Supply Chain Problems Hitting Hospitals Near You

I’ve taken off and on to writing about devolution, which is when the application of new technology winds up not producing net gains, but at best, questionable tradeoffs, and at worst, net negatives. Consider how cheap carbohydrates like high fructose corn syrup lower the cost of food but almost certainly have contributed to the increase in the incidence of diabetes.

The stealthy “technology” that has been applied across large businesses around the world is the relentless pursuit of efficiency, which too often takes the form of simple-minded cost cutting. It’s not hard to see how this can create all sorts of problems: reduced service levels or product quality leading to customer defections; reductions in investment or maintenance producing catastrophic breakdowns; concentration on a few suppliers to gain more bargaining leverage over them producing vulnerability to problems with those suppliers, whether directly (problems in their operations) or indirectly (changes in shipping, tariffing, or foreign exchange rates making them less attractive, and their size impeding an easy migration to a new source).

Readers have had a bit of schadenfreude in seeing how Walmart has gotten too clever by half and has squeezed both its workers and staffing levels so much that it is undermining critical store operations to the point where the mainstream media has taken notice. But while Walmart’s tsuris are unlikely to have broad negative social ramifications, that’s not true when drug makers become unduly fixated with their bottom lines.

Reader and MD Francois T passed along this sighting from the Denver Post, of hospitals having trouble getting critical medications. The number in scarce supply is 323, the highest level since the database was started in 2001.

His message: “Getting closer to the edge, drug shortages are now affecting simple, everyday drugs in use in any hospital. This is going to end very badly.”

And the reason? From the article:

The current wave of problems stems from simple chemicals such as potassium or magnesium, which nevertheless need careful, sterile manufacturing procedures for hospital injections and drips. They also tend to be low-profit for the manufacturer.

Now this shortage does not appear to be critically dangerous…yet:

Hospital drug shortages nationwide have hit an all-time high, and Colorado pharmacists warn of disturbing new deficits in basics such as electrolytes, epinephrine, dextrose and other common chemicals.

Health officials do not yet call the shortages life-threatening, but do say delays and substitutions can create side effects, lengthen recoveries and hit vulnerable populations in ICUs and neonatal care…

Calculating harm to patients is more difficult with an electrolyte shortage than, say, a cancer patient missing a treatment, [Jennifer] Davis [pharmacy director at Exempla Lutheran Medical Center]said. A patient low on electrolytes might simply feel less energetic.

The reason that it might seem OK to squeeze hospitals is precisely that it’s hard to point a finger at the drug companies. But notice the comment that these shortages can affect people in ICUs. It’s not hard to imagine a hospital having to ration limited supplies, say if some sort of disaster (big explosion, natural disaster) led hospitals in an area to have a flood of emergency room patients.

And the savings to the drug companies simply shifts costs onto hospitals and may well increase health care costs overall:

Scrambling to cover the gaps through hospital trades or pharmacy brokers also wastes large amounts of staff time, Colorado health experts said.

But on a more basic level, this is all about a disturbing trend to define corporate missions not in terms of producing terrific products or happy customers, but of placing profits first and viewing everything as secondary. John Kay, in his book Obliquity, showed that studies of companies that paired ones that sought to maximize profits versus those that had loftier aspirations showed that the ones with richer, more complex goals also performed better financially. But it is always easier to follow fads, especially since the stock market is geared toward rewarding expediencies, regardless of whether they put lives at risk.

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  1. John Firestone

    I think you meant to write “schadenfreude” not “schaudenfreude”. I remember when the word was little known in America, and set in italics.

    1. Yves Smith Post author

      Thanks! I am over reliant on spell check these days, between my inaccurate typing and lousy proofreading skills. And it does not pick up most foreign language terms.

      1. AbyNormal

        looking forward to the shares on this subject
        Thanks Yves for aiming your beams this direction

  2. jake chase

    Another side effect of Pharma’s fixation on short term profit: drug additives are becoming increasingly toxic. Now, when one suffers an adverse reaction to an antibiotic, he cannot be certain whether the problem is the drug itself or the filler wrapped around it. How many of these pills are now manufactured in Mexico, Viet Nam, Bangledesh?

    Anybody know anything about this?

    1. LucyLulu

      “How many of these pills are now manufactured in Mexico, Viet Nam, Bangledesh?”

      None. In rare cases, during a shortage of a critical drug, the FDA will approve temporary importation of the drug until supply is re-established. But not from Vietnam or Bangladesh, there is still some type of modified approval process. Otherwise, manufacturing takes place in the US at FDA inspected facilities. Raw materials, however, have become increasingly imported however. Free trade, global free markets, and all that.

      Eliminate the evil FDA and regulation, THEN they’ll be manufactured in Vietnam.

      1. LucyLulu

        I was wrong. Drugs are imported from abroad. See post below from AbyNormal. (Thanks, AbyNormal!)

      1. AbyNormal

        Drugs and Pharmaceuticals Mexico (bit of background)

        Pharmaceutical Manufacturing In Mexico Part Of 2nd Largest Production Sector
        After conducting a recent assessment, industry chamber organization, Canifarma, has concluded that any pharmaceutical Manufacturing Plant In Mexico is contributing to the second largest manufacturing sector in the country. This was a surprise even to the industry, not having known how large their presence has been to Mexico’s economy. In fact, it is so substantial it accounts for 1.2% of Mexico’s GDP and 7.2% of manufacturing GDP. (Automotive manufacturing being first.) The country’s 112 million people buy 2.5 billion unit sales ($14 billion U.S) annually. Further, it has been suggested with this kind of purchasing clout, Mexico is a strategic location for such multinational firms as Pfizer, Novartis, Merck and Sanofi, to name a few.

        President of Canifarma and CEO of Merck’s Mexican operations, Robelio Ambrosi commented, “we’re more relevant than we thought”. Merck represents a little over 3% of Mexican pharmaceutical sales. The recent study has further pointed out that the pharmaceutical industry gets $1.52 billion annually in investments, constituting 8% of FDI that the country now receives. As a ‘bright spot’ in a turbulent international economic environment, the Mexican domestic economy remains robust, with pharmaceutical annual sales growing at a sequential 6% year over year. Any pharmaceutical manufacturing plant in Mexico supports 75% of medicine produced in-country it is also consumed in-country. Even so, there is room for growth. It is estimated the industry is operating at 70% capacity. With the global market at $700 billion and American consumers accounting for half of that, Mexico’s pharma industry will likely expand.

    2. Nathanael

      FWIW, all the drug manufacturing companies in India have EXTREMELY good reputations; I’d rather get drugs imported from India than made in the slipshod, poorly-regulated environment of the US.

        1. Paul Tioxon

          Walmart is loaded with generics from India in my area. I did not seem to get the same results as when I was getting generics that were domestic, Teva. I switched to the local independent pharmacy, you know, the one with greeting cards, too much expensive candy in a box in glass cases, and a big magazine selection. Other bric a brac. And, the cost not much more or the same. And the local guy is open 365 days a year til midnight and delivers. All he needs is a retro burger grill and soda fountain for a complete return to the past.

  3. LucyLulu

    It’s not ONLY about profits, though they are involved too. Another problem is that there are fewer companies as a result of mergers and consolidations. There might only be one or two companies making a particular product, esp. low profit generics with high manufacturing costs (IV solutions). So, if one manufacturer experiences a problem, e.g. gets shut down due to regulatory/quality control/recall issues, like Ben Venue a couple years ago, then the other manufacturer must pick up the slack. However, they may not have the excess capacity, or other lines suffer if they divert resources, leading to additional shortages. If word gets out of a possible impending shortage, stockpiling also often occurs, like runs on banks with rumors of account seizures, thus inducing a shortage.

    1. Jim Haygood

      ‘Hospital drug shortages nationwide have hit an all-time high, and pharmacists warn of disturbing new deficits in basics such as electrolytes, epinephrine, dextrose and other common chemicals.’

      Kind of sounds like the old Soviet system, where a creaky sole supplier would grind out goods whose prices bore no relation to the cost of production, and the underpriced ones would be in perpetual shortage.

      We regret the inconvenience, comrades. Everything will be better next year when Obamacare kicks in! /sarc

  4. HS

    Enron lives on. Look how well artificially constraining supplies worked at the gas pump for Big Oil. I’m sure it won’t be long until we here about the pharmaceutical companies taking drug plants offline for “unplanned maintenance” to further restrict the availability of high margin products.

  5. AbyNormal

    According to the FDA, 13% of generic prescription drugs are made in the USA, 43% in China and 39% in India. I guess the remaining 5% includes places like Germany
    According to a NYT article in 2009, the last major drug manufacturing plant producing antibiotics in the US closed in 2004.
    According to the Food and Drug Administration (FDA), demand outstripped the supply of 178 drugs in 2010. The University of Utah Drug Information Service, which works with the American Society of Health System Pharmacists (ASHP) to track shortfalls, says the number was actually closer to 211. Last year, the ASHP and Utah group say, the number of drugs in short supply reached a record high of 267.
    Congress has launched several investigations of the drug-shortage problem, and last year President Obama issued an Executive Order directing the FDA to expand its authority to police drug shortages, including requiring all manufacturers to notify the agency of impending shortages; currently the FDA can only compel companies to alert them if they are the sole maker of a drug they plan to discontinue.

    The Obama Administration also instructed the FDA to report any violations of the government’s price controls on generics, which some critics believe will serve only to inflame the problem rather than resolve it.

    Other observers point once again to the economics, noting that it costs more to manufacture sterile injectables — which include methotrexate and the flu vaccine — while their selling price remains relatively low. They also note that drug shortages are more common in the U.S. than in Europe or other countries, owing primarily to the smaller profit margin for generics here. In the U.K., for example, generic drugs often cost more than brand-name medications because the government health system is the primary purchaser of pharmaceuticals, and their negotiated price for brand drugs are far lower than they are in the U.S.

    That also leads to the siphoning of generic drugs from the U.S. supply, which may also contribute to the shortfalls. “Because the profit margin is higher for generic drugs in Europe and outside the U.S., it’s rare to see a shortage in these drugs anywhere but here,”

  6. Shirley

    Drug shortages? You don’t say!

    I went to Costco recently to fill a generic Ritalin prescription. 60 tabs. This usually costs around $30 (no insurance) at CVS. The clerk who went to ring it up said “wow, this is expensive”. I figured she was kidding. Nope: $78. Why? There’s a “shortage”. Why? Well, why sell something for $30 that you can sell for $80?

    This is America, after all.

    1. Mr. Jack M. Hoff

      Yeah Shirley, “this is america”. I had to laugh at that one. Reminded me of all the times the dumasses would say “Move somewhere else if you don’t like whats going on, this is the best place in the world.” Or put their hands over their hearts and sing the national anthem, tearing at the eyes….
      Ain’t we just so lucky to be able to live in such a “God fearing” nation? LMAO I guess the neocons and neolibs have made a mockery of God.

  7. bobw

    Hey, no problem…can’t we get them from China, the place with the fine quality control?

    1. Capo Regime

      Plenty of other nations (Canada, Mexico) make the same thing for a fraction of the price. Those lazy and socialistic europeans seem to have hosptils and clinics well stocked.

      1. Mark P.

        NC readers who travel can testify that most Americans would be shocked by how much better in most instances medical care now is in most parts of Northern Europe, even before the rapacious costs extracted the American health-insurance/Big Pharma are considered.

        The U.S. medical-industrial complex is numero uno in payoffs to Washington, funneling more through lobbyists than even the financial industry, which is #2.

        Consider the career of Billy Tauzin, a former member (as both D. and R.) of the House of Representatives, and recipient of $11.6 million in 2010 as the highest-paid health-law lobbyist.

  8. TomDor

    Drug shortages are like famines…. they are all man made.
    Injectables undergo extensive validation when manufacturing is ramped-up. The validation process is used to ensure product quality.
    Once your into production – it does not cost much to make a drug – the variables have been figured out and the validated process can move out to lower-cost-production-areas (global labour cost arbitrage). It ain’t rocket science.

    As far as supply/demand curves are concerned: they enter into cost in the following way.
    Supply = cost to limit importation and generic substitutes to protect obscene profits via re-branding, regulatory manipulation and other off-production ploys.

    Demand = massive advertising, huge lobby expenses, over medication of populations and capturing market share (your consumers are not free to shop elsewhere)

    New product (1) = Defer new product research, implementation, introduction (COSTS) to universities and other government supported facilities….ie; get costs of development outside corporate veil and profits inboard.

    New Product (2) = Rebrand existing protected product by devising new use to extend product protection. This lowers development costs but, no new product is actually introduced.

    Bottom line = any product shortage is not a problem with the supply chain…typical minor problems that do exist – whiplash, Just in Time, product revision control etc…..these are minor distribution problems.
    The real culprit is product and market manipulation in regards to maximizing profit using less-than-free-market principles (polite term) and nothing to do with classic supply/demand curves.

  9. Reverb

    My childhood friend, now the head of one of the 50 state medical societies, confirms that docs, by default, are being forced to use suboptimal 2nd or 3rd choice drugs in surgery.

  10. Benoit Essiambre

    I have a feeling these shortage stories are put out there by pharmaceutical companies to justify future price increases. I’m a little disappointed that this blog is falling into the trap.

    1. AbyNormal

      your disappointed in this blog, based on your feelings?

      get a grip

      with basic antibiotics not manufactured here since 2004, what would you expect from ‘free’ trade wars

  11. Eric Patton

    [T]his is all about a disturbing trend to define corporate missions not in terms of producing terrific products or happy customers, but of placing profits first and viewing everything as secondary.

    This is the way capitalism operates. If you’re pro-capitalism, you should accept this. If you’re not, then tell us what you’re for.

    1. YankeeFrank

      Actually, no. Capitalism does not necessitate placing maximization of profits in the short term over every other consideration. Profit can be one of a variety of factors, such as providing a valuable service in a consistent way that means profits may not be completely maximized in the short term, but that by providing a reliable service over time, long term profits and the good will and benefit provided mean a stable and long term market which translates into more profit over time.

      The fact that there has not been a new class of antibiotic discovered since 1987 is a market failure, largely due to the fact that pharma companies have decided that one-shot type products are not worth developing, and they prefer to develop drugs that don’t cure anything, but require long term usage for chronic problems. This is total market failure to provide a basic medical service. If you’re not for good healthcare, what are you for? What you describe is a form of capitalism that only works if monopolies dominate an industry. Otherwise small upstarts will be able to fill the niches ignored by the big players, and slowly jockey then out of position. But crony capitalism, barriers to entry for small players erected by monopolists, all help to aid your vision of capitalism to flower in all its corruption and failure to provide adequate supply of needed medicines.

      You can pretend capitalism has to be a short-term maximization of profits scheme, but how did that work out for the banks? Of course they got the government to bail them out but that is certainly not capitalism as you define it. The capitalism you define is full of “creative destruction” I’m sure, and the idea of government bailing out failed capitalist enterprise with taxpayer money is anathema to the type of greed, aggressive profiteering and “free market” piracy you so admire.

      But don’t pretend that your capitalist vision is the only vision. Or go ahead and pretend, but that won’t make it so.

      1. Nathanael

        There are a number of thinkers, starting with Adam Smith, who have said that left alone, capitalism will always degenerate into loot-and-burn thief-based monopolistic crony capitalism.

        So far these thinkers seem to be mostly right.

        The “escape valve” appears to be high redistributive taxation: take the money away from the rich and they can’t afford to buy the government and make the system degenerate.

    2. LucyLulu

      I’m for a good product, with good service, at a good price. That has always been my vision of capitalism. It meant profits for the producer, and satisfied customers. A win-win situation.

      Predatory businesses should lose market share and fail.

  12. Dave of Maryland

    Stop messing with symptoms. What we have is a lousy system of medicine. It was imposed by law a century ago, which is to say the sick did not want it. It has failed, it needs to be thrown out wholesale. The sooper-dooper herbalism we had before was superior, and dirt cheap.

    The Cubans have barefoot doctors. The Chinese have Traditional Chinese Medicine, which Mao came up with. In India there is Ayurveda. Europe has its own system – the best of all, I think, but as that’s the enemy we love to hate, it will have to wait. The failure of “science-based” medicine is by now overwhelming.

    1. Yearning to Learn

      “The sooper-dooper herbalism we had before was superior, and dirt cheap”

      No it was not.
      Herbalsim has its place. Heck, half of the medications (or more) that we have are derived from Herbalism. But life expectancies and outcomes of treatment are far better under our currant system than they were under a purely herbalist environment.

      Obviously some medications are better than others. And some are just downright toxic. But anybody who thinks that life was better without pain medicines and antibiotics should honestly evaluate what happened to a person who steps on a nail with tetanus under the Herbalist system. Or a person with appendicitis. Or a person with Leukemia.

      on a side note: I’m not a hater of alternative medicine. I routinely prescribe Yoga and Accupuncture and routinely use Eccinacea and Goldenseal and St John’s Wort and Star Anise and Honey and a host of other alternative remedies. They have their place.
      My heritage is German, and the Germans use more alternative medicine than almost any other culture (by some standards, more than China, India, or Japan).
      They do extensive work and research on botanicals.
      A great resource is “the Commission E Monographs” if one is interested.

      Thus: I’m not hostile to Alternative Medicine. Far From it.
      But to pretend that they are “superior” is simply not true.

  13. Mcmike

    Its a version of the tragedy of the commons.

    The economy is dominated by a few companies trying to eat up all the grass, and no one is planting any seeds.

  14. LAS

    But this is what is so neat … I’ve heard it from friends working in drug development … the drug/biological companies ARE working on new drugs … they are working on personalized medicine. That is drugs for people to take before they get sick, according to their genotype, phenotype or exposures. These drugs are meant to be sold to affluent people who have no evidence of disease.

    What’s disturbing is that the delivery of drugs and healthcare to persons with clear evidence of disease is being neglected and/or relegated to non-profitable activity.

    1. petridish

      I know that cursing is not often done in these comments, but this one deserves a resounding WTF???? I can’t tell if this is supposed to be sarcasm or not. “Neat.”–REALLY.

      “That is drugs for people to take before they get sick, according to their genotype, phenotype or exposures.” (Do you know what a phenotype is? It’s the way you LOOK.)

      OK. After I stopped laughing, I decided to reconsider.
      “These drugs are meant to be sold to affluent people who have no evidence of disease.” Maybe not such a bad idea. That’s a herd that needs to be thinned.

      I hope they’re working specifically on a cure for the Jamie Dimon and Lloyd Blankfein phenotypes and I hope it’s really expensive since those are the only good ones. (No sarcasm here.)

    2. Yearning to Learn

      actually, that is partially true.

      Some medicines have always been meant to prevent disease (such as Vaccines)
      others are meant to treat a condition (such as antibiotics)

      the same process will happen with so called “personalized medicine”
      Some of them will be meant to prevent disease (what if you could take a personalized medicine that would prevent Alzheimers for instance?)

      and others to cure disease(especially interesting is the cancer world).

      nothing wrong with prevention.

  15. McMike

    Have no fear, once the State DoH/CDC/FDA decides this is a “crisis”, they can easily create a fasttrack to enable rapid production, which mainly entails preemptively absolving producers of liability, and removing annoying “hurdles” such as trials, testing, etc.

    Almost like the whole “shortage” thing is deliberate…

  16. Mannwich

    I wonder if this is spilling over to the pharmacies? I’ve been seeing shortages of my regular prescription there the last couple times.

  17. Oren

    While I agree with all of you points (you rock…), I would restate the beginning of the second paragraph as “relentless pursuit of MARGINS”. Efficiency, real or imagined, is a means to that end.

  18. washunate

    Isn’t this a natural outcome of allowing firms to possess market power? I don’t see how the drug dealers are operating in a manner inconsistent with their own best interests. I’ll believe they’ve stretched cost cutting too far when they go out of business to new entrants offering better products (ha).

    Why would they care if their activities raise costs for the overall healthcare industry? That tab gets picked up by taxpayers, insurance customers, and patients. As long as our current leaders are in power, the government isn’t going to do anything drastic like change IP laws, negotiate volume discounts, stockpile strategic reserves, break up hospital chains, or implement national health insurance/healthcare.

    1. Mark P.

      ‘Isn’t this a natural outcome of allowing firms to possess market power?’

      Yes. Rain is also wet.

  19. Yearning to Learn

    we get weekly emails in the hospital i work at regarding which drugs are in shortage.
    It’s typically about 5-10 drugs long every week.

    It’s often doable. But sometimes it really is a nightmare.

    The problem of course is that a lot of the harm is not immediately recognizable.
    For instance: what if a patient misses their antacid for a few weeks. They may have no immediate symptoms, and then have a GI bleed 2 months later. Not even clear it would be tracked back correctly.

    Of if the needed antibiotic is not available and we have to use a second tier one, and the infection proceeds. It may not be easily tracked back to the fact that we had to use a less effective antibiotic. (this happened to me a few weeks ago.)

    1. AbyNormal

      Exactly the boots-on-the-ground 411 i’ve been looking for today.
      Thank You YtL! (please continue posting/educating)

      And what would humans be without love?”
      RARE, said Death. pratchett

  20. MaroonBulldog

    In case you haven’t noticed, the big pharma companies these days are run by bean counters, not pharmacologists, chemical engineers, or marketers. Their decision criteria are ruthlessly financial.

  21. Gus Wynn

    My mother told me this morning her doctors were “shocked” when Medicare denied their usual 6-month request for a MRI to monitor her breast cancer.

    They will appeal, but the woman on the phone mentioned the sequester as a reason.

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