Chemotalk Newsletter

Chemotalk Newsletter, Vol. 69: January 1, 2014

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I waited until the last minute, and I'm not the fastest typist in the world anymore, but there are political/medical stories that should be retold. They are truly relevant to all of us. Here are a few of them...


By Margaret Clapp, Michael A Rie and Phillip L. Zweig*

About a year ago, President Obama signed a law that was supposed to end chronic shortages of lifesaving drugs. But the critical lack of generic drugs continues unabated. It is a preventable crisis that is inflicting suffering on patients and in some cases causing needless deaths.

According to the American Society of Health-System Pharmacists a group that maintains a closely watched drug-shortage database, 302 drugs were in short supply as of July 31, up from 211 about a year earlier.

The new law, which among other things requires manufacturers to report anticipated shortages is ineffective because it addresses symptoms, not the underlying economic cause. Policy makers apparently failed to ask the important question: How could this happen in a free-market economy? That would have steered them to the giant purchasing organizations that control the procurement of up to $300 billion in drugs, devices and supplies annually for some 5,000 health care facilities. These cartels have undetermined the laws of supply and demand.

Most of the drugs in short supply are sterile injectables that have been cheap mainstays for decades. They're generally administered in hospitals and outpatient clinics and sold through hospital purchasing organization contracts, not through retail pharmacies or pharmacy benefit managers.

Scarce or unavailable drugs include anesthetics, chemotherapeutic agents, antibiotics, nutrients for malnourished infants, poinkillers and even intravenous solutions. Physicians have been forced to improvise with less desirable or more expensive substitutes. One study reported in an issue of The New England Journal of Medicine last December found that children with Hodgkin's disease were at greater risk of relapse because the most effective generic, mechlorethamine, wasn't available. Propofol, the preferred anesthetic for many surgical procedures, is scarce because there's just one supplier of the generic in the United States in full production.

Improvisation has caused some patients to wake up during operations -- or not at all. A March 2012 survey by the American Society of Anesthesiologists, in which about 3,000 members responded (out of around 50,000), attributed six deaths, as well as other adverse outcomes, to shortages of drugs.

A deadly outbreak of fungal meningitis, which was first identified last September in Tennessee, was triggered by shortages of a steroid painkiller, prompting providers to turn to the new bankrupt New England Compounding Center, which, as a so-called compounding pharmacy, was not held by the Food and Drug Administration to the same stringent standards as regular drug manufacturers.

The pharmacy's sister company, Ameridose, which has also been closed, had supply contracts with five of the largest American hospital purchasing organizations: MedAssets, Novation, Premier, Health Trust and Amerinet. This tragedy had killed 63 and sickened 749, according to the Centers for Disease Control and Prevention.

The Government Accountability Office is investigating the role of the group purchasing organizations in the shortages and the meningitis debacle.

The agency's report is expected in 2014.

The F.D.A. has permitted temporary imports, which almost surely have created shortages in other countries. That's because there is finite global manufacturing capacity; production cannot be ramped up overnight. Hospitals are rationing medications, while their pharmacists spread untold hours scrambling to find them.**

The economic root cause is simple: the purchasing organizations have squeezed manufacturers' operating margins to razor-thin levels. By awarding select suppliers exclusive contracts in return for exorbitant (and undisclosed) "administrative,", marketing and other fees, they have reduced the number of suppliers to just one or two for many generics. Further, they've crimped investment in maintenance and quality control, resulting in adverse F.D.A. inspections and plant closings.

This perverse system was created in 1987 when Congress enacted the Medicare anti-kickback "safe harbor", which exempted those buying organizations from criminal prosecution for accepting vendor kickbacks. Spurred by a 2002 New York Times investigation into anticompetitive purchasing group practices, Congress held several hearings to determine whether greater federal regulation was needed.

Antitrust lawsuits and more government investigations and exposes followed. A study in fall 2011 issue of the Journal of Contemporary Health Law and Policy found that group purchasing organization kickbacks inflated supply costs by at least $30 billion annually. But little has changed because of the enormous political clout of the industry's lobby, which includes the Healthcare Supply Chain Association and the American Hospital Association.

The Obama administration and Congress must protect patients by repealing the anti-kickback safe harbor and restoring free-market competition to the hospital purchasing industry.

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And just when you think you've heard the worst ...


By Andrew Pollack

As drug prices have soared in recent years and insurers have increased co-payments, a new type of charity has blossomed to fill a vital niche -- helping patients pay the steep out-of-pocket costs for their medicines.

But the largest of these co-payment assistance charities, the Chronic Disease Fund, is now in turmoil after questions have arisen about the relationship with a pharmaceutical company that is itself under investigation for its marketing practices.

The practice is casting light on what has long been an open secret: The bulk of the contributions to these charities come from the pharmaceutical companies The foundations not only help hundreds of thousands of patients a year, they also raise drug company sales and profits.

After all, if a patient cannot afford out-of-pocket costs of $5,000 for a $100,000-a-year drug, the drug company gets nothing, But if the manufacturer or the charity pays the $5,000, the patient gets the drug and the company receives $95,000 from the patient's insurance company or Medicare.

The contributions -- which also provide tax deductions to drug makers -- are legal as log as a company does not require that the money it donates be used exclusively to pay for its own drugs.

But articles circulating in the investment world have suggested that the Chronic Disease Fund might be showing improper favoritism toward Questcor Pharmaceuticals, which sells an expensive drug for immune diseases. Moreover, the articles noted that the charity was purchasing millions of dollars a year in services from for-profit companies owned by the charity's founder and president, Michael Banigan.

Questcor and the charity have said they are victims of a campaign by short-sellers -- investors who benefit from the decline of a stock's price.

Nonetheless, fearing defections from donors, the charity hired a Washington law firm, Venable, to evaluate it practices and recommend changes to ensure it was in compliance with legal requirements.

As a result Nr. Banigan is leaving the charity and the entire board has been replaced. The charity is also revamping policies I a way that could eliminate co-pay assistance for certain drugs, according to Jeffrey S. Tenenbaum, the head of the nonprofit organizations practice at Venable.

"When an organization comes under great scrutiny like C.D.F. Has come under, you have to make sure they are squeaky clean," Mr. Tenenbaum said. He said he thought the fund and Mr. Banigan had good intentions but "just didn't know some of the things they should be doing."

Mr. Tenenbaum said the charity was cooperating with a request for information in a federal investigation of Questcor's marketing practices. He also said that the fund itself was "absolutely not a target of that or any other investigation." Nonetheless, he said, he had advised the fund that an investigation might be coming.

He said the controversy "definitely has gotten the drug companies' attention." While no company has ended its donations, some were still considering what to do, he said.

The Chronic Disease Fund, which is based in Plano, TX, received $200 million in contributions in 2012, triple its 2007 total and ranking it among the 50 largest charities in the United States. It says it helped nearly 86,000 patients last year ad more than 500,000 since its inception in 2003.

Critics say co=pay assistance helps keep drug prices high and circumvents efforts by insurers to control drug spending by making consumers bear part of the cost.

"These subsidies are unfortunately used to promote the overutilization of expensive brand-name drugs," said Wells Wilkinson, a lawyer at Community Catalyst, a consumer advocacy organization.

The charities counter that any benefit to the drug companies is secondary to helping patients.

"Look at the alternative," said Dana Kuhn, founder of Patient Services, one of the charities. "If they didn't donate their dollars people would die."

Drug companies often directly subsidize the co-payments for privately insured patients. But they cannot do so for patients covered by federal programs like Medicare's Part D drug benefit, because that would be considered a kickback, an illegal inducement to use a drug.

So the drug companies donate to the co-pay assistance charities. A handful of charities specialize in providing such help. In addition, some patient advocacy groups like the Leukemia and Lymphoma Society have similar programs.

Some executives of these charities now worry about increased scrutiny.

"We could all get painted with the same brush," said Patrick McKercher, president of the Patient Access Network Foundation. Its contributions ore than doubled in 2012 in $179 million. It expects to help more than 100,000 patients this year (2013), an increase from 59,000 in 2012.

The charities are supposed to solicit donations from the public, not just drug companies. Still, 81% of the contributions to the Chronic Disease Fund in 2011 came from two pharmaceutical companies, according to its financial report for the year. The companies were not identified.

Drug companies cannot contribute money specifically for their own drugs. Rather, they donate money to provide co-payment assistance for people with a specific disease, regardless of which drug is used. The Chronic Disease Fund, its website says, provides co-pay assistance for 78 drugs used to treat 46 diseases.

For 15 of those diseases there is only one drug available, however, meaning the manufacturer of that drug can be certain its contribution will be spent on co-pays for its product.

The articles raising questions about the fund were published in October in Barron's and on the investor website Seeking Alpha.

The latter was written by a anonymous short-seller of Questcor stock.

Questcor sells a drug called H.P. Acthar Gen, which was approved more than 60 years ago to treat a variety of immune-related conditions. The company, which acquired the drug in 2001, has raised its price since then from $40 to more than $28,000 a vial.

It has been gradually expanding the marketing of its drug to different diseases. And as it does so, it appears the Chronic Disease Fund has started to co-pay assistance for those diseases.

For instance although the fund already offered support for MULTIPLE SCLEROSOS, it started a new program for "acute exacerbation of M.D.," which applies only to Acthar.

The fund does not provide co-pay assistance for an approved drug for lupus, but it does for "exacerbations of lupus," a use of Acthar.

Questor's contributions for co-pay assistance are increasing even faster than sales of Acthar. Its contribution of $9 million in the first nine months of this year (2013) was 74% higher than the sane period a year earlier. Its total 2012 contribution of $8 million was quadruple the level in 2011.

Don M. Bailey, Questcor's chief executive, said at an investor conference that the company was "doing exactly the same thing everybody else is doing" in contributing to the charity.

Mr. Tenenbaum, the lawyer, said the fund would no longer provide co-pay assistance for diseases treatable by only a single drug, unless there was clearly a second drug in development. And he said the fund would sever all ties with companies owned by Mr. Banigan, its departing president.

Mr. Banigan declined to comment. But in an email the fund forwarded to donors, he wrote: "There are many things I still want to accomplish in my lifetime and with C.D.F. well positioned for the future, I believe this is the right time for me to step aside and let others carry the organization forward."

Clorinda Walley, the executive director, will now run the organization. She issued a letter calling the earlier articles misleading but wrote that the charity was nonetheless making changes to its structure and practices aimed at 'not just meeting, but exceeding best practices for nonprofit charities."

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* Margaret Clapp is a former chief pharmacy officer at Massachusetts general Hospital, Michael A. Rie is associate professor of anesthesiology at the University of Kentucky College of Medicine and co-chairman of Physicians Against Drug Shortages, where Phillip L. Zweig is the executive director.

** In the spirit of full disclosure, I recently tried to fill my monthly prescription for tamoxifen, the only estrogen-suppressant drug I can tolerate, which happens to be generic. My local pharmacist had to give the few pills they had, until she could scramble up the month's supply. Tamoxifen has kept me healthy for a long time. It took a few scary days to resolve.

Welcome to 2014. Stay well.

* * *

And if you have any thoughts of how this newsletter could be improved, please email me directly, at

Elaine Jesmer

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