Date:
Author:

Medication shortages: how Ontario came to rely on one manufacturer


Concerns about quality and a fire at a Sandoz plant in Quebec exacerbated the current drug shortage in Canada.

Many are asking why the shutdown of a single facility could threaten the nation’s supply of vital prescription medications.

While federal and provincial governments have been eager to play the blame game, a shared sense of responsibility could lead to important changes to the way we secure the nation’s drug supply.

The Sandoz crisis

On March 4 a fire broke out at a Quebec manufacturing facility of the multinational generic drug manufacturer Sandoz. The fire halted production and led to medication shortages across the country. While the fire made for dramatic headlines, shortages had already been a problem at that factory for months. A few months earlier, the United States Food and Drug Administration (FDA) had warned Sandoz about potential quality problems, and Sandoz had slowed down its supply as it worked to improve its production processes.

The resulting shortage has hit hospitals especially hard because the Sandoz plant manufactures the vast majority of injectable medications used in Canada. Most oral medications, in contrast, are produced by multiple suppliers.

But why was one factory manufacturing such a large proportion of so many important drugs?  And who is responsible for ensuring a stable supply of such drugs in Canada?

The political blame game

The federal Minister of Health, Leona Aglukkaq, has argued that the blame lies with the provinces. In a special parliamentary session devoted to the drug shortage, she stated that “the shortage has been created largely by the decision of the provinces and territories to pick a sole source supplier, and that supplier cannot provide the drugs now.”

Provincial governments have pushed back, arguing that it is Health Canada’s role to regulate suppliers, and to inform provinces about changes. Deb Matthews, Ontario’s Minister of Health and Long-Term Care said “we did not get the advance notice that we should have received” and “it is the responsibility of the federal government to make sure that we’re aware of slowdowns in production in time to actually prepare a response to that.”

But neither government has clearly acknowledged that one of the causes of the drug shortage can be found in any introductory economics textbook—when prices are pushed too low, suppliers reduce production and sometimes exit the market altogether. When there is just one supplier, a single event—like a fire at a single manufacturing plant—can trigger a major crisis.

Market concentration and the role of group purchasing organizations

Hospitals in Ontario purchase most of their drugs through group purchasing organizations (GPOs). The two largest GPOs in Ontario are Medbuy and HealthPRO. Both organizations are governed by their member organizations, which are mainly hospitals and other health care providers. GPOs were established to increase efficiency for member hospitals. Instead of each hospital signing its own contracts with multiple different pharmaceutical companies, GPOs deal with the pharmaceutical companies and the hospitals only have to deal with GPOs.

GPOs drive down prices by buying in bulk. But the downside of negotiating aggressively is that sometimes only one manufacturer remains willing to supply a particular drug at the negotiated price. And what appears to have occurred in Canada is that Sandoz was the only willing manufacturer not just for one important medication, but for dozens.

Helen Stevenson, a former Assistant Deputy Minister responsible for prescription drugs in Ontario says that “in an ideal world we’d have many manufacturers of every drug, but that’s not practical and there is not enough of a market for these products, so manufacturers specialize in certain types of drugs.” In Canada, Sandoz has become the manufacturer that specializes in drugs that are administered via injection.

Richard Jones, a Vice-President at Medbuy, says that “GPOs are complying with the procurement policies of governments – to reduce costs to the public purse. However, neither governments nor GPOs can control the business decisions of corporations affecting the product offerings they make available in Canada.  One unintended consequence is that the marketplace can be left with a single supplier for a key product leaving Canadians vulnerable to any production related issues.”

GPOs gather information from member hospitals about the amount of medications each hospital needs, and then ask pharmaceutical companies to make corresponding bids. The lowest bidder typically wins the entire contract. This can drive other producers out of the market, and with only one remaining supplier, prices can even increase. Alan Robinson, a pharmaceutical industry consultant in the United Kingdom, says, “When you get down to one supplier you run the risk of supply problems but there is also the point that you are also handing more pricing power to the monopoly supplier.”

The Competition Bureau, a federal agency, expressed similar concerns in a 2008 report. The authors of the report noted that “a frequently expressed concern regarding competitive tendering is that it could lead to shortages when winning bidders are unable to meet demand.” The report also suggested potential solutions to this problem, such as including penalty provisions and selecting more than one supplier.

Canadian GPOs do include penalty clauses in their contracts with drug companies.  But it appears that the other solution suggested by the Competition Bureau—that of selecting two or more suppliers—was not adopted by GPOs. In contrast, Robinson says that health authorities in Sweden “choose the three cheapest products in a monthly tender thereby giving greater security of supply.”

International markets – a small fish in a big pond

In order to participate in the Canadian market, drug manufacturers must comply with a strict set of regulations from Health Canada. These regulations are designed to ensure that medications are safe and effective. According to Health Canada, nearly 80% of drugs consumed by Canadians are manufactured outside our borders. However, most drug manufacturers around the world have not been approved to supply the Canadian market, and until the Sandoz crisis, neither the GPOs nor federal or provincial governments were actively encouraging foreign drug manufacturers to apply for approval.

Going forward

It seems unlikely that GPOs will rely on single suppliers in the future as heavily as they have relied on Sandoz in the past.  Alyssa Stuart, Director of Marketing and Communications at HealthPRO noted her organization is considering “multi-supplier awards” as a response to the Sandoz crisis. Broadening the supply base may result in higher prices, at least over the short term, and this may be the price we need to pay for a stable supply of vital prescription medications.

Some have suggested that Canadian provinces consider establishing crown corporations for manufacturing drugs. However, a Health Canada spokesperson says the federal government is not interested in interfering with the pharmaceutical industry. She noted that “industry is and will remain responsible for manufacturing and supplying drugs to the Canadian market.”

In a rare show of unanimity last month, federal MPs voted to work with the provinces, territories and the pharmaceutical industry to develop a strategy to better anticipate and manage medication shortages. Although federal politicians were unanimous about the need for a national strategy, there is much less agreement on what concrete steps should be taken next. Jackie Duffin, a medical historian and hematologist who has established a website resource on the Canadian drug shortage, notes that there is an unwillingness to accept responsibility even though in this context “responsibility isn’t equal to blame.” She also notes, somewhat ominously, that the recent shortage triggered by the fire at Sandoz may be “just the tip of the iceberg” and that we may suffer even worse medication shortages in the future. If she is correct, we urgently need to stop the blame game and collectively work toward finding solutions.

Who do you think is most responsible for ensuring that hospitals have a secure supply of prescription drugs?

Loading ... Loading ...

Leave a Comment

Enter the debate: reply to an existing comment
8 comments

  1. Phil Zweig

    You’re on the right track about GPOs, but the Canadian drug shortage was Made in the USA by US GPOs. These U. S. purchasing cartels are responsible for the drug shortages in the U. S., Canada, and elsewhere around the world. Keep in mind that Sandoz Canada is a subsidiary of Princeton, NJ-based Sandoz Inc., itself a unit of Novartis AG, a Swiss drug maker. The big U. S. GPOs have exclusionary contracts with Sandoz Inc. and other generic drug makers that have concentrated production in a handful of suppliers. That’s why Sandoz Canada is the only Canadian supplier of many of the drugs in short supply. Further, GPOs don’t drive down prices. They raise them. Competition, not cartels, drives down prices.

    To understand the root cause of this crisis, see this 1/4/12 white paper, “Connecting the Dots: How Anticompetitive Contracting Practices, Kickbacks, and Self-dealing by Hospital Group Purchasing Organizations (GPOs) Caused the U. S. Drug Shortage,” by Patricia Earl and Phillip L. Zweig. It’s available at http://www.canadadrugshortage.com and http://www.puncturemovie.com, which also contains extensive documentation on GPO abuses, This material includes four U. S. Senate Antitrust Subcommittee hearings, federal and state investigations, media exposes, antitrust lawsuits, a book, and even a Hollywood movie.
    The most effective thing the Canadian government can do to address the drug shortages is to write to top U. S. officials—President Obama, Secretary of the Department of Health and Human Services Sebelius, FDA Commissioner Hamburg, Senators Tom Harkin (D-IA), Michael Enzi (R-WY), Richard Durbin (D-IL) and others demanding that they put a stop to corrupt, anticompetitive GPO practices. They should make those letters public so Canadians can understand what’s really going on here. This scandal is healthcare’s version of Wall Street.

    • Irfan Dhalla

      Thanks for your comment Phil. My understanding is that the GPOs in the US are for-profit corporations, which is quite different than the Canadian situation, where the GPOs are an extension of the (non-profit) hospital sector. So, I don’t think there’s an antitrust issue here the way there might be in the United States. The links between the US situation and the Canadian situation would still be worth exploring though, and hopefully somebody will do that carefully.

  2. Andrew Holt

    This provides a good case study on why it is important to retain a competitive market in the supply chain for health care supplies and equipment. It would be prudent for provincial and federal governments to evaluate other parts of health care where excess consolidation adds considerable risks that far outweigh any short term reductions in price.

  3. David Henry

    This is a very useful summary of the situation in Canada as it applies to shortages of injectables. Shortages are being felt around the world for both parenteral and oral medications. So there is a wider problem, and something ails the generic drugs industry. I wonder if the writers have a view on this? This should be a boom time for generic manufacturers as many widely used drugs have come off patent. So is the problem excessively low prices for generics coupled with bad procurement practices? Or is there something deeper? The large pharmaceutical companies have largely got out of the business of drug discovery and actual drug production and the industry as a whole became dependent on blockbuster drugs and large profit margins during the 1990s. Has this led to a weakened sector that is having difficulty surviving in a market with much narrower margins and competition from India?

    • Irfan Dhalla

      Thanks David. I agree it should be a “boom time for generic manufacturers.” You raise a good point about whether domestic companies are having a hard time surviving in a market with narrower margins and competition from India. But if there is really competition from India, then why do we have a shortage here at all? Is there a shortage of intravenous furosemide in India as well? I wonder whether our barriers to entry for foreign firms are too restrictive. Obviously we need to be concerned about quality, but we (i.e., Health Canada and the FDA) could inspect foreign plants carefully and frequently.

  4. Phil Zweig

    Irfan,
    Maybe I didn’t make the point clear enough. Read our white paper so you can understand how the U. S. system works. You seem to think the Canadian generic drug marketplace operates in a vacuum. It doesn’t. The Canadian market is a small fraction of the U. S. market. Again, U. S. GPOs are responsible for the U. S. AND Canadian drug shortages, and probably the generic drug shortages globally. The Sandoz plant in Quebec also made generics for the U. S. market based on contracts between Sandoz Inc., Premier Inc. and other big U. S. GPOs. If the plant made drugs just for the Canadian market the FDA would not have jurisdiction.

    • Irfan Dhalla

      Phil – I did read your white paper and found it very informative. Kudos to you for your investigative work. And I agree of course that the Canadian market is tied to the international market, and that Sandoz supplies US GPOs as well.

      But we should not conclude that US GPOs are entirely responsible for the Canadian drug shortage. Our own governments, hospitals, GPOs, etc., have a responsibility to ensure that Canadians have access to the medications they need. If all our doctors and nurses went to work in the US, would we not shoulder some of the responsibility for that unfortunate outcome ourselves?

      I also note that you quote Michael Porter as saying “Most troubling is that some [American] GPOs are funded by suppliers rather than solely by hospitals.” Our GPOs are funded by hospitals – yet we still have a major problem.

  5. Markus

    1. The blame should be put on the provincial and federal governments. They keep pushing for bigger and bigger contracts expecting lower and lower pricing, and measuring public procurement performance solely on savings. This leads to market disruption single or sole-sourcing with its inherent risks. Instead of increasing competition which is a government mandate, they lower it. The private sector quickly figured this out with the trend to global sourcing.
    2. Penalties don’t help, even if you collect on them they don’t prevent such disruption, and how to you accurately measure the cost?
    3. Correction: Medbuy and HealthPro are not the largest GPOs in the healthcare sector, they are the only two in Canada, and headquartered in Ontario. There are other buying groups but they are not true GPOs.

Submit a comment