has to come about.
    So when I see these, there is another part of this equation 
that bothers me. When you are having to huddle around deciding 
who gets what, there is a liability issue, is there not, 
doctor?
    Dr. Hudspeth. Absolutely. We sit around and say, Do we need 
to call the hospital risk management? Should we have ethics 
committee here? How do you begin to make these decisions? 
Absolutely.
    Mr. Gosar. Dr. Gottlieb, I want to go back to you and your 
background, particularly with the FDA. I know that when we see 
a glitch in manufacturing, the FDA tends to be very 
recalcitrant in shutting everything down, instead of being more 
interactive and maybe looking at one part of that. How do you 
see the FDA changing a little bit that could help this 
scenario? Not just with the cancer drugs, but all the way 
across the drug shortages.
    Dr. Gottlieb. Right. Well, I think that the agency has and 
had legitimate concerns around a lot of the remediation that 
its forced and some of the capacity that is frankly offline 
right now is a result of the FDA actions. Contribution from 
manufacturing process should never get into the sterile 
injectable drug, and that was a lot of the problem with some of 
the things that they shut down.
    Thinking of a couple things that the agency could do, the 
agency, right now, prioritizes the supplements for drugs when 
they approach shortage status or when they are in shortage. I 
think it could prioritize all the supplements, the 
manufacturing supplements, for all the sterile injectable 
drugs, because what could happen is a supplement can sit in the 
queue now and 2 years from now that drug will be in shortage.
    But I believe some of the drugs that are currently in 
shortage might, one of the contravening factors is because 
supplements might not have been reviewed in a timely fashion 1 
or 2 years ago; and to do that the agency is going to need to 
put more chemist reviewers on these supplements. I think as 
part of the generic drug user fee program that is being 
considered by this Congress, you could prioritize resources 
directly for all the sterile injectable drugs, and not just 
segregate them once they get into shortage.
    I think you can think about changing the regulations to 
make it easier to make manufacturing changes and improvements 
and undergo remedial steps without having to file supplements 
every time. It is a very cumbersome process.
    And then the other problem here is that the agency, and the 
manufacturers, for that matter, don't understand the root 
causes of a lot of these problems, so what happens is entire 
factories get shut down, entire product lines get refurbished. 
And I think there needs to be more work done to try to 
understand how some of these problems arise in the first place. 
There is just not a lot of intelligence either on the 
regulatory side or on the manufacturing side, for that matter.
    Mr. Gosar. Dr. Hudspeth, you know, I am from Arizona, rural 
Arizona, and it is a little bit different when it is coming 
from hospitals in rural America, because we are at another 
disadvantage, much more than the metropolitan. Now we are 
talking about surgeries that are being rescheduled, putting 
people on a prioritization based upon the drugs that we have 
available for anesthesia. Do you even see that from the 
standpoint, from outlying areas as a problem?
    Dr. Hudspeth. Absolutely. We have actually shipped drug to 
another children's hospital in our State because they didn't 
have any Cytarabine for a little boy with AML. So we try to 
band together and help other folks when we have the capacity to 
do that. But we are hearing widespread shortages at many, many 
other children's hospitals.
    Mr. Gosar. So I guess what my whole point is we are seeing 
a symptom again. This may be just a small choreographed part of 
drugs, but there is more coming, and that is the biggest 
problem.
    Dr. Hudspeth. Exactly. There is no reason to think this is 
going to get any better any time soon.
    Mr. Gosar. Thank you.
    Mr. Gowdy. I thank the gentleman from Arizona.
    The Chair will now recognize the gentleman from Illinois, 
Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman.
    Mr. Okon, you assert in your statement that Medicare is the 
root cause of the drug shortage which have affected oncology 
drugs. However, a recent Health and Human Services study 
entitled, The Economic Analysis of the Causes of Drug 
Shortages, noted that 54 percent of the shortages are caused by 
production and quality problems. What is the basis of your 
assertion?
    Mr. Okon. Well, I think the FDA study, as I told Mr. 
Murphy, is absolutely, positively spot on, Mr. Davis, in terms 
of it being right now due to a lot of manufacturing quality and 
problems, but again what has happened here is that when we 
changed reimbursement, and the change was really well intended, 
part of it was the fallback of the falling of the execution on 
CMS's part, but the nature of ASP and the price regulated 
nature around that, we just have to realize what it has done is 
we shrunk the manufacturing base.
    So when you look, Mr. Davis, at how many manufacturers were 
in the product, and remember these products were on the market 
well before MMA, so when you shrunk that down, what happen is 
you shrink that base. Now, when you have a manufacturing 
problem you have a regulatory problem, you have a quality 
problem, even a supply problem. You have so few manufacturers 
that you have a huge problem associated, and that is why I 
think we are getting so profound in terms of the number of 
shortages, because our manufacturing base has shrunk down. And 
I applaud you and I think you should get the manufacturers in 
on the generic side, and we all need to come around and talk 
and put politics aside and just solve the crisis.
    Mr. Davis. Are you saying that HHS is a little behind?
    Mr. Okon. Well, Mr. Davis, I probably am saying HHS is a 
little behind. Actually, if you look at the HHS report, what 
was kind of interesting about that is they started talking 
about the economics and then they kind of stopped. So I am 
wondering if somebody edited that portion of the report out. 
But I think that it is a problem.
    Mr. Davis. Dr. Thompson, how would you respond to that?
    Dr. Thompson. Clearly, the FDA data is accurate and we do 
think the economic factors need to be looked at. One thing that 
we have learned over a decade of looking at shortages is that 
there is no single root cause of these shortages; they are in 
the tens and twenties and it runs the gamut of things.
    We have been very supportive of the concept of looking at 
the range of potential economic factors that have happened, 
that are being suggested, and we have tried to sort of get 
insights from manufacturers, wholesalers, GTOs and others that 
really are the critical part of that supply chain around what 
some of those may be to help solve the problem, but I think a 
more substantial conversation with these various groups needs 
to happen so we better understand what the economic drivers 
are.
    Mr. Davis. Let me ask if any of you are saying that our 
regulatory activity really needs to be stepped up and become 
perhaps a bit more direct.
    Mr. Kalmans. I like the idea of directness. One of the 
things that I think is possible here is, when you are citing 
manufacturing issues, these issues aren't apparently related to 
high-cost generic drugs. They are having no problem making 
enough Gemcitabine and Docetaxel; it is the ones that are low-
cost. Same manufacturing plant. So manufacturing issues could 
just be defined as capacity constraints. So I think it is a 
question of how you define things as a regulator.
    Mr. Okon. And I just want to add to Dr. Kalmans' remarks is 
you have to understand some of these generics we are literally 
talking about a dollar, under a dollar to manufacture a sterile 
injectable. So it is not like stamping out a generic tablet; it 
is a very intricate process.
    Mr. Davis. Well, the next time I am talking with any of 
them, I am going to suggest that maybe, rather than dancing, 
that they need to come out and say here is what we need to do 
and let's do it.
    Thank you, gentlemen, very much, and thank you, Dr. 
Hudspeth.
    Mr. Gowdy. I thank the gentleman from Illinois.
    If we were looking at this like a trial, I would say you 
have proven beyond a reasonable doubt that there is a drug 
shortage. You have proven beyond a reasonable doubt that it is 
a crisis. You have proven by clear and convincing evidence that 
there are a number of causes.
    So I want to do this. Dr. Hudspeth, I asked you this 
morning and I am going to ask you to do it again. I want you to 
assume that you made the grades I made in college, and not the 
ones you made, and that you weren't in medical school, but that 
you found yourself in a legislative body. What is next? There 
is no need to continue to have hearings on whether or not it is 
an issue. You can beat a dead horse. It doesn't hurt the horse, 
but it doesn't do any good. So what is next? Who should we be 
asking questions of and what questions would you ask if you 
were sitting here?
    Dr. Hudspeth. Sure. I think there has to be a strategy 
group that looks at pricing and pricing options. And I am not 
an economist, so that is going to require all those folks to be 
involved. Looking at pricing strategies and how you deal with 
that.
    But then the second fold of that, yes, we are going to need 
to give incentives; yes, we are going to need to make it 
profitable to make generics. But they can't cry wolf over and 
over again, okay? So they cannot have continued manufacturing 
problems. So there is going to have to be some sort of three 
strikes you are out policy. Incentives and those things are 
only so good as long as you can prove that you can keep up with 
GMP.
    And then I think the second thing is contingency planning. 
That is what we all have to do. In school you have to have a 
fire escape plan. And here we have lifesaving drugs with no 
contingency plan and a single manufacturer, and I think some 
solid planning for A through Z, what you do when you go 
offline, how do we fill that in.
    Mr. Gowdy. Mr. Kalmans.
    Mr. Kalmans. Well, there has been stockpiling of medicines 
for defense in the past. It could be an idea to look at 
providing incentives to stockpile a generic injectable drug 
stockpile. Just coming up with ideas, potential solutions. That 
is one area I would look at. But this is an issue that is going 
to stick around. It will grow for a period of time. I think it 
may, over time, which we don't have, by the way. We don't have 
the benefit of time.
    But over time there has been an unprecedented number of 
branded drugs that have gone off patent. Those actually will, 
there are not as many drugs coming off patent in the future in 
the generic injectable space, so I think the capacity will come 
back into line. But, unfortunately, the bottom line is we don't 
have the benefit of time, so the sooner we figure out a 
solution together, the better off we all are.
    Mr. Gowdy. Mr. Okon.
    Mr. Okon. Mr. Chairman, I think we have to draw a line down 
the paper and I think that what we have to do is put in place 
is a solution that basically provides the proper incentives on 
the manufacturing side, realizing that this is a regulated 
market. It is regulated both in terms of price, it is regulated 
in terms of manufacturing. We have to accept that. So I think 
we have to put the incentives on the manufacturing side and I 
think we basically have to do something on the reimbursement 
piece.
    The other side of the paper is more immediate, because even 
when we do that it is not going to take care of Dr. Hudspeth's 
patient that basically she has to find a drug. I think this is 
a crisis, it is a national crisis, and we need to come 
together, put all politics aside and say, how can we get these 
drugs safely distributed through the proper channels? How can 
we get them immediately so that we can basically get the drugs 
in the patients' hands that need them?
    And I think that with all what we have to do and I think we 
should do on the legislation side to put the proper incentives 
in place and basically take care of both the manufacturer and 
the provider side, I think we have to do something more 
immediate and I think it has to be drastic.
    Mr. Gowdy. Dr. Gottlieb.
    Dr. Gottlieb. Well, unfortunately, I think it is going to 
get worse before it gets better. There are things we can do 
both immediate and long-term. Immediate, I would urge the 
committee to send a letter to the top five manufacturers and 
ask them how much of their manufacturing capacity is currently 
offline because it is undergoing remediation, and make sure 
that, as that manufacturing capacity gets remediated in 
consultation with the FDA, it is done in as efficient a fashion 
as possible with the regulatory authorities.
    The reality is we have more manufacturing in this country, 
but the industry is consolidated so more of that manufacturing 
capacity is sort of consolidated at a handful of very large 
facilities. So when you take Teva's Irvine facility offline or 
Hospira's facility offline, you have just taken out 15 percent 
of the entire market.
    Longer term, I think we need to find ways to allow these 
prices to float to justify long-term investments. It could take 
as long as 7 years to stand up a new manufacturing facility for 
parenteral drugs, so the companies need to know that they can 
take and sustain price increases for some of these drugs if 
they are going to make those long-term investments. And that 
would be sort of a long-term policy.
    Mr. Gowdy. Dr. Thompson.
    Dr. Thompson. Step one, pass the current legislation that 
is pending in Congress, that is S. 296 and H.R. 2245. 
Reporting, confidential reporting to the FDA isn't going to 
solve drug shortages, but there is evidence to say that in 101 
cases the FDA has been able to prevent a shortage when a 
manufacturer confidentially reported to them, and that is what 
this legislation does.
    Now, there are 240 shortages on the list now, so you can 
imagine that if reporting occurred across the spectrum, that 
that number would be higher than 101. So I would say step one, 
pass that legislation now that requires confidential reporting. 
And it is confidential reporting to the FDA, it is not public 
reporting.
    And then the second would be to explore all these other 
factors. I think that there is a little more time to do those 
sorts of things. Not a lot of time, but look at the economic 
factors. Really have a deep discussion with the manufacturers 
and other members of the supply chain and get a very thorough 
understanding of really what these drivers are, and then go to 
that next step. But I think the legislation that is pending 
Congress now needs to move.
    Mr. Gowdy. Well, on behalf of all of us, thank you for 
loaning us your expertise, your time. Fascinating is not the 
right word. I don't know what the right word is, but I thank 
you, Dr. Hudspeth, for bringing it to my attention and for the 
other witnesses for loaning us your acumen and expertise.
    The committee stands adjourned.
    [Whereupon, at 11:27 a.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]

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