Senate Commerce Committee Report on Drug Shortages and the Gray Market “Where Have They All Gone”

Drug shortages continue to make the headlines in both mainstream media and on Capitol Hill. According to drug shortage tracking conducted by the Food and Drug Administration’s (FDA) Center for Drug Evaluation and Research (CDER) and the American Society of Health-System Pharmacists (ASHP), drug shortages more than quadrupled between 2005 and 2011.  For example, CDER reported that drug shortages increased from 61 in 2005 to 251 in 2011. 

FDA defines a drug shortage as “a situation in which the total supply of all clinically interchangeable versions of an FDA-regulated drug is inadequate to meet the current or projected demand at the patient level.”   

To address this issue, Congress passed in July the Food and Drug Administration Safety and Innovation Act (FDASIA), which gives FDA significant new authorities to combat drug shortages, as we previously reported.  While numerous causes for drug shortages have been identified, one serious problem remains: the “gray market.”  Consequently, the U.S. Senate Commerce, Science and Transportation Committee recently held a hearing and published a report addressing the gray market.  

Background on Congressional Investigation 

The rising number of drug shortages has been concentrated primarily in the area of generic sterile injectable drugs, liquids packaged in sterile glass vials that are

“parenterally” administered to the body through syringes or an intravenous (i.v.) administration set.  Drugs administered in this manner reach their target treatment area more quickly than oral drugs, but also carry greater risks of infection and complications caused by incorrect dosages.  Administering a drug intravenously usually requires a trained health care professional who can carefully monitor the dosage and the patient’s reaction to the drug.  As a result, drug shortages are affecting mostly acute care patients being treated by providers in hospitals and out-patient facilities. 

Of the 251 drug shortages the CDER reported in 2011, 182 of the shortages (73%) involved sterile injectables.   An October 2011 analysis of short-supply drugs conducted by the IMS Institute for Healthcare Informatics also found that most of the reported shortages involved generic sterile injectable drugs.  The largest numbers of drugs in this group (20) were sterile injectables used in chemotherapy treatment for cancer patients. The sterile injectables in shortage have also included frequently-used items such as anesthetics for surgery, “crash cart” drugs used in emergency rooms, and electrolytes for intravenous feeding. 

In October 2011, House Committee on Oversight and Government Reform Ranking Member Elijah Cummings opened this investigation by sending information request letters to five “gray market” companies that were taking advantage of drug shortages to charge exorbitant prices for drugs used to treat cancer and other life-threatening conditions.  These companies’ questionable business practices put patients at risk and cost the United States health care system hundreds of millions of dollars each year. 

During drug shortages, hospitals are sometimes unable to buy drugs from their normal trading partners, usually one of the three large national “primary” distributors, AmerisourceBergen, Cardinal Health, or McKesson.  At the same time, hospitals are deluged by sales solicitations from gray market companies offering to sell the shortage drugs for prices that are often hundreds of times higher than the prices they normally pay.   

The five companies were aggressively marketing five prescription drugs to hospitals that were at the time in short-supply, according to the FDA.  Four of the drugs are used to treat various forms of cancer, and one is used to treat seizures during pregnancy.  The letters asked the companies where they had obtained the short-supply drugs they were offering for sale and how much they were charging hospitals for the drugs.  

In December 2011, Senator John D. Rockefeller IV, Chairman of the Senate Committee on Commerce, Science, and Transportation, and Senator Tom Harkin, Chairman of the Senate Health, Education, Labor, and Pensions Committee, joined Ranking Member Cummings in the investigation.  Since that time, the three Members of Congress have requested information from more than 50 prescription drug industry experts, regulators, and stakeholders about how short-supply prescription drugs are distributed, marketed, and sold. 

A key source of information in the investigation has been “drug pedigree” documents, which record the distribution route a drug has traveled since it left the manufacturer. Many businesses that distribute drugs in the United States are required, either by state or federal laws, to provide these pedigrees to their customers. 

Congressional investigators carefully studied 300 of these “paper pedigrees,” which list the names of all parties that purportedly took possession of the drug and the dates of their possession. The 300 pedigrees show 125 different companies that were involved in selling short-supply prescription drugs.  The Committee used the pedigrees to reconstruct how and when drugs entered gray market distribution chains and contacted companies listed in the pedigrees to collect information regarding the prices for which they purchased and re-sold the drugs. The Committee obtained specific information from the companies listed on 58 of the pedigrees, including the prices for which they purchased and sold the drugs and the dates they possessed them. 

The drug “pedigree” documents showed that some short-supply injectable drugs “leak” into longer gray market distribution networks, in which a number of different companies – some doing business as pharmacies and some as distributors – buy and resell the drugs to each other before one of them finally sells the drugs to a hospital or other health care facility.  In more than two-thirds (69%) of the 300 drug distribution chains reviewed in the investigation, prescription drugs leaked into the gray market through pharmacies.  Instead of dispensing the drugs in accordance with their professional duties, state laws, and the expectations of their trading partners, these pharmacies re-sold the drugs to gray market wholesalers.  Some pharmacies sold their entire inventories into the gray market.  The wholesalers in turn sold the drugs − usually at significant markups − to other gray market companies. 

Gray Market Companies Aggressively Mark Up Drug Prices 

As the drugs pass through these gray market distribution chains, they are significantly marked up, sometimes to prices that are hundreds of times higher than the prices that hospitals and other health care providers normally pay. The markups in these chains often bear no relation to the companies’ cost of purchasing, shipping, or storing the drugs.  Instead, they reflect intent to take advantage of the acute demand for short supply drugs by charging health care providers exorbitant prices.  Some companies marked up vials by more than 100%, even if they never took physical custody of the vials or only held them for a short time. The hospital that purchased the drug ended up paying $600 per vial for a drug that a pharmacy had purchased for $7 per vial.  Hospitals purchase short-supply drugs at these exorbitant prices because, as one hospital explained, “We have no other choice … We have to take care of our patients.”  The investigation also found that: 

• “Fake Pharmacies” Acquire Prescription Drugs from Authorized Distributors and then Sell Them Into the Gray Market: A number of businesses hold pharmacy licenses that do not dispense drugs, but instead appear to operate for the sole purpose of acquiring short-supply drugs that can be sold into the gray market.
• “Drug Brokers” Recruit Pharmacies to Purchase Drugs for the Gray Market.
• Gray Market Business Practices Are Widespread: Pedigree and price information collected for five different short-supply injectable drugs, documenting the activities of 125 different companies, showed similar patterns of leakage and aggressive gray market price markups.  For all five drugs, units normally costing $10 to $20 were regularly marked up to prices of $200 or more while they traveled through the gray market.
• Gray Market Drugs Are Marked Up as They Quickly Pass from Owner to Owner.  On average, the prescription drugs examined in the investigation were owned by three to four different gray market businesses before being sold to a hospital; most of the drugs traveled through the gray market in five days or less.
• Gray Market Companies Sometimes Charge Hospitals Significantly Different Prices for the Same Drug Product on the Same Day.  

The Appearance of Gray Market Companies 

As a growing number of sterile injectable drugs went into short supply in 2010 and 2011, hospitals around the country began receiving increasing numbers of telephone,

fax, and e-mail solicitations from “gray market” drug companies.  These companies claimed to have supplies of short-supply drugs that the hospitals could not obtain through their normal distribution channels.  The companies’ offers generally mentioned the fact that the drugs were in short supply and often suggested that their supplies were very limited. 

The gray market companies appeared to be taking advantage of supply shortages to sell the drugs at prices much higher than hospitals paid their normal suppliers.  An analysis by the Premier Healthcare Alliance of 636 solicitations made to hospitals in early 2011 found that gray market companies were selling short-supply drugs at prices that were on average 650% higher than the prices hospitals paid for the drugs through their group purchasing agreements. In some cases, companies were selling the drugs at markups as high as 3,000% to 4,000% over their typical contract prices.  In addition, some hospital pharmacists believe that gray market wholesalers contact them to learn which drugs the hospitals are having trouble acquiring so that the gray market wholesalers can quickly attempt to buy quantities of those drugs. 

When the Institute for Safe Medication Practices (ISMP) surveyed a large group of hospitals in July and August 2011, it received hundreds of comments complaining about the gray market solicitations and asking “why hospitals can’t get these products, but the ‘scalpers’ can.”  Hospital pharmacists also “reported feeling pressured by physicians and hospital administrators to purchase medications from the gray market.” 

Choosing between having no supply of a drug or purchasing the drug at an exorbitant price from an unknown gray market company raised difficult ethical and business questions for hospitals.  Many hospitals and other stakeholders expressed concern about the safety of drugs purchased from gray market companies because they did not understand how gray market vendors obtain short-supply prescription drugs.  Hospitals do not know where the drugs come from or if they were stored properly. 

How Drug Distribution Chains Typically Work 

A typical drug distribution chain has three elements: (1) a manufacturer, which creates and sells a prescription drug to (2) a wholesale distributor, which then sells the drug to (3) a hospital or pharmacy, which dispenses it to patients.  In some cases, additional authorized parties might be involved in these chains.  Drug manufacturers sometimes sell their products to “repackagers,” before the drugs are distributed.  In addition, large “primary” distributors sometimes sell drugs to “secondary” distributors, which then sell the drugs to pharmacies or hospitals.  Such sales to secondary distributors comprise only a small percentage of primary distributors’ sales. 

Distributors that have an ongoing relationships with manufacturers serve as “authorized distributors of record” (ADR) for the manufacturers.  About 85% of all revenues in the wholesale market are generated by three national distributors −AmerisourceBergen, Cardinal Health, and McKesson − that serve as ADRs for many manufacturers.

Distributors that predominantly buy prescription medicines from the manufacturers and predominantly distribute them directly to health care providers such as hospitals and pharmacies are called “primary” distributors.  “Secondary” distributors are also sometimes ADRs, and they obtain access to drugs from primary distributors or other sources.   

Distributors and pharmacies play distinct roles in the distribution chain and are subject to different regulatory and licensing requirements.  Under federal law, distributors have the authority to purchase drugs from manufacturers and deliver them to pharmacies, hospitals, and other parties that are not patients.  Pharmacies are the end point of the chain, responsible for dispensing the drug in a manner that is consistent with the appropriate treatment of a patient. 

In addition to the obligations that come with their licenses as distributors or pharmacies, companies involved in drug distribution chains often also have contractual obligations to their trading partners.  Most large distributors purchase drugs from manufacturers pursuant to ADR agreements, which sometimes restrict the distributors’ freedom to buy and sell the drugs.  The drug manufacturer Hospira, for example, requires its ADRs to commit that “they will purchase Hospira products directly from Hospira, and only sell Hospira products to end users of our products.” 

Primary wholesale distributors commonly place similar “own use” restrictions on their customers.  For example, one of the primary wholesale distributors requires most of its customers that hold themselves out as “Final Dispensers,” such as pharmacies, to certify “that they do not and will not redistribute prescription pharmaceuticals purchased from [that primary wholesale distributor] into the Secondary Market.”  The same primary wholesale distributor also requires its secondary wholesaler customers to sell to “Final Dispensers” the pharmaceutical products they purchase from that primary wholesale distributor.  Another primary wholesale distributor typically requires its final dispenser customers to agree to use purchased products for their “own use” and its secondary wholesaler customers to agree to sell purchased products only to final dispensers. 

Ensuring that drugs pass through as few hands as possible on their way to patients helps to ensure the integrity and safety of the drug supply chain. According to the FDA, counterfeit drugs are most likely to be introduced as part of a drug supply chain involving multiple wholesalers.   

Detailed Findings of Senate Report 

1. Significant Markups Throughout Gray Market Distribution Chains.  The Committee found that inflated prices were often the result of unnecessarily long distribution chains, diverted into longer “gray market” distribution networks that include significant markups at almost every level, often hundreds of times higher than the prices the hospitals and other health care providers normally paid for them. 

2. Similar Results Found for All Five Shortage Drugs Examined.  The pedigree and price information that was collected on the five sterile injectable drugs that were the subject of this investigation show a similar pattern.  

3. Additional Information on Gray Market Chains.  Some of the most significant results of this analysis were the following: 

• In more than half of the transactions, prices for the drugs increased by $200 per unit or more while traveling through the gray market. In six chains, the price increase was $500 or more per unit. The largest increase was $975 per unit.
• On average, drugs traveling through these gray market chains were owned by three to four separate business entities before reaching the hospital or provider that administered the drugs to a patient.
• Most of the drugs traveling through the gray market (60.8%) were sold to hospitals within five days or less after they entered the gray market.55 In 13 chains, the drugs remained in the hands of gray market companies longer than 10 days. 

The hospitals that purchased short-supply drugs through the 300 gray market chains staff reviewed include a range of small and large hospitals, urban and rural hospitals, for- profit hospitals, and military, veteran, and other nonprofit hospitals located in all regions of the United States. To estimate the financial impact that gray market purchases have on hospitals, congressional investigators compared actual gray market prices for one form of each of the five drugs reviewed to hospitals’ contract price for the same drug product. The per-unit costs in the gray market were dramatically higher than the hospitals would have incurred to purchase the same drugs from their primary wholesale distributors: 

Analysis revealed that hospitals overspent nearly $750,000 on over 2,100 units of the five prescription drugs examined as a result of purchasing the drugs from the gray market instead of their normal distributors. The more than 2,100 units included in this analysis are just a fraction of the total number of drug units that were sold in the 300 gray market chains. 

How Drugs Enter the Gray Market 

1. Drugs Entering Gray Market Primarily Through Pharmacies 

2. Some Pharmacies Selling Their Entire Inventories into Gray Market.  Evidence that some pharmacies are selling short-supply injectable drugs to gray market wholesalers suggests that these pharmacies are not complying with their states’ pharmacy laws that limit re-sales. Some states allow pharmacies to re-sell portions of their inventories in emergency circumstances, while other states permit up to 5% of pharmacies’ annual sales to come from re-selling their drugs. The parameters of these exceptions rules vary from state to state. Some states’ rules appear to be intended to resolve local supply problems by allowing pharmacies to sell drugs to each other, while other states’ rules may permit pharmacies to re-sell their drugs to wholesalers.

Documents obtained during the investigation indicate that some pharmacies are clearly exceeding these limited re-sale exceptions.  

3. Using Pharmacies as Purchasing Agents for Shortage Drugs.  Documents obtained during the investigation indicate that wholesalers and independent brokers often approached pharmacies and convinced them to purchase shortage drugs on their behalf, promising significant profits.  Twenty-one of the 25 pharmacies that responded to requests for information about their purchases and sales of shortage drugs stated that wholesalers or brokers representing wholesalers had asked them to purchase shortage drugs for them. 

Documents obtained during the investigation also reveal that brokers and consultants monitor the release of new drug shipments from manufacturers and their distributors. For example, on January 20, 2012, one broker sent an e-mail indicating that a new batch of metoprolol had been released, and asked various pharmacies to buy up the shortage drug, “we just [sic] found some it’s been a release find it get sale it [sic].”

Metoprolol is a drug used to improve survival after a heart attack and in the treatment of heart failure.  Wholesalers operating in the gray market purchased a significant portion of prescription drugs through pharmacies.  

4. Establishing Fake Pharmacies.  Documents obtained during the investigation identified numerous entities that appear to have established “fake pharmacies” to gain greater access to shortage drugs. After obtaining these drugs, the “pharmacies” typically did not dispense the drugs to patients pursuant to their pharmacy licenses, but instead sold them to wholesalers they also owned or in which they had interests. 

Gray market drug distributors sometimes cite shipping costs as one of the reasons they mark up the per unit price of the drugs they sell.  But in many transactions examined in the investigation, the gray market companies billed shipping as a separate line item cost on their invoices. The shipping costs varied, but generally were less than $100 per invoice.  In some transactions, the gray market companies never took physical possession of the drugs and instead arranged for drugs to be “drop shipped,” directly from the company from which they purchased the drugs, to the customer to which they sold them.