Demand-Side Reforms To Prevent Drug Shortages: Medicare’s Role In A Successful National Strategy

A persistent drug shortage crisis in the U.S. is associated with higher mortality rates, medication errors, delays in life-saving cancer treatment and other critical medical procedures, and significant financial costs to the health care system. The Centers for Medicare & Medicaid Services (CMS) has proposed new financial supports for hospitals to maintain larger “buffer stocks” of drugs at high risk of shortage or potentially in shortage as a short-term administrative reform to help reduce the impact of shortages; CMS is considering refinements to this proposal to avoid unintended consequences. While larger buffer stocks may reduce the immediate impact of some shortages, further reforms are likely needed to address the root causes of systemic, chronic shortages of many critical drugs.

To confront the challenge, the Duke-Margolis Center for Health Policy recently launched a new Drug Supply Chain Resilience and Advanced Manufacturing Consortium, which consists of experts with perspectives in supply chains, manufacturing, regulatory science, national security, and drug shortages from academia, private industry, governmental agencies, and other stakeholder groups. Informed by our work with the Consortium, recent Duke-Margolis publications have recommended the establishment of a cross-cutting initiative to coordinate and expand on the federal government’s approach to addressing drug shortages, along with the advancement of programs to help measure the reliability of supply chains for essential generic drugs.

Here, we first review the root causes of drug shortages, noting “supply-side” and “demand-side” reforms that could be put into place to address them. Then, we describe a path to developing feasible demand-side supports to prevent drug shortages by shifting low-reliability drug markets to high-reliability markets, then sustaining those high-reliability markets over time. We particularly focus on efficient steps that could be implemented in Medicare hospital payment programs. We propose a Medicare “reliable drug supply payment adjustment,” as Medicare changes implemented with private-payer engagement can drive needed changes in markets for drugs at risk of shortage. These drugs are disproportionately generic medications that require specialized manufacturing facilities—for example, because they are injectable or derived through complex processes—leading to challenges with reliable quality manufacturing.