Drug Prices Soar as Hospital Suppliers are Forced into ‘Gray Market’

BY Jason Kane  August 29, 2011 at 5:18 PM EST


A breast cancer patient receives a chemotherapy drip at Cape Fear Valley Medical Center in Fayetteville, N.C. Photo by Chris Hondros/Getty Images.

Michael O’Neal buys drugs for a living — and too often these days, he’s forced to do it on the “Gray Market.”

Like most pharmacists charged with stocking an entire hospital, O’Neal prefers to conduct his official business for Vanderbilt University Medical Center through big-name distributors.

But there are days when his “back’s against the wall,” O’Neal said — when official supply chains run dry for all kinds of drugs — from the “bread-and-butter variety” used every day in hospitals to specialty medication for cancer treatment. On those days, O’Neal resorts to haggling on the little-known sector of the health care economy that’s only a slight shade more legal than the black market.

The gray market is an expanding world fueled by a deepening drug-shortage crisis in which secondary retailers buy up medication outside of the normal, tightly controlled pharmaceutical distribution channels and then sell their stockpiled supplies to desperate pharmacists and hospitals at exorbitant mark-ups.

High blood pressure medication that normally costs $25.90, for example, can go for $1,200 — a mark-up of 4,533 percent.

“The whole thing’s squirrely, but this is always our last-ditch effort. It only happens when the manufacturer has already told us there’s none in the supply chain, and we’ve turned to as many other sources as we possibly can,” O’Neal said. “The concern that this is suspicious is overshadowed by the much larger concern of being able to get medication for a patient.”

Suspicious or not, the gray market is legal.

Most drugs pass seamlessly from manufacturer to wholesaler to a pharmacy or hospital — then on to patients. But secondary wholesalers can buy bulk drugs from the big-name distributors to supply smaller hospitals, clinics and pharmacies that don’t have enough purchasing power to buy directly from the big wholesalers.

After that, medication can be traded between distributors, sometimes traveling back from these smaller distributors and pharmacies to major wholesalers through sales or returns, according to a recent report from the Pew Health Group.

Dizzy yet?

That’s just the beginning — gray-market drugs often change hands multiple times across state lines, moving in whole or partial lots that can obscure tracking information. Sometimes they’re even repackaged or relabeled.

There is no national system for monitoring the path of these drugs — that’s all left to the states, which have a hodgepodge system of rules that are inconsistent and sparsely regulated.

Simply raising the price on something in short supply is only a violation of Federal Trade Commission law if companies agree to create a shortage and raise the price or if they monopolize a market by buying up a product and creating an artificial shortage. Most gray market vendors aren’t large enough to do anything close.

The Food and Drug Administration’s Office of Criminal Investigations looks into complaints about blatant safety concerns in the gray market but the agency defers to the states to do the bulk of regulation, said Valerie Jensen, associate director of the FDA’s Drug Shortage Program.

For a pharmacist, trying to determine a product’s supply source in such a web — let alone its origins or authenticity — can be extremely difficult.

Even if many secondary vendors in the gray market are legitimate, the whole set-up is one asking for unethical practices and outright exploitation, O’Neal said.

Most of the major manufacturers now force their distributors to sign contracts that keep them from manipulating a drug’s price. But gray market vendors still manage to get their hands on these scarce drugs by other means — and then proceed to cold-call hospitals and pharmacists at times of acute shortage with a vastly inflated sale price.

It’s under these circumstances that O’Neal’s office is bombarded with a steady stream of phone calls, emails, and faxes from gray market vendors looking to buy and sell.

“Overall, I tell them, ‘Please don’t call us, we’ll call you,’” he said. “If we didn’t monitor that and shut it down, it would be a constant buzz.”

Those prepared to hand over a pedigree — or a detailed record of a products’ custody — occasionally hear from O’Neal when there’s no other choice.

If the drug he’s trying to find typically costs $30 per case, O’Neal might send an email to his gray market contacts and receive several sales pitches — one for $289, another for $322, and one more for $150.

“It’s like just walking into a flea market and trying to argue the price down,” he said. “But the crazy thing is — these are drugs we’re talking about. When you take a step back, it doesn’t make any sense that this can go on.”

Choose your hospital and the scene is much the same. To measure the depth of the problem, Premier healthcare alliance, a North Carolina-based quality improvement and group-purchasing organization, sent its hospital membership a request for examples of unsolicited sales offers made by gray market vendors.

The results were startling. Over a two-week period in spring 2011, 1,745 examples of gray market offers were recorded from 42 acute care hospitals. The average mark-up for shortage drugs was 650 percent. A full 96 percent were at least double the normal price, while 45 percent were 10 times more expensive and 27 percent were 20 times more.

Of the 416 separate drugs offered for sale, the highest mark-ups were for those needed to treat critically ill patients in four categories: emergency care; critical care sedation and surgery; chemotherapy; and fighting infectious disease.

Such dramatically inflated prices are forcing hospitals nationwide to collectively shell out $400 to $500 million more per year, said Blair Childs, Premier’s senior vice president. And that’s driving up prices across the health care industry.

But even more importantly, “it’s creating safety challenges for a physician trying to ensure a patient is going to get the right drug, at the right time and that it’s safe,” he said. “There have been a lot of situations where there have been close calls.”

Many drugs become ineffective or harmful if they haven’t been stored in the right environment and at precise temperatures. While official supply chains are tightly controlled to guarantee safety, the crisscrossing nature of the gray market can throw the safety of a drug into serious doubt.

In 2009, the FDA reported several cases in which diabetic patients complained that their insulin wasn’t working. It turned out the drug had been stolen and that improper handling in the gray market had caused it to lose its potency.

Gray market vendors have also been known to sell counterfeit or diluted medication, Childs said. He’s even read reports of vendors buying scarce drugs from Medicaid patients in hospital parking lots.

When Bill Woodward, senior director at the Texas-based health care supply company Novation, decided to investigate some suspicious-looking pedigrees from local “distributors,” he discovered that one was paying an office tower in Dallas to maintain the guise of a work space and the other was located in the false storefront of a warehouse.

“It had a ‘For Lease’ sign in front of it and when we looked through the window, it was just a table, a chair and a phone. They’re not distributors at all,” Woodward said. “The whole thing is an open door for allowing counterfeit, stolen, tainted drugs into our health care system. They could be easily inspected to see if they’re actually legitimate, but no single federal agency is charged with tracking this so no one is doing that.”

That’s why organizations like the American Society of Health-System Pharmacists have issued strict warnings to their members, urging them to take matters into their own hands — to demand an authentic pedigree and to ensure the vendor is authorized by the state to distribute medication, said Joseph Hill, the group’s director of federal legislative affairs.

But sometimes even that’s not enough to provide peace of mind, O’Neal said. He remembers one case in which the pedigree for a batch cancer medication was provided but it was still unclear whether the drug was safe, he said.

“We were in dire straights, so we still had to use it,” he said. “We did as much investigation as we could. But even though you know where it came from, you don’t know what the particular product has been through when it’s moved through so many different hands.”

Mike Cohen of the Institute for Safe Medication Practices qualifies that as “a massive concern.” According to Cohen, the gray market should be more tightly regulated by the federal government.

After all, he said, this phenomenon has been around for decades — though it’s steadily increased to epic proportions in the last few years due to the toxic situation brought on by the drug shortage.

“Hospitals have patients that are sick, they need the drug, and gray is legal,” he said. “So on balance, hospitals are making the decision to buy it.”

A national pedigree law with legislative teeth might not solve the whole issue, he said, but it could go a long way toward making the entire market a little less gray.