The government should not take over the manufacturing of critical care drugs

This article is the second part of a debate. To read the introduction and the arguments in favour of nationalizing drug manufacturing, click here

Introduction

The issue of drug shortages is a critical one and deserves a sober, evidence-based policy discussion by governments and experts. I argue that generic drug manufacturing should not be nationalized for three reasons.

Nationalization projects are generally inefficient and wasteful

Governments in Canada and around the world have proven many times that their operation of activities normally left to the private sector generally coincides with inefficiency, waste and delays – for which taxpayers pay the price. There is no shortage of Canadian examples of government-run institutions that have lagged behind private-sector peers in other countries: VIA RailCanada PostMetrolinx – this list is long.

Put simply, our governments are not in, nor should be, in the business of operating a drug manufacturing facility, let alone knowing how to do it efficiently. In addition to the numerous anecdotal examples, several studies both in Canada and globally have concretely established that privately run organizations are more efficient, dynamic and, over time, contribute more to the nation’s social and economic welfare through taxes, jobs, etc. And while the example of CivicaRX in the U.S. is interesting and appears to be going well, it’s important to recall it is not a public, government-owned entity. Rather, it allows for-profit U.S. hospital systems to leverage economies of scale in pursuit of their profit motive: lower costs and increased reliability.

It would be very expensive

COVID-19 has brought to the fore the topic of supply repatriation and flexibility across many industries – in many cases, rightly so. However, what is not as prominent in the discussion to date are the massive costs of doing so. Take generics drugs as an example. China and India are top exporters of generics globally, a position supported by their access to APIs and ability to produce cheaply. In India, drug prices are 70 per cent lower than the global median. Locating production in a high-cost country like Canada would undoubtedly be very costly – particularly given that a publicly owned producer would be starting from scratch, lacking the economies of scale present in other countries and available to large pharmaceutical companies. We need to be intelligent about how we approach the competing trade-off between complete supply-chain flexibility on one end and balancing costs to taxpayers on the other. The answer probably lies somewhere in the middle.

There are alternatives to nationalization

There are several market or quasi-market based alternatives for the government to pursue that would alleviate drug shortages without nationalizing manufacturing.

In the short term, there should be a concerted effort to modernize our hospital’s inventory management systems to avoid shortages as well as a concerted focus to implement industry-standard predictive inventory management. In the long term, some options our government could consider are:

  • Joint ventures/PPPs with drug manufacturers: Use appropriate financial incentives to make Canadian-hosted generic manufacturing economically feasible for large pharma companies while leveraging the private sector’s expertise in efficient operation of these facilities. This would obviously come at a higher cost than the current import regime, however it would undoubtedly be more efficient than the government “going it alone.”
  • Shift our import mix: A suspected root cause for drug shortages is quality control from countries like India and China. There are several other countries with significant drug manufacturing capabilities (e.g., Germany, Switzerland) and we could make a concerted effort to shift our imports away from India/China to these countries. While this would also likely be more costly than our current import mix, leveraging an existing manufacturing base and expertise in those countries may prove cheaper than setting up production in Canada.

One factor that has made our healthcare system an international benchmark is that the government has decided which aspects of the system it needs to be in and which should be left to the private sector. The direct provision of healthcare – which requires a risk pool to capture the largest number of citizens in a cost effective manner – is rightly public. However, many of our ancillary healthcare services (e.g., labs) are private as the private sector has proven it can operate these facilities more efficiently. This public-private division has worked for us to date and I would argue drug manufacturing falls squarely into the second category.

Conclusion

We both acknowledge that Canada must take action on drug shortages. The status quo is not tenable and the risks are very real as we brace for a second COVID-19 wave in the fall.  There is certainly much work that still needs to be done and questions to be answered. For example, we do not know how much the government is spending to deal with current critical drug shortages. And although we have Tier 3 assignments, it is not clear which drugs would qualify as essential for hospitals and would benefit from domestic manufacturing. This all must be the subject of further research, much of which must be done in an evidence-based fashion.

While both of us have varied personal and professional experiences that influence how we approach this issue, we acknowledge that reasonable people can disagree. Whatever the right solution is, we must act. Before it’s too late.

Author

Ahsan Irfan

Contributor

Ahsan Irfan is a management consultant at Boston Consulting Group (BCG) in Toronto, where he works with F500 corporations and governments on strategy and operational topics. He has held several leadership roles in conservative politics, including time in the Prime Minister’s Office in the Harper government.

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