America’s Other Health Care Crisis: Generic Medicine Supply Chains
For the last two years, our nation has been engulfed by a health care crisis, as Covid-19 and its variants halted global supply chains, shuttered small and large businesses, and upended the everyday lives of countless Americans. Yet as the national and local media, elected officials at every level, and health care experts focused on addressing this challenge, a separate health care and national security crisis continued to affect nearly every American.
Today, the United States is dangerously dependent on foreign manufacturers—particularly in China and India—for essential, lifesaving generic medicines. (Of all prescriptions dispensed in the United States, roughly 90 percent are generics.) As detailed in a recent report by our organization, the Coalition for a Prosperous America, a loophole in the 1984 Hatch-Waxman Act has led to the offshoring of America’s domestic production of generic pharmaceuticals to China and India, price gouging in the U.S. market by foreign companies, and generic drug shortages in the United States.
Authors of the Hatch-Waxman Act intended to create competition, increase innovation, and lower prices for U.S. patients. Instead, in many cases, the opposite happened. Foreign manufacturers engaged in a race-to-the-bottom strategy that eliminated U.S. manufacturers from the market. And the offshoring of U.S. production did not lead to more innovation and lower prices, but to the importation of poor quality, unsafe generic drugs, mainly from China and India, and widespread price manipulation.
This health care and national security crisis started long before the Covid‑19 pandemic began. The pandemic revealed, however, that America’s dependence on Chinese and other foreign drug manufacturers is a serious risk that will only continue to worsen unless Congress takes decisive action to reshore the U.S. generic pharmaceutical manufacturing industry.
At the start of the Covid-19 pandemic, consumers were exposed for the first time to the repercussions of America’s dependence on foreign nations for critical goods—the result of decades of offshoring our nation’s productive capacity. Shortages of lifesaving medicines, personal protective equipment (PPE), and basic goods like household cleaning supplies impacted communities across the nation. Even before the pandemic began, however, drug shortages were an all too common occurrence in American hospitals, with over half of health care workers claiming that drug shortages were a daily struggle. The Covid-19 pandemic was perhaps the first time that there was a national spotlight on this problem. With global supply chains shut down and little to no domestic capacity to manufacture generic medicines, the coronavirus pandemic exacerbated the crisis caused by our nation’s overreliance on foreign drug manufacturers. Hospitals across the United States faced drug shortages as Chinese pharmaceutical manufacturers shut down production and India restricted exports of critical medications.
As the federal government rushed to take action, lawmakers in Congress, members of the media, public health officials, and everyday Americans began to question how it was possible that the United States of America could face a shortage of lifesaving medicines. This national security and health care risk did not emerge overnight, but in just weeks the American people saw firsthand the consequences of disastrous trade and economic policies that had led to deindustrialization and the offshoring of our pharmaceutical manufacturing capacity.
Hatch-Waxman’s Unintended Consequences:
Dependence on Foreign Generic Drugs
The Hatch-Waxman Act, formally known as the Drug Price Competition and Patent Term Restoration Act of 1984, was originally designed to create more competition in the generic drug market. Congress sought to balance the need to incentivize drug research and development with a desire to increase competition and make drug prices more affordable. The law made several key changes that initially helped foster competition in the drug manufacturing space and drove down the cost of essential medicines.
A loophole in the legislation, however, led to the hollowing out of America’s public health industrial base. While the law rolled back some regulatory barriers in order to make it easier for new companies to enter the market, the law’s original intent was never to create a race to the bottom that forced companies to cut corners in order to manufacture drugs for less than the price of a cup of coffee in order to remain competitive.
In an effort to increase competition, the Hatch-Waxman Act eliminated duplicative tests that had been required for a generic drug to obtain approval from the FDA. Before 1984, manufacturers of generic drugs were required to independently prove the safety and efficacy of their products. By streamlining this process for approval by requiring only that manufacturers demonstrate “bioequivalence” to an already approved drug, Hatch-Waxman made entry into the generic drug manufacturing market much easier and less costly.
The law, however, failed to take into account how foreign manufacturers—which were not subject to the same levels of FDA scrutiny as U.S. firms and could benefit from different economic and industrial policy contexts—could exploit the new rules to flood the market and launch a race to the bottom in manufacturing. By lowering standards and allowing manufacturers to only demonstrate bioequivalency, which is less costly than tests required to prove safety and efficacy, Hatch-Waxman created a situation that foreign generic drug manufacturers exploited through their slash-and-gouge strategy to destroy competition from U.S. producers. As a result, in certain cases, this change has actually eliminated competition from the generic drug market, while increasing U.S. dependence on foreign-produced generics.
The United States is currently reliant on imports for at least two-thirds of our generic medicines, and nearly 90 percent of generic active pharmaceutical ingredient (API) facilities are overseas. The majority of those supply chains run through China and, to a lesser extent, India. Poor quality controls, environmental degradation, and cheap labor have combined to give producers in those countries a major advantage. Since 2002, imports from India have increased thirty-five-fold, while the floodgates have opened to allow imports from China to rise to an astounding 165 times their 2002 levels. This has left American patients in a vulnerable position that is made even more dangerous during times of national crisis.
In fact, nearly half of all generic pharmaceuticals on the FDA’s newly created essential medicines list appear in some form on the FDA’s drug shortage list. U.S. dependence on foreign imports has proven to be a major factor in causing such shortages. The Food and Drug Administration (FDA) itself notes that two-thirds of drug shortages are caused by quality issues, and China and India have established themselves as world leaders when it comes to producing substandard drugs.
When Chinese and Indian manufacturers detain FDA inspectors, delete or fabricate data, and sell medications contaminated with rocket fuel or metallic particles, they place the FDA in an impossible situation. Restricting imports from these manufacturers will likely exacerbate drug shortages in the United States, while failing to do so will embolden these foreign manufacturers to continue selling substandard, unsafe products that can potentially harm or kill American patients.
One of the primary reasons that the FDA is left facing such impossible decisions in these cases is because of a lack of competition in the essential generic manufacturing industry. Foreign manufacturers have a long history of slashing prices or acquiring their U.S. competitors in order to gain a monopoly over the production of one generic drug, only to gouge customers by raising prices as much as 2,000 percent once they eliminate their competition from the market.
There are three key factors that have allowed foreign manufacturers to engage in this slash-and-gouge strategy to drive out competitors and monopolize the market: (1) Strong government support for manufacturers in China and India, including a wide range of subsidies, grant payments, and procurement supports for their manufacturers. (2) A lack of support for domestic manufacturers in the United States, whether through trade policy, federal procurement, reimbursements, or direct payments. And (3) a lack of regulatory oversight in developing countries, especially China and India, which allows companies to cut as much as 25 percent off of their production costs.
Combined, these factors have directly led to the gutting of America’s generic pharmaceutical manufacturing industry and made the United States dangerously reliant on China and India for essential, lifesaving medicines. Moreover, this race to the bottom has been further exacerbated by the role of middlemen in the pharmaceutical industry. Group Purchasing Organizations (GPOs) and Pharmacy Benefit Managers (PBMs) all have the common goal of maximizing margins and short-term profit.
While the GPOs and PBMs’ efforts to maximize return at the expense of any other considerations have created their own set of quality control and safety issues, their efforts to secure the lowest possible price point for drugs have also provided implicit support for overseas manufacturers that can cut corners on environmental and worker standards to manufacture drugs below the market rate. The result of America’s dependence on India and China is extreme volatility—both in price and product availability.
Three recurring patterns have emerged as a result of this dependence: (1) The foreign manufacturer will flood the U.S. market with product priced below the market rate—causing other competition to leave the marketplace—leaving just one manufacture for the product in question. (2) After eliminating all competition, the foreign manufacturer raises the price above what the average price was prior to the elimination of all other manufacturers; and (3) this sole source dependence is now more vulnerable to supply chain shortages due to quality control violations or supply chain disruptions, jeopardizing patient health and safety.
As a result, Hatch-Waxman is effectively evaded and its goals of increased competition are undermined. The Covid-19 pandemic forced lawmakers to confront this unfortunate reality, but addressing this health care and national security crisis will require both Democrats and Republicans in Congress to take action to stop the dangerous race to the bottom in the generic pharmaceutical industry.
A Race to the Bottom
China and India both provide significant subsidies to generic manufacturers. China’s “Made in China 2025” plan openly states Beijing’s goal of having their top twenty national champion manufacturers of essential drugs control at least 80 percent of the global market for those goods. As part of the Chinese Communist Party’s strategy to accomplish this, China imposes 5.5 to 6.5 percent tariffs on most drug imports, in addition to a 17 percent value added tax on all imported goods, which works similarly to an additional tariff. By contrast, the United States imposes no cost on imports.
India also offers funding to its pharmaceutical manufacturers through the production-linked incentive (PLI) scheme, which provides companies with grants worth up to 10 percent of their additional incremental sales of targeted pharmaceutical goods for a six-year span. Subsidizing these increases in output (rather than profit) is one of the many factors that make it possible for foreign manufacturers to temporarily sell below their production costs as they attempt to gain a monopoly in the market for a generic drug.
These subsidies have directly resulted in the offshoring of America’s generic pharmaceutical manufacturing industry, and today they place U.S. firms at a significant disadvantage. But subsidies tell only part of the story when it comes to companies deciding to offshore production.
An additional factor is the role of regulatory policy. The FDA’s wide range of regulations on pharmaceutical manufacturers overall do an excellent job of protecting patient health and safety. For drugs made in the United States, where the FDA enforces these regulations through regular on-site inspections, these policies give hospitals and patients the confidence that the drugs they are taking are safe, not tainted with dangerous carcinogens, and contain the appropriate amount of active ingredients as indicated by the label.
The problem is not the regulations themselves, but the FDA’s enforcement of them—including lack of enforcement for foreign drug manufacturers, particularly in China and India. For factories in the United States, the FDA is allowed to inspect the facilities with no advance notice, and it often sends teams of multiple inspectors on multiday trips to assess every minutia of a company’s manufacturing operations several times per year. To ensure they pass FDA inspections, American manufacturers tend to comply with the “good manufacturing practices” (GMP) designed to ensure product safety, and even so, they often get flagged for minor infractions that pose no real threat to consumer safety.
In stark contrast, overseas manufacturers have a long history of evading the bulk of the FDA’s oversight, as the agency’s inspectors have no statutory authority abroad and their ability to inspect facilities is restricted to the level of access that foreign countries and companies are willing to provide. In China, for example, FDA inspectors generally must provide several weeks or months’ notice before inspections, during which time the manufacturer typically attempts to make changes to appear GMP-compliant. Despite this, FDA inspections of overseas manufacturers still result in shocking discoveries, including finding things like rodents running through factory floors and clean room facilities that lack clean running water.
Overseas manufacturers’ willingness to cut corners on safety and quality control is worsened by the fact that, if their products do ultimately kill Americans or cause other health issues, they are not liable for any of the damages caused. In fact, Chinese manufacturers have openly admitted that their lack of liability contributes to their decision to ignore quality issues in the name of pursuing the lowest possible price. According to a U.S. lawyer with firsthand knowledge of liability concerns, Chinese companies maintain the following when it comes to their responsibility: “We are not liable for consumer protection. If we were liable, the product would be very, very expensive. If you want a cheap product, the price is that we do not take any liability for consequential damages.”
One example that illustrates the extent to which the FDA’s efforts to regulate overseas manufacturers have been stymied is the fact that, in the first half of 2021, the FDA’s Center for Drug Evaluation and Research (CDER) issued only two negative observation reports to Chinese manufacturers, and four to the rest of the world. In comparison, CDER issued sixty-six negative observations for American manufacturers, even though American manufacturers generally operate at the highest global manufacturing standards and produce a relatively small share of pharmaceuticals. Incredibly, as of 2016, one in three foreign drug establishments had no FDA inspection history.
The issue with FDA health and safety regulations is by no means the policies themselves. In fact, these regulations tend to receive broad support from the American manufacturers affected by them and the drug industry as a whole. Nevertheless, the FDA’s uneven enforcement of these laws has essentially created a multibillion-dollar regulatory loophole for overseas manufacturers that simultaneously undermines the FDA’s efforts to protect patients and incentivizes companies to shift their production beyond the reach of the FDA’s inspectors. The result is less resilient pharmaceutical supply chains and more American patients being exposed to potentially harmful and substandard medicines.
Price Gouging by Foreign Manufacturers
One effect of Hatch-Waxman and the offshoring of America’s generic pharmaceutical manufacturing industry has been price gouging by foreign manufacturers. Our CPA report documents specific foreign companies that have slashed prices on generic medicines or acquired their American competitors to gain a monopoly over the production of a drug, only to gouge U.S. patients by raising prices as much as 2,000 percent once they eliminate their competition.
One example is mitomycin, which is a critical drug used to treat several different types of cancer. From 2010 to 2017, offshoring had a drastic effect on the market for this lifesaving drug. At the start of 2010, U.S. producers controlled roughly 65 percent of the market for mitomycin manufacturing and were selling doses for about $65 a piece. The American manufacturers were still held in check, however, by foreign suppliers offering to sell the drug for a slightly higher price, and who were able to maintain control over the remaining third of the market. In many ways, this equilibrium that existed in 2010 reflected what the true goal of the 1984 Hatch-Waxman legislation was: to create competition in the generic manufacturing market to keep drug prices under control and maintain access to essential medicines.
Unfortunately, this balance did not last. In 2011, Accord Healthcare, an Indian manufacturer, began to slash its prices to gain control of the market. That year, Accord was able to capture two-thirds of the market, and by 2012, it had successfully gained monopoly control. The American manufacturer, Bedford Labs, was forced to cut production down to 3 percent of its 2010 levels, while Accord accounted for 98 percent of all mitomycin sales. By 2014, Bedford had exited the market entirely, and Accord was able to begin raising its prices.
From 2013 to 2014, Accord gouged patients by raising prices from $97 to $170—a price increase greater than the total price that Bedford had been selling for in 2010. In 2015, Accord began gouging hospital systems even further, more than doubling prices from $170 to a whopping $393 per vial. By 2017, prices reached $540, or more than eight times what they had been when American manufacturers were in the market.
Sadly, mitomycin is just one of many products where this has occurred. Most notably, this was the same strategy used to put the last U.S. manufacturer of penicillin out of business in 2004. When the costs imposed in the mitomycin market are multiplied by the hundreds of drugs on the FDA’s essential medicines list, the cost to U.S. consumers of losing American drug manufacturing is easily in the tens of billions of dollars per year. Slightly higher domestic labor costs have led GPOs, PBMs, wholesalers, and other drug supply middlemen to procure product from China and India to secure the lowest short-term prices possible. But in the long run, these practices have made drugs far more expensive for consumers overall than they would be if they could simply source them from American manufacturers.
For example, in the case of mitomycin, GPOs procuring from India were able to save about 10 percent on their costs in 2010 and 2011. Once the American manufacturer was forced out of the market, however, the product became far more costly for consumers, and consequently more profitable for GPOs, who actually benefit from the higher prices. GPOs, like PBMs, seek to maximize margins and short-term profit at the expense of quality control and safety.
In fact, when comparing the cost added by the Indian manufacturer in 2017 versus what the U.S. manufacturer had previously supplied, the added cost of relying on India was more than five times the amount that the United States had spent in total on mitomycin when there was an American manufacturer in the market. And this is despite the fact that the quantity of mitomycin used actually declined slightly over this period.
Another example is carmustine, which is an essential oncology medicine used to treat brain tumors, Hodgkin’s lymphoma, non-Hodgkin’s lymphoma, and multiple myeloma. Maintaining access to this drug is essential for hospitals to be able to save the lives of their patients. That means hospitals are forced to pay whatever price they are charged for the drug. Demand for carmustine makes the threat of a monopoly particularly costly for the U.S. health care system, and American patients in particular.
From 2010 to 2012, there was indeed a monopoly for the production of carmustine, held by New York–based Bristol Myers Squibb (BMS). Fortunately, despite its monopoly, BMS did not engage in any particularly egregious price gouging, charging a steady price of $157 to $161 per dose over this period.
At the beginning of 2013, however, BMS sold the rights to manufacture and market its carmustine injection to India-based Emcure Pharmaceuticals. Predictably, the Indian manufacturer began price gouging immediately. That year, the average price per vial skyrocketed from $160 to $820. Prices went up by another $1,000 in both 2014 and 2015, before settling in the $3,000 to $3,500 per vial range—a twentyfold increase.
When distributors or manufacturers with a large U.S. footprint engage in price fixing, America’s federal and state governments have a range of legal options to sue the companies, as happened in the widely reported lawsuit that twenty state attorneys general filed against Teva, Mylan, and four smaller companies in 2016. When the manufacturer is entirely based in India, however, it may face little or no legal consequences for price-fixing or price gouging. In fact, when U.S. businesses sued Chinese companies that had formed a cartel to raise vitamin C prices by 600 percent, the Chinese government asserted in federal court that Chinese law required the companies to do so.
Despite carmustine prices skyrocketing, hospitals were left with no option but to pay, and to pass their exorbitant costs onto patients, health insurers, and the Centers for Medicare and Medicaid Services (CMS). Over this entire period, annual quantities remained between 24,500 and 27,500 vials every year. The amount spent on a nearly identical quantity of product, however, jumped by $75 million per year. Unfortunately, carmustine is just one of many examples of foreign manufacturers’ price gouging once a monopoly has shifted from the hands of a domestic producer to a foreign one.
Prochlorperazine is another sickening example of foreign manufacturers gouging American patients as soon as they were able to gain control over the market for a critical drug. Prochlorperazine is a critical anti-nausea product for children undergoing chemotherapy. From 2010 to 2013, an American manufacturer, Bedford Labs, held monopoly control over the pricing for the drug. Over this period, Bedford maintained relatively low, stable, and affordable prices that allowed the company to remain profitable while keeping supplies of this critical product available to patients. The average price charged by Bedford over this period was only $2.56 per dose—less than a cup of coffee.
Conversely, once Indian manufacturer Heritage Pharma took over Bedford’s position in the market in 2014, they immediately raised prices dramatically. Over the period from 2014 to 2017, Bedford’s unit price averaged out to $12 per vial—roughly 4.5 times Bedford’s prices.
The fact that the FDA and other U.S. regulators are unable to stop overseas producers from engaging in price gouging makes it even more important for the U.S. government to ensure that domestic manufacturers are able to compete in the market for essential medicine manufacturing. Domestic competitors have proven time and time again that they are able to make high quality medicines at affordable prices—and they will be subject to U.S. regulation should they engage in price gouging.
How Offshoring Has Led to Drug Shortages
The examples of price gouging above illustrate how America’s reliance on foreign importers can lead to extreme volatility in drug prices. And while estimates vary on how reliant the United States is on foreign pharmaceutical imports, even the most optimistic figures show that we rely on imports for at least half of our prescriptions.
The skyrocketing rates that result from allowing foreign companies to secure monopolies over the production of essential, lifesaving generic medicines can cost the U.S. health care system billions of dollars each year. In some cases, these prices also contribute to patients not receiving the care they need, as approximately 60 percent of prescriptions that cost over $500 never get filled, compared to 5 percent of prescriptions that are free.
Yet price gouging is unfortunately not the most dangerous impact of America’s reliance on overseas manufacturers for generic drugs. Far too often, American hospitals, pharmacies, and patients are unable to access the lifesaving medicines they need because there is simply no available supply of these drugs. Largely as a result of America’s reliance on foreign manufacturers, these drug shortages have persisted for decades, with no meaningful improvement.
From 2000 to 2005, there were an average of eighty-three new drug shortages per year. In the last five years prior to the pandemic, an average of 159 new drug shortages were identified annually. Many of these drugs have also remained in shortage for long periods of time, such as lidocaine hydrochloride (Xylocaine), which has been on the FDA’s drug shortage list since 2012. As of last year, the FDA considers over one hundred generic drugs in over one thousand unique product/dosage forms to currently be in shortage.
While the annual new drug shortages spiked in 2011, when 267 new drug shortages were identified, new drug shortages have remained relatively steady since 2012. The importance of these drug shortages should not be overlooked by policymakers. Although the sheer volume of these shortages alone is staggering, cross-referencing the FDA’s drug shortage list with the newly created essential medicine list helps provide further perspective on the prevalence of these shortages. The FDA essential medicines and medical countermeasures list was created in response to a Covid-era executive order and was designed to provide policymakers and government officials with information to evaluate the full spectrum of medical products that would pose threats to American health security if they were not available in a time of need. This includes everything from surgical gloves and gowns to ventilators and blood plasma.
Nearly 50 percent of all pharmaceutical products on the FDA’s essential medicines list also appear, in some form, on the FDA drug shortage list. While some of these products have recently been removed from the drug shortage list or did not have every dosage of their drug added to the drug shortage list, even their occasional presence on this list indicates that their supply chains are, at best, unreliable and prone to disruptions.
These drug shortages affect virtually every aspect of the health care system in America. Health care professionals working in nearly every setting, from emergency and cardiovascular care to gynecology and psychiatry reported facing drug shortages. The results of a 2018 survey of health care professionals, which had nearly three hundred respondents, showed that over half of respondents across all sectors reported that more than twenty drugs they worked with faced shortages in the six months prior to the survey, and that drug shortages were a daily struggle.
Patients suffered as a result of these shortages. According to the survey, 71 percent of respondents were unable to provide patients with the recommended treatments due to shortages. Additionally, 75 percent stated that patient treatments were delayed due to drug shortages, which can lead to worse patient outcomes or even death.
As part of the drug shortage list, the FDA collects data on the causes of drug shortages in the United States. Overwhelmingly, these shortages are caused by one of two factors: quality issues (64 percent), or raw material shortages (27 percent). The remaining 9 percent of shortages are attributed to increased demand (5 percent), product discontinuation (2 percent), and the loss of a manufacturing site due to a natural disaster or acquisition (2 percent).
Unfortunately, the FDA does not report the manufacturing locations of drugs currently in shortage. With two-thirds of all drug shortages being caused by quality issues, however, it is impossible to ignore the role of substandard manufacturing practices in China and India as important contributors to drug shortages in the United States.
Examples of these foreign manufacturing quality issues leading to supply chain disruptions are abundant in the pharmaceutical industry. For example, when the FDA found one Chinese manufacturer guilty of concealing test results, a company employee ran away from the inspector with a thumb drive from a chromatography machine, leading the FDA to initially suspend imports of the drug that the factory was producing. Unfortunately, the FDA was forced to overturn that decision shortly thereafter due to a shortage of that drug. Undoubtedly, reducing America’s reliance on countries known for failing to live up to appropriate manufacturing standards would go a long way toward alleviating drug shortages.
Rebuilding U.S. Generic Pharma Manufacturing
In order to bring back competition, strengthen U.S. domestic supply chains, and resolve price gouging and rampant quality control issues for generic drugs made by foreign manufacturers, the federal government should pursue a combination of three policies to support American manufacturers and accomplish the original goals of the 1984 Hatch-Waxman Act.
First, the U.S. government must create a reliable source of demand for domestic manufacturers. CMS spent nearly $300 billion on drug expenditures in 2019, making it a larger market than any other country in the world. Generic drugs account for 20 percent of CMS total drug spending. Using this buying power to provide a small incentive—even a 10 percent price premium—for U.S.-made generic medicines would have a dramatic impact on the market and strengthen American, and global, pharmaceutical supply chains.
A customer base is essential for any industry to survive and reach scale. The U.S. government is best positioned to meet this challenge by providing a benefit to generic products made in the United States. With over eighty million Americans enrolled in Medicare, Medicaid, or the Child Health Insurance Program (CHIP), and Medicare and Medicaid patients accounting for more than 60 percent of all care provided by hospitals nationwide, nearly every major hospital must accept Medicare and Medicaid patients and comply with the requirements that CMS sets for them to do so. This provides tremendous ability to leverage these programs to support domestic manufacturers.
The federal government should, at a bare minimum, provide priority to domestic producers when agencies are procuring drugs directly. The Department of Veterans Affairs, the Department of Health and Human Services’ Strategic National Stockpile, and the Department of Defense’s Defense Health Agency should all prioritize signing long-term contracts with domestic manufacturers to give them the confidence of knowing that they will have a buyer for multiple years. Congress should consider creating working capital funds for each of these agencies to allow them to enter into long-term contracts without relying on their current year’s funding to finance procurements several years into the future.
Second, the U.S. government must use trade remedies to defend domestic manufacturers from predatory policies by foreign governments and manufacturers. American companies do not receive the same government support that their foreign counterparts do to enable them to withstand extended periods of losses. As a result, they are vulnerable to foreign companies selling their products below cost in order to corner the market, only to immediately raise their rates by several orders of magnitude. The U.S. government has a wide range of trade remedies available to stop this predatory behavior, and fully utilizing these authorities to combat price gouging would significantly reduce overall health care costs while supporting resilient domestic supply chains. In other words, successfully utilizing trade remedies can help combat shortages of critical and lifesaving medicines.
The export restraints other countries imposed in March 2020 demonstrated that decades of positive rhetoric around international trade and globalization can be shoved aside at a moment’s notice. For this reason, Section 232 duties and quotas should be phased in on all medicines listed in the FDA’s essential medicine list to help bring about the necessary domestic investment in their production. One benefit of a Section 232 approach is that it provides the administration with a great amount of flexibility to adjust rates and exempt specific products or countries when such changes are needed. They are also less prone to litigation risk than traditional antidumping and countervailing duties cases.
The U.S. government should also make active use of Section 301 of the Trade Act of 1974. Section 301 exists to authorize the president to deploy duties and quotas in response to unfair trade practices by foreign governments. The term “unfair trade practices” is defined quite broadly and captures a wide swath of foreign government activity happening today in the pharmaceutical industry. If a foreign country deploys policy tools to localize their pharmaceutical manufacturing, the best approach is to wish them no ill-will, but not to stand idly by while they dump excess capacity on our market. Section 301 is the mechanism to advance this policy.
Finally, the United States could impose Section 201 safeguards to support domestic manufacturers. Section 201 involves some practical implementation challenges, however, considering that Section 201 safeguards are typically requested by domestic manufacturers and usually are requested for one product at a time. Implementing Section 201 safeguards also requires an affirmative finding from the United States International Trade Commission (ITC).
Finally, because America’s pharmaceutical industrial base has been so thoroughly depleted, there needs to be some direct financial support to reestablish America as a global pharmaceutical manufacturing leader. While the Biden administration’s American Rescue Plan provides some initial funding to launch these efforts, far more support will be needed over the coming years to reinvigorate America’s public health industrial base, whether it be through tax incentives or direct government funding.
The Biden administration’s American Rescue Plan provides an excellent starting point for this investment. The $10 billion appropriated to the Defense Production Act fund that is earmarked for the Covid-19 response and pandemic preparedness will provide a major stimulus to America’s pharmaceutical manufacturing base. Nevertheless, this will still be insufficient for America to be able to manufacture all of its most essential generic medicines.
For example, the United States has not been able to manufacture penicillin domestically since 2004. Building a facility to manufacture the API and finished drug form of just one penicillin product could easily cost $500 million, and it would not even be able to fill the majority of the U.S. demand for that product. In fact, just to be able to domestically produce two-thirds of America’s antibiotic consumption domestically could require investment on the scale of $4 to 5 billion, and antibiotics represent only a small fraction of the total essential medicine list. Additionally, as new drug products and improved manufacturing techniques are developed, American manufacturers will need to make steady investments in their equipment to avoid shuttering facilities.
To that end, it is clear that Congress should consider creating some permanent financial incentives to support American manufacturers. For example, Congress could establish a permanent program run by DOD or HHS to allocate grant funding to support critical investments. These direct funding programs have the benefit of allowing HHS to select investments in the products that are most critical to American national security interests, which may not always be the most profitable.
More cost-effective options may include the provision of subsidized loans, rather than grants, that can help small companies overcome some of the barriers to entry for pharmaceutical production. The Development Finance Corporation’s (DFC) Defense Production Act (DPA) loan program has successfully incentivized domestic investments in a number of cases and could be expanded. Other options are tax credits for new investments in pharmaceutical manufacturing, or tax credits on the sale of pharmaceutical products that essentially cut the tax rate domestic manufacturers face.
Similarly, tax incentives to support reshoring to the island of Puerto Rico, which already has much of the infrastructure and workforce in place from when it was previously a global pharmaceutical manufacturing powerhouse, may increase investments on the island. Senator Marco Rubio and Representative Jenniffer González-Colón have introduced legislation that would encourage companies currently producing medical devices and pharmaceuticals abroad to relocate to the United States. The bill would enact a tax credit applicable to federal income tax liability for wages and eligible pharmaceutical manufacturing facilities, with enhanced benefits for repatriated facilities in economically distressed zones, including Puerto Rico.
Additional policies that could help reshore this critical industry include strengthening the regulatory oversight of foreign-made drugs and providing more transparency about quality issues and country-of-origin information to consumers. We might also provide a “first to file” preference for American manufacturers, which would allow them to become the first entrants in new generic markets.
Overcoming This National Security and
Health Care Challenge
America’s generic pharmaceutical industry has been all but gutted as a result of foreign governments subsidizing their producers, predatory practices by foreign manufacturers, and uneven enforcement of FDA regulations, particularly for manufacturers in China and India. The data outlining America’s reliance on foreign manufacturers is shocking: over two-thirds of generic drugs and 87 percent of generic APIs are made abroad. In reality, the situation is even worse, as Americans have zero domestic production for many of these products, including drugs as basic as penicillin.
This dangerous reliance on overseas supply chains has contributed to widespread drug shortages and price gouging, driving up costs and preventing Americans from receiving the world-class health care that they deserve. The only way to resolve these public health challenges is to bring generic drug manufacturing back to the United States. Doing so begins with leveraging the federal government’s buying power, paired with supportive trade policies and financial incentives to give domestic manufacturers the certainty they need to rebuild America’s pharmaceutical industrial base. Together, these policies would represent the most significant change in the American generic manufacturing industry since the 1980s, and would finally accomplish the original goals of the Hatch-Waxman Act by creating more competition for generic pharmaceuticals. Accomplishing this would leave the United States far more prepared for a future pandemic, and ensure that essential medicines are safe, affordable, and readily accessible for all Americans.