Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How Government Subsidies Create Billion-Dollar Drug Shortages
Transcript
- Lucas: If you walked through the U.S. healthcare economy and noticed something weird — that the government spends billions subsidizing drug manufacturing, yet we keep running out of cheap generic drugs — you'd be right. Luna: Yeah, it's a paradox. We throw money at the problem, and the problem gets worse. Lucas: And there's a very specific case that explains the whole dynamic: the cisplatin and carboplatin shortage of 2024. These are old-school chemotherapy drugs — been around for decades, cost pennies to make. Suddenly, they were almost impossible to get. Luna: I remember that. Hospitals were rationing doses. Some cancer centers had to postpone treatments. Lucas: Exactly. And if you dig into why it happened, you find a perfect storm of government policies — each well-intentioned, but collectively creating a perverse incentive to stop making cheap drugs. Luna: Let me guess — it starts with Medicare reimbursement? Lucas: That's a big piece. Medicare Part B pays for these infused drugs. The reimbursement formula is based on average sales price plus a small markup. For a drug that costs $15 a dose, the margin is tiny. Manufacturers make far more money on a $10,000 specialty drug than on a $15 generic. Luna: So the market pushes companies toward high-priced drugs. But where do the subsidies come in? Lucas: The government also offers orphan drug tax credits and manufacturing incentives — things like the 2022 Domestic Manufacturing Act, which gave grants to build new factories. The catch: the incentives are for capacity, not output. You get the subsidy for building a plant, not for actually producing the drug. Luna: Right, so companies build factories, claim the tax break, and then decide what to produce. And they choose the profitable stuff. Lucas: Bingo. One of the two main U.S. manufacturers of cisplatin shut down its generic line in 2023 to focus on higher-margin oncology drugs. The other factory had a contamination issue — which is more common when you're running old equipment with thin margins. Luna: And the government didn't step in? The FDA could have forced production, right? Lucas: The FDA has limited authority to mandate production. They tried a 'shortage mitigation' order, but it was voluntary. By the time the shortage hit in early 2024, the price of a single cisplatin course had jumped from $15 to $350. Luna: So the subsidy actually created the shortage by letting manufacturers shift resources away from generics. Lucas: That's the core irony. A Government Accountability Office report from March 2026 found that 70 percent of all generic drug shortages between 2023 and 2025 involved products where federal subsidies directly or indirectly reduced competition. 15 generic drug factories closed in that period. Luna: And the government response? More subsidies? Lucas: Partly. A new bill proposed in late 2025, the 'Essential Drug Manufacturing Act,' would give manufacturers guaranteed purchase commitments for a list of 50 essential generics. The idea is to create a stable revenue floor. But critics say it's just another subsidy without fixing the underlying pricing problem. Luna: Because as long as Medicare pays based on average sales price, the lowest-cost drugs will always be the least profitable. Lucas: Right. And that's the fiscal policy angle: the government is spending billions on both sides — subsidizing production and paying for drugs — but the two programs are completely misaligned. The left hand doesn't know what the right hand is doing. Luna: It reminds me of the way the government subsidizes housing through mortgage interest deduction and then separately through Section 8 vouchers — two programs that sometimes work at cross purposes. Lucas: Exactly the same logic. And in the drug case, the mismatch is even more acute because lives are at stake. The GAO report estimated that 120,000 cancer patients were affected by the cisplatin shortage alone. Luna: So what would a smarter approach look like? Should the government just buy the factories outright? Lucas: Some economists argue for a public option — a government-owned generic drug manufacturer that would serve as a 'supplier of last resort.' But that's politically contentious and expensive upfront. Luna: And it doesn't solve the incentive problem if the private sector still has the same pricing signals. Lucas: Right. A more targeted fix would be to reform the Medicare reimbursement formula for generics — maybe a fixed markup plus a bonus for guaranteed supply. You could tie the subsidy to output, not capacity. Luna: That would align the incentives. You get paid more if you actually deliver the drug. Lucas: Other countries do this. In Germany, the government negotiates prices for essential generics and guarantees a minimum volume. Manufacturers compete for the contract, but they know they'll sell a certain number of doses. Luna: So why hasn't the U.S. adopted something similar? Political gridlock? Lucas: Partly. But also, the pharmaceutical lobby is powerful, and big drug companies don't want a system that could depress prices on their high-margin products. They frame it as 'government overreach.' Luna: Yet the current system is already distorting the market — just in the wrong direction. Lucas: Exactly. And the cost of that distortion is measured in delayed treatments, rationed care, and occasionally, preventable deaths. The fiscal cost is real too: the government spent $2.3 billion on drug manufacturing subsidies in 2025, and we still had shortages. Luna: So it's not a spending problem — it's a design problem. Lucas: That's the takeaway. We're not spending too little; we're spending in a way that creates the wrong incentives. And until Congress aligns the subsidy programs with the actual goal — getting cheap generics to patients — we'll keep seeing these boom and bust cycles. Luna: It's a classic case of good intentions, bad implementation. Lucas: And one that affects real people. So when you hear about a 'shortage,' ask who got paid not to make the drug. Luna: Speaking of getting paid — it actually costs something to keep this podcast ad-free and independent. If walking through the economy with us has made something click, a small monthly contribution on buy me a coffee dot com slash fexingo helps cover our research and production. Lucas: Yeah, it's a small group that keeps this going — no big sponsor, no corporate strings. Just listeners who find value in this kind of deep dive. And that's what lets us keep doing episodes like this one. Luna: It's a quiet way to say this kind of reporting matters. And it works. Lucas: Alright, back to the numbers. One thing that could change soon: the FDA just announced in June 2026 a pilot program for 'strategic generic reserves' — the government would buy and stockpile a six-month supply of 30 critical generics, including cisplatin. Luna: That's a direct intervention. Like the Strategic Petroleum Reserve, but for drugs. Lucas: Exactly. It's a stopgap, but it acknowledges that the market alone won't solve the problem. The question is whether it'll be enough, or if we'll need a more fundamental redesign of how the government pays for and incentivizes generic drug production. Luna: And whether the next shortage hits before that redesign happens. Lucas: That's the gamble we're taking right now. And given the track record, I wouldn't bet on a smooth ride.