Drug Resellers Probed for Marking Up Scarce Medicine 80-Fold

The number of drug shortages has tripled in five years, according to the U.S. Food and Drug Administration. Photo: Rich Clement/Bloomberg

By Drew Armstrong and Tom Randall - Oct 6, 2011 2:00 AM GMT+0700

Companies that buy up critical drugs in short supply and resell them to hospitals and pharmacies at a markup of as much as 80 times their price are under investigation by a U.S. lawmaker challenging the practice.

While so-called gray-market resellers can offer life-saving drugs that are in low supply, they charge the typical contract price sevenfold on average, with some surgical and other medically critical treatments increasing 20-fold, according to a survey by the Premier Healthcare Alliance.

Representative Elijah Cummings, a Maryland Democrat, launched the investigation as the U.S. faces record drug shortages. The scarcity is causing some hospitals to change medical practices and in some cases, use less-effective medicines, doctors and pharmacists say. Cummings said he found that one reseller charged a hospital 80 times the typical price for cytarabine, a pediatric cancer drug.

“Price gouging for drugs that treat cancer in children is simply unconscionable,” said Cummings, the senior Democrat on the House Oversight and Government Reform Committee, in an e- mailed statement. “We want to know where these companies are getting these drugs, and how much they are making in profits.”

More than half of hospitals and medical centers reported that shortages compromised patient care last year, according to a survey of 1,322 pharmacy directors conducted in November by the American Society of Health-System Pharmacists, a Bethesda, Maryland-based trade group. About 97 percent said the shortages drove up costs.

Cancer, Sedation Drugs

Lifesaving therapies for cancer, seizures and sedation are among the list of more than 180 medications unavailable this year, according to the Utah Drug Information Service, which keeps a comprehensive list sent to pharmacists in collaboration with the American Society of Health-System Pharmacists.

“We’ve seen a dramatic increase in the last three to four years, steadily increasing last year,” said Cynthia Reilly, director of the Practice Development Division for the American Society of Health-System Pharmacists, in a phone interview.

The letters went to Allied Medical Supply, of Miami; Superior Medical Supply Inc., of Superior, Colorado; Premium Health Services Inc., of Columbia, Maryland; PRN Pharmaceuticals, of Rockville, Maryland; and Miami-based Reliance Wholesale Inc. All are closely held companies. Cummings has demanded a response by Oct. 19.

All of the companies targeted by the letters attempted to sell medicine at similarly steep mark-ups, Cummings said. Superior Medical offered paclitaxel, a breast and ovarian cancer drug, at seven times a typical contact price of $65 per vial and Premium Health Services sold leucovorin, another cancer drug, for $270 per vial, 50 times its typical price, he said.

Industry Response

Brian Greenwald, president of PRN, says his industry doesn’t hoard drugs to drive up prices.

“It’s like Gordon Gecko in ‘Wall Street,’ saying we could buy enough of a stock to cause a price increase,” he said in a telephone interview today before the release of the letters. “It just doesn’t happen. We don’t have the resources,”

The markups claimed by critics of the industry don’t reflect the reseller’s costs, Greenwald said. He pays higher prices than hospitals for scarce medicines, carries storage and shipping costs, and pays employees for the time it takes them to find the treatments.

“We do above-the-board business,” he said.

Greenwald, who wouldn’t comment on his company’s revenue, said he blames distributors such as San Francisco-based McKesson Corp. (MCK), Cardinal Health Inc. (CAH), of Dublin, Ohio, and AmerisourceBergen Corp. (ABC), based in Chesterbrook, Pennsylvania -- the three largest by revenue -- for his industry’s reputation.

Distributors Compete

“We’re competition for those big guys,” he said. “They have a lot of money and a lot of power, so what they’re going to try and do is to claim as much of the industry for themselves as they can. If they’re inefficient, there’s going to be an industry that helps more efficiently distribute products.”

Anthony Minnutto, CEO of Allied Medical Supply, confirmed receiving a letter from Cummings and said his company would respond. Reseller prices are high because the drugs have been bought and sold many times over before finding their final buyer, he said. A drug originally purchased at $10 may be marked up each time it’s resold, he said.

His company, with revenues of about $5 million a year, made only a 20 percent margin on that revenue, he said.

“It’s nowhere near price gouging,” he said in a phone interview. “If companies like us went away, that doesn’t mean the shortage goes away,”

Telephone messages left with the other three companies targeted with letters from Cummings’ office weren’t immediately returned.

Little Regulation

Joseph Pinto, director of pharmacy services for Nyack Hospital in Nyack, New York, said he’s uncomfortable buying from resellers because there’s no way to know for sure where the drugs came from and if they’ve been stored properly -- known in industry as the drug’s pedigree.

“Some of them I have spoken to say that they do have a pedigree, but I can’t confirm that,” Pinto said in a phone interview. “I wouldn’t know and I wouldn’t be comfortable.”

There is little regulation of the resellers, Howard Koh, the U.S. assistant secretary for health, said at a September hearing by the House Energy and Commerce Committee.

“We know very little about the products in the gray market,” he testified.

The Institute for Safe Medication Practices, a Horsham, Pennsylvania-based nonprofit educational group, has found similar pricing offers to those cited by Cummings. In one case, a drug reseller offered a supply of propofol, an anesthesia drug whose brand-name version is sold by AstraZeneca PLC (AZN) as Diprivan, for $25,000, instead of the usual price of $1,500, a 15-fold- mark up, according to a survey by the group.

Hoarding Cited

Dr. Michael Link, a pediatric oncologist at Stanford University in Palo Alto, California, said he had to deal with a shortage of cytarabine, a chemotherapy drug manufactured by Petach Tikva, Israel-based Teva Pharmaceutical Industries Ltd. (TEVA)

“When the drug is available and distributors are hoarding the drug, people are buying the drug at a markup,” Link said in a telephone interview. His hospital “paid up to 100 times what the former going rate was to make sure that we had a supply.”

The sales pitches to pharmacy managers come over phone, e- mail or fax, with offers of hard-to-find medicines, according to the medication practices institute and pharmacists.

“We are seeing our members who are receiving faxes from companies where the cost of the drug is hundreds and maybe thousands times more with the normal price is,” said Cynthia Reilly, director of the practice development division of the American Society of Health-System Pharmacists.

Shortages Tripled

Reilly said she advises pharmacists to contact their state attorney general’s office and report what she calls the inappropriate pricing.

The number of shortages has tripled in five years, according to the U.S. Food and Drug Administration. The Washington-based agency tracks only shortages that threaten patient health, and found the number rose to 178 last year from 56 in 2006.

When the drugs aren’t available, hospitals ration what’s left or find alternatives, Nyack Hospital’s Pinto said. In one shortage, the pharmacy reserved the steroid dexamethasone for chemotherapy patients, who get it for nausea, and found a substitute for patients who use it as an anti-inflammatory.

To contact the reporter on this story: Drew Armstrong in Washington at darmstrong17@bloomberg.net;

To contact the editor responsible for this story: Adriel Bettelheim at abettelheim@bloomberg.net.