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Will The Defense Production Act Solve Drug Shortages? · CareTalk: Healthcare. Unfiltered.

• 0:00
  President Biden recently invoked the Defense Production act to support investment in domestic drug manufacturing. It's part of the so called bidenomics and designed to bolster supply chains and increase spending at home. What's the strategy here, and will it work?
• 0:22
  Welcome to CareTalk, America's home for incisive debate about healthcare, business and policy. I'm David Williams, president of health Business Group.
• 0:30
  And I'm John Driscoll, the president of Walgreens Health. Hey, come join our ever growing community on LinkedIn, where you can access caretalk content and interact with your wonderful hosts. And be sure to leave us a rating on Apple or Spotify while you're at it.
• 0:45
  We love those ratings. So, David, what is the Defense Production act, and how is defense becoming part of healthcare? I mean, what's going on here? Yeah, well, Defense Production act, it's the main source of presidential authority to expedite and expand the supply of materials and services for the US industrial base needed to promote the national defense. John it came out of the Korean War.
• 1:08
  That's when it first was first put into place, although its antecedents go way back to World War I. John. And World War II as well, when Woodrow Wilson was organizing us against the imperial german alliance.
• 1:23
  David but let's step back a second.
• 1:26
  This, I think, is an outgrowth of understanding during the pandemic that we had a problem in terms of sourcing critical healthcare supplies in the middle of a public health emergency. There was certainly a lot of talk about it then, but how does the Defense Production act actually allow us to solve supply chain problems in healthcare? So there are two main categories. They call them titles within the Defense Production act, title one and title three. Title one is about prioritization and allocation. So that basically says, hey, Mr. President can say, or, Ms. President, here's things that are important, and you have to accept and prioritize government contracts in these areas. So President Trump used it for personal protective equipment.
• 2:15
  There's another one. So that's great if you have existing capacity. There's another one about expansion of the productive capacity and supply.
• 2:22
  So presidents can actually make loans, provide guarantees to businesses, and directly purchase critical supplies and repurpose production facilities. So in the pandemic, it was used for nasal swabs and respirators. President Truman used it to establish heavy industry to be able to fight the korean war, or police action, as you may wish to call it.
• 2:44
  It was a war. So this is sort of like a wartime mobilization thought.
• 2:53
  Aren't you one of those people who just believes the private sector will provide.
• 2:57
  And the magical invisible hand of Adam Smith renown immediately meets the supplies that we need. I mean, what could possibly go wrong with the way we are set up with the private sector supporting, at a very high cost, I might add, the healthcare system? Well John, there's a lot wrapped into that, so I'll take the simple version of it. Yeah, I'm a believer in the invisible hand in general. And I think the Defense Production act is an example of sort know, wrapping us in the flag of patriotism, which happens during wartime when people want to do more central planning and repress individual rights. And you wrap it up with defense or patriotism and it does it. And that's pretty much what the Defense Production act is. In the Soviet Union, they call this central planning.
• 3:44
  A Soviet Union went out of business, but the US is still using the same activity. Let's be honest, over fifty cents of every health care dollar is somehow related to the government.
• 3:55
  The government's the largest payer. It buys everything.
• 3:57
  And I think it's completely reasonable that the government should be more directive with the private sector. But let me understand your private sector perfect system. If we're already paying the highest prices for everything in the world, how can it be that we need the defense Production act involved with our healthcare system? In the US? Defense production act was really, you go back to how it was used to in the Vietnam war. It was used to prioritize and accelerate the production of the m one tank by Chrysler. Yeah, and Agent Orange, John, it was also used for that. Yes, and Agent Orange in the korean war, it was used to distribute manufacturing and prioritize government use of critical materials to support our soldiers and sailors in the korean war. But those are situations where there's only kind of one buyer and you've got the fierce urgency of a wartime situation. I don't quite understand how we ended up with a healthcare system where again, everything costs too much. You need somehow the government meddling around. I thought the private sector was perfect.
• 5:17
  So John, the government is supposed to have a monopoly on the use of force on the military, and so it makes it a monopsony. They're the only buyer and therefore Defense Production act kind of makes sense, right? The government's the only buyer. Therefore they may have some say on the industrial base. Now what's interesting in healthcare is sometimes we pretend that it's a free market. And so what happens is it's supposedly free market, but the government is providing most of the money. And so you see a lot of distortions I was just in Canada over the weekend and talking to somebody who's taken a bunch of medications.
• 5:48
  Canada? Yeah. Well, is it Quebec, which this person is an english speaker, so they consider it part of Canada. And they were saying, how come it's so expensive for. Here's what I pay for drugs. He has twelve drugs that he takes. This guy's 89 years old, in good health. It's like $150 a month. How come it costs so much in the US? And how come people are coming here for insulin? He doesn't understand it. And I said, well, yeah, it's because it's the only government in the world that doesn't actually negotiate drug prices. They're doing all the payments, but they're not negotiating for it.
• 6:16
  So it's actually reasonable to extend this.
• 6:18
  John, maybe Defense Production act is a misnomer to extend the same concept into healthcare, because government is the main buyer, although not the only buyer, as they are with the military. But we actually are in a moment of crisis, particularly in some critical generic drugs.
• 6:35
  I mean, the drugs that everyone knows, amoxicillin, penicillin, certain chemo drugs. There are, I think, 150 drugs that are on sort of the high risk list at the FDA that are Adderall, that are critically in short supply.
• 6:54
  How did we end up with this, where there's such a challenge with supplying drugs that almost every american family is going to use at one point or another, in some cases, one of the three people is going to get cancer. Adderall is a common add medicine, but penicillin and amoxicillin is sort of the standard.
• 7:14
  Like, how do we end up running out of that? All right, John, so the thing with making these antibiotics and making injectable products is actually, they tend to be low margin, low price, because you actually have something close to Adam Smith's perfect competition there. Unlimited number of suppliers, low barriers to entry, undifferentiated products. The problem is that you're not making pins or whatever they were making back in Adam Smith's day, and instead you're making these drugs that actually are complicated to make. And just because they're low price and low cost doesn't mean that they aren't complicated. And the lines don't get shut down. So when you have some contamination which occurs, then the whole factory can be shut down and you have these supply issues. So it hasn't been worthwhile for the manufacturers to actually invest here.
• 8:00
  The same factories that make these low cost products are also making higher margin products. The more of the branded products and the FDA comes in, they don't care if it's a high margin or low margin product that's causing problem, they'll shut the whole factory down. Give you a 480 letter.
• 8:16
  So companies have generally not wanted to make these products.
• 8:19
  And so you don't actually have perfect supply because there's not enough people that can make it. But you've also got, this is where, and don't go blaming the FTA.
• 8:29
  I still think the FTA is one of the best regulators that we've got, David. But I think that what many may not realize is, I think 70% of the 4000 drug manufacturers that supply drugs in the US, places where drugs are manufactured, are abroad. And as the market has pushed down the price and in a time when we had much greater hopes for fair and free trade with China, as we now have with India and the majority of those sites, but not all of them are in China and India, I think that we put ourselves where we kind of outsource the supply x US. But those are still federally regulated facilities. They just have much lower cost of manufacture and labor. And you have had, as the commissioner of the FDA, Rob, Calif. Mentioned the other day in a know branded prices for drugs are actually much, far too high. Yeah, but that doesn't present a system where in the case of generics, those drugs that are off patent and that can be manufactured by multiple manufacturers. Hence the free market aspect where there's sort of a drive to the bottom and that can create, depending on where that price sits. And it does move around a bit, some. Some outages and some shortages. So I think the combination of those shortages plus the fact that are created by the market, plus the fact that it's outside of the US, is what's triggered this desire to use the Defense Production act, which is kind of a blunt, but in your point, poorly aimed instrument, do you think this is going to solve the problem of drug shortages? Will the dPA solve the problem of drug shortages in the US? So the answer is no. But let's look at this. So it's interesting that this issue about the drug shortages predates the pandemic. And it's a very thorny one. And I've given one part of the convoluted reason of what's happening, but it's not completely clear. Since the pandemic started, there's been three attempts to basically bring drug manufacturing to the US and help the supply chains become simpler.
• 10:55
  And the first was in 2020. President Trump issued an executive order in 2021, President Biden created a public private consortium to look at this. And now we've got this invocation of the Defense Production act. Now except for vaccines, there's been little or no movement of production to the US. And the reason is that it's still cheaper to produce, much cheaper over in China or India. And so no one's going to willingly bring it to the US. What has changed now though is the assumption, okay, it's cheaper, except what if you can't get it here or it's not being produced, then it's not cheaper. And that's one of the things that changed with the pandemic.
• 11:32
  So there's some possibility that these new efforts on supply chain resilience and reducing shortages will have an impact if companies recalculate the cost. Not just what's the price I pay in India or what's the cost of production, but can you get it or not? And to that end, what's new about what Biden is doing is setting up this supply chain resilience council with senior co chairs on it. The White House National Economic Council leader and the national security advisor are the chairs and a bunch of heavy hitters there. And then also they're supposed to a coordinator to monitor changes in the supply chain, et cetera, and basically bring the health and human services, healthcare side of the world similar to what the Defense Department has, which actually does fairly thorough job of managing supply chain in the US for military products.
• 12:23
  But I do think that it's really interesting and I think that there's been a lot of interest in the DPA because it was thrown out around a lot during the public health emergency by people in Congress, people in the press. The White House council was under Peter Navarro and it was actually utilized for things like ventilators and PPE. And one of the things that ventilators are perfect example of where we bought a bunch of them and probably bought a lot more than we needed to. Industrial policy is hard to get right, but when you are literally running out of basic antibiotics. As the commissioner of the FDA mentioned the other day, these shortages and these problems in the supply chain are a national security issue and certainly that's been recognized by the Pentagon. So hence the invocation know sort of the imprecise tool of the Defense Production act. But I think what's going to be really interesting and you're seeing it I think in targeted industrial policy throughout the Biden administration, the Chips act which to bring back semiconductor manufacturing to the US.
• 13:34
  This resilience and supply chain council at the White House with literally the head of the National Security Council and the head of the National Economic Council. I mean, this is elevating to the secretary of commerce and the senior levels of the, you know, effectively some form of industrial planning, which I know is something that we in the US like people like you and many are uncomfortable with.
• 13:59
  But I do think it's kind of critical. You don't have to imagine a world without trade that would create obviously massive barriers for our manufacturing because our supply chains are long and varied across the globally to identify critical choke points like generic manufacturing of common drugs as a real problem.
• 14:26
  Another solution, David, might be just to pay a little bit more, in a more consistent way for the generics that we need in bulk. And the government does set prices for how much it's going to pay for those drugs when you're paying for it under Medicare. Why shouldn't the government start to think about setting a floor for generic prices that might actually promote, if not just domestic production, maybe it would promote at least consistent production of these desperately needed drugs. I think there is a possibility for John, you know, ideologically, I'm opposed to central planning, but I think that as we look into the world, there are actually market failures.
• 15:13
  And there's also what we see now in a multipolar world.
• 15:17
  You've got countries like in particular China, that enter things like the World Trade Organization, but then may actually use it sort of strategically in a way that may undermine their adversaries. Here's an area where I think, but I also think if you see, like the Gates foundation, they have actually created a market for some vaccines where they wouldn't naturally be a market because you're serving people that are too poor to pay. But they say if there's a vaccine here, we're going to pay for it. So there's things like that, which I think is similar to what you're describing on generic drugs. An area that I think actually we can get behind and does make sense is providing more information. So the government, without having an industrial policy, provides information about economic activity, housing starts, all sorts of things like that that actually help people in the private sector, help that invisible hand actually get the information that it needs. And similarly, I think with this supply chain resilience and shortage coordinator, they can't actually help get information out there, like what capacity is there? What are the inventory levels? Like, where do things actually stand?
• 16:20
  Whereas that information is now sometimes protected by people who are just trading these products. And it would be better if that information were more broadly available. That's an area that I think could be helpful. Now, in defense, it's different, right? You don't actually advertise, hey, here's our capacity to make titanium for fighter jets. But in healthcare, it would be actually helpful to the players in the market, which include hospitals and drug companies, to be able to actually know more information that's there. And maybe there should be something that actually takes into account the cost of a potential shutdown. So the same way that banks have to have some sort of financial reserve, they can't just loan out all the deposits. Maybe there needs to be something similar in the pharmaceutical industry where either there's some allowance made for the fact that there may not be that much resilience, whether it's certain inventory requirements or certain fee that's assessed.
• 17:13
  So you're kind of inching your way towards my notion of a price floor.
• 17:17
  You're sort of like, there's. But you're not willing to raise the floor. So you've got price and quantity, right? So you can have a price floor, but does that mean you can sell as much as you want into that? Or is it better maybe to ensure that there are long term contracts or that there's a backup supplier and that we're looking at these systemic risks in the right way, where all of a sudden, at least to put out these scenarios, what if you can't bring in any product from China that just happened? Rather than answer a question with a question, David, let me suggest an operating. I do think we need to set a price floor for commonly needed drugs, and I think that the government's in a perfect position to do it. Spending so much.
• 18:08
  Half of the 4 trillion we spend is government money. So we could absolutely do that. But it sort of depends on whether you believe you could do a strategic stockpile, which is sort of one of the things that you imprecisely started to articulate. And I think that actually exists. And there are a lot of these drugs are actually there. I don't think we've ever exposed what is in the strategic stockpile. We know that ventilators were there, but there weren't enough, but for national security reasons, don't do that. So I think that we've got some element of planning related to those supply shocks or surges, particularly if there's a national security need. But right now we've got 150 drugs, roughly, that are in short supply, and that list grows. So I think we absolutely have to start to think about creating a market signal through pricing that would solve the problem and government's in the right place to do it, even though ideologues like yourself are uncomfortable with the idea. All right, John. Well, in the spirit of continuous improvement, I have an idea. Since you don't like it when I answer a question with a question, next time you'll give me an answer and I'll give you the question. Think about that for a minute. Now my last question for you is, will this invocation of the Defense Production act be a winner politically?
• 19:23
  I think that my view of the president, I'm a fan of measuring people on results. We've got a strong economy, low unemployment.
• 19:36
  We don't have a public health emergency, and we've got a coalition of supporters abroad. But I don't think the president has necessarily articulated his successes as well as he might, and that is reflected in very low poll ratings. And so I think even if he's doing absolutely the right thing, which I think he is, I think they have to find a more thoughtful way to articulate this and other successes and ideas that even when they get like the bipartisan Chips act was extraordinary, win the successful end and exit from the pandemic extraordinary, I think the White House needs to figure out a better way to articulate it so that even if he's successful, unless you communicate it correctly, I don't think you get credit. I think that's fair, John.
• 20:25
  There's a soft landing that's coming that everyone said was impossible.
• 20:28
  Somehow they're managing to engineer it. I think, if anything, it's a good defensive play. Things that you're protected from attacks and in effect, attacking is what works politically.
• 20:39
  And so you got your defense, including Defense Production act, and you need to attack if you're going to be successful. In any case, attacking is not part of what we do here on the Caretalk podcast. That's it for another episode. I'm David Williams, president of health Business Group. And I'm John Driscoll, the president of Walgreens Health. If you liked what you heard or you didn't, we'd love you to subscribe on your favorite service.