Hospitals, sick of drug shortages, take matters into their own hands

Sick and tired of dealing with generic drug shortages and unpredictable price increases, five large U.S. health systems are taking an unusual step: They're forming their own nonprofit generic drugmaker. 

Representing more than 450 hospitals, nonprofit groups Intermountain Healthcare, Ascension, SSM Health, Trinity Health and the U.S. Department of Veterans Affairs will participate in the effort, according to an announcement. The new company will directly manufacture or contract out its production and will seek to put patients first, the organizers said, combating the price hikes and shortages that have made so many headlines in recent years. 

"We witness, on a daily basis, how shortages of essential generic medications or egregious cost increases for those same drugs affect our patients," Intermountain Healthcare CEO Marc Harrison, M.D., said in a statement. "We are confident we can improve the situation for our patients by bringing much needed competition to the generic drug market.” 

Despite the unique nature of the announcement, RBC Capital Markets analyst Randall Stanicky cautioned about reading too much into the plan. He wrote in a note on Thursday that nonprofit hospitals make up a fraction of the market and that the new company will take time to get set up.  

Further, the analyst believes it's more about "targeting 'certain' drugs that have traditionally seen shortages or are at risk of shortages" rather than a broad play on the generics market.

To get started, the group has recruited an advisory committee that includes expertise that ranges from the practical to the political. It includes two retired Amgen executives and former Centers for Medicare & Medicaid Services administrator Don Berwick. The team will also draw on experience from a Harvard Business School professor and former Nebraska governor, senator and pharmacist Bob Kerrey, among other experts. 

As industry watchers know, the move comes at a tense time for the generics industry and the larger pharmaceutical industry. Pricing has come under fire in recent years after companies such as Martin Shkreli's Turing Pharmaceuticals, Valeant Pharmaceuticals and Mylan raised prices on old drugs several times over. Each controversy drew more attention to pharma's pricing and as a result, the public, lawmakers and other parts of the healthcare sector have lambasted the industry. 

Hitting back, pharma has at times criticized hospitals for their large markups. 

RELATED: Shortages, soaring generic injectable drug prices leave hospitals scrambling  

Over the years, hospitals have had to deal with shortages that led to price hikes. A shortage of simple saline solution has created a big headache for health providers recently. But experts representing providers argue that when supply returns to normal, they don't experience the price relief they would expect. Drugmakers have responded by citing manufacturing upgrades to improve quality and supply. 

Though President Donald Trump has said pharma is "getting away with murder" on its pricing, Congress hasn't advanced any legislation on the issue, and as a result, many states have taken the matter into their own hands. Maryland, for one, focused its efforts on "unconscionable" price hikes in the generic sector with a bill last year. Generic drugmakers sued to stop its implementation but failed in that effort. 

In addition to all of those challenges, many generic companies have recently been hit with allegations of price fixing. A government investigation has made its way to top players and even some execs including Mylan President Rajiv Malik. Mylan said it was conducting an internal investigation and hadn't found any evidence of price fixing.