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January 18, 2018

Health systems to launch nonprofit drug company. Here are the details.

Daily Briefing

    Read Advisory Board's take on this story.

    Faced with drug price surges and shortages of vital medicines, some of the biggest hospital systems in the country on Tuesday announced plans to form a nonprofit company to supply certain generic drugs themselves.

    According to a release, four hospital systems—including Intermountain Healthcare, Ascension, SSM Health, and Trinity Health—are helming the project in consultation with the Department of Veterans Affairs. About 300 hospitals have joined the effort, with more voicing interest, the New York Times reports.

    According to the Times, the initiative "appears to be the first on this scale."

    Price hikes and shortages

    With the new company, the hospital systems hope to challenge companies that have bought and hiked the prices of older, off-patent medicines, as well as help stave off drug shortages—which have become increasingly common in recent years, according to the Times.

    The practice of companies purchasing old drugs and raising the prices gained attention around 2015, when Martin Shkreli, former CEO of Turing Pharmaceuticals, raised the price of Darapim, an old medication, from $13.50 to $750 per tablet. Shkreli was later convicted on unrelated charges of securities fraud. Also in 2015, Valeant Pharmaceuticals hiked the price of heart drugs Nitropress and Isuprel, a move that quickly spiked hospitals' drug costs significantly, the Times reports.

    Further, the Times reports that hospitals in recent years have faced shortages of hundreds of key drugs, such as injectable morphine and sodium bicarbonate. Richard Gilfillan, CEO of Trinity Health, said, "We're seeing an acceleration of both shortages and escalation of prices. … There's not been any effective push back on either of these."

    Company details

    Intermountain declined to specify the drugs the new company would produce, citing potential competition from drug companies. But, the health system said the new company would focus only on drugs that have seen price hikes or have been in short supply. "There are individual places where there are problems," Intermountain CEO Marc Harrison said. "We are not indicting an entire industry."

    Hospitals participating in the initiative said the new company would either work with third-party manufacturers or produce the drugs itself. Intermountain officials added that they would seek FDA approval to manufacture the drugs. According to the Times, FDA has said it will give priority to companies that want to produce generic drugs in uncompetitive markets.

    At the outset, hospitals participating in the initiative said the nonprofit would sell to hospitals, although officials said it may broaden its operation at a later time.

    The new company's formation will be overseen by a group of advisors, including Bob Kerrey, a former Democratic senator; Donald Berwick, a physician and a former CMS administrator; two former drug industry executives; and senior-level leaders from founding health systems.


    Discussing need for a response to drug shortages and price hikes, Ascension CEO Anthony Tersigni said he and other hospital executives "took the position collectively rather than waiting and hoping for the generic drug companies to address it. We have to address it head on."

    Harrison called the effort an "ambitious plan," but he added that "health care systems are in the best position to fix the problems in the generic drug market." He said, "We witness, on a daily basis, how shortages of essential generic medications or egregious cost increases for those same drugs affect our patients. We are confident we can improve the situation for our patients by bringing much needed competition to the generic drug market."

    Laura Kaiser, president and CEO of SSM Health, added, "The best way to control the rising cost of health care in the United States is for payers, providers, and pharmaceutical companies to work together and share responsibility in making care affordable. … Until that time, initiatives such as this will foster our ability to protect patients from drug shortages and price increases that limit their ability to access the care they need."

    Separately, Carolyn Clancy, who leads the Veterans Health Administration, said, "Our strong interest here is minimizing the impact of any shortages of generic drugs." VA has the ability to negotiate drug prices, but does not "necessarily control supply," Clancy noted, so VA has not been immune to the shortages affecting other providers. 

    Erin Fox, a drug shortage expert at the University of Utah, said the hospitals' idea holds promise. "I think anything that increases the number of suppliers will help," Fox said.

    Kevin Schulman—a professor of medicine at the Duke University School of Medicine, who has studied the generic drug market—said, "If they all agree to buy enough to sustain this effort, you will have a huge threat to people that are trying to manipulate the generic drug market. They will want to think twice."

    Meanwhile, the Association for Accessible Medicines, the trade group for generic drugmakers, said its members generally support competition. Spokesperson Allen Goldberg said, "The whole generic industry is premised on competition, and that competition brings dramatic savings for patients" (Abelson/Thomas, New York Times, 1/18; Teichert, Modern Healthcare, 1/18).

    Advisory Board's take

    Yulan Egan

    Yulan Egan, Practice Manager, Health Care Advisory Board

    The past few months have seen a wave of major health care deals, so it can be tempting to lump them altogether, but this latest announcement differs from other recent initiatives in two important respects.

    First, it doesn't involve a major payer or attempt to more tightly align payer and provider assets. And second, many of the previous newsy deals, such as CVS-Aetna, Optum-DaVita, and Humana-Kindred, have sought to move closer to the end-consumers of health care, while this partnership seeks to move up the health care supply chain in an attempt to control input costs.

    It remains to be seen which of these approaches might be successful, but it's clear that the trend towards vertical integration is not fading anytime soon.

    Editor's note: Daily Briefing is published by Advisory Board Research, a division of Optum, which is a wholly owned subsidiary of UnitedHealth Group.

    Brandi Greenberg

    Brandi Greenberg, Managing Director

    Today's news should be a wake-up call not only to generic drug manufacturers but to all medical product suppliers. Health systems are trying to use their increased scale and supply chain sophistication in new ways. Manufacturing generic drugs is far more complex than running system-owned distribution centers or leading regional purchasing coalitions, but the ultimate goal remains the same: Health systems want more control over medical products' cost and reliability. While today's announcement triggered many fascinating discussions internally, three aspects of the multi-system partnership stand out.

    First, even the largest health systems still need partners and allies to achieve the scale necessary to inflect generic drug market economics. Despite continued health system consolidation, the largest systems are still much smaller than the largest drug companies or health plans. Providers will still look for ways to get bigger—through formal mergers or more creative partnerships.

    Second, many of today's most pressing industry challenges—drug shortages being a perfect example— are pushing potential competitors into more collaborative arrangements. We anticipate that more of these large-scale partnerships and joint ventures will emerge in efforts to disrupt the supply chain, disseminate know-how, and harness innovation.

    Third, health systems can't just partner with their own kind. Significant problems, like the opioid crisis, demand creative solutions with the expertise and capabilities of cross-industry stakeholders. We hope that today's announcement sparks meaningful conversations about new ways that payers, providers, and manufacturers can work together in new ways to bend the cost curve and improve patient care.

    We will continue to track cross-industry partnerships and would be happy to connect with any members interested in discussing further.

    Lindsay Conway

    Lindsay Conway, Managing Director

    In recent years, we have seen large health systems invest in drug compounding capabilities, in part to reduce their exposure to shortages and to mitigate concerns third-party drug manufacturers' quality control. This new venture is an exciting development, as it hopefully will ensure a more reliable source of high-quality, affordable generic drugs to a much larger group of health systems and providers.

    It's a particularly noteworthy initiative given that over the past two decades, drug shortages have become commonplace. By some estimates, shortages cost U.S. hospitals $446 million annually—$230 million generated by the need to purchase more expensive therapeutic substitutes, and $216 million by increased labor costs. Additionally, drug shortages increase the risk of medication errors, lead to sub-optimal patient outcomes, and increase burnout among health system staff.

    Generic drugs are especially susceptible to shortage. Because of their less favorable financials for drugmakers, they tend to be manufactured by fewer companies. As a result, disruption in manufacturing at one even site—due to natural disaster, supply chain disruption, FDA enforcement actions, or other factors—can compromise a significant portion of the total supply.

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