Building Resilience Into US Prescription Drug Supply Chains
Patients and hospitals routinely cannot access the most basic and essential prescription medications due to shortages of drugs such as amoxicillin, Adderall, saline, and epinephrine. The recent COVID-19 pandemic and associated geopolitical challenges have further highlighted the need to proactively identify and address vulnerabilities in US pharmaceutical supply chains.
Numerous reports have been written by government agencies, academics, think tanks, consulting companies, and other industry participants to systematically identify causes of and potential solutions to these challenges. One of these efforts was Building Resilience into the Nation’s Medical Product Supply Chains, from the National Academies of Sciences, Engineering, and Medicine (NASEM) , to which this article’s authors contributed as authors or consultants. (The report was commissioned in response to Congress’ enactment of the Coronavirus Aid, Relief, and Economic Security[CARES] Act in October 2020.)
To synthesize for policy makers some of the best thinking on drug supply chain resilience, we characterize the recommendations of a comprehensive, although not exhaustive, list of the reports on the topic. We also describe some recent actions by the government and private industry to bolster supply chains. We conclude with potential next steps to advance three areas: transparency, inventory management, and onshoring. In this context, we discuss the need to develop financial incentive mechanisms and prioritize efforts.
What Makes A Resilient Supply Chain?
Supply chains are resilient if they can avoid shortages despite shocks to supply or demand. Trigger events that may cause or precipitate shortages include an unexpected demand surge, a supply capacity reduction, and failures of coordination.
There are many ways private- and public-sector actors can make supply chains more resilient to such trigger events. The 2022 NASEM report aggregates these into four layers, defined as follows:
- Awareness is the possession by the appropriate people of the information needed to assess, mitigate, prepare for, and respond to risks of pharmaceutical shortages;
- Mitigation actions are taken prior to a disruptive event to avoid the event altogether or to reduce its magnitude;
- Preparedness are actions taken prior to a disruptive event to reduce negative effects on health and safety; and
- Response actions are taken post-event to minimize harm from the shortage and to resolve the shortage.
Each of these layers can be further subdivided into categories, as illustrated in Exhibit 1 below.
Exhibit 1: Medical product supply chains resilience framework: potential trigger events and resilience measures
Source: Hopp WJ, Brown L, Shore, C, editors. Building Resilience into the Nation’s Medical Product Supply Chains. Washington (DC): National Academies Press; 2022. Figure S-3, summary, p. 9.
Common Recommendations
We reviewed recommendations included in 22 reports. The appendix at the bottom of this article describes these reports. In this section, we reference the reports using the identifiers in the appendix. Although the reports differ in focus and scope, they contain recurring recommendations.
Transparency
Transparency in supply chains helps buyers to assess product quality and quantity available for purchase, producers to assess consumer demand for their products, and other members of supply chains to ensure the product reaches the right consumer. Many of these actions are impossible in the US prescription drug market because of a lack of transparency into supply chains links, which makes identification of weak links difficult. Increasing transparency of supply chain maps—who makes what, where, and how much—is therefore a key recommendation across many reports.1,11,14,19,20 Another oft-proposed transparency enhancement is manufacturing quality-rating systems.1,2,6,12,15,20,21
Advanced Manufacturing
Outdated production technology is another commonly identified cause of prescription drug supply disruptions.1,2,21 Reports recommend promoting the use of advanced manufacturing technologies because they can reduce the likelihood of trigger events and promote responsiveness and adaptability.1-4,6,8,14,15
Onshoring Of Supply
Many reports recommend onshoring (or nearshoring or friend-shoring) manufacturing facilities to lower the risk of geopolitical disruptions.2,3,8-10,12,14,15,18 However, a few suggest that onshoring is not a panacea for achieving reliable and resilient supply chains, due to higher costs from local sourcing.1,9,19 Others suggest that concentrating manufacturing onshore can make supplies more vulnerable to regional disruptions (for example, hurricanes, regional climate change, or geopolitical events).1,15
Inventory Management
The COVID-19 pandemic emphasized inventory management challenges, with pharmacies, hospitals, and clinics competing for essential prescription drug supplies from private suppliers and the US Strategic National Stockpile (SNS). Some reports argue that the SNS—previously targeted for regional public health threats and natural disasters, but not national pandemics3—is outdated and insufficient for addressing disruptions.3,8,9,17 Inventory-related issues extend to the last mile, where providers frequently have to allocate scarce prescription drugs to patients. Numerous reports criticize the lack of equitable allocation of essential prescription drugs during the pandemic.9,12,13,17
Several reports recommend that raw material suppliers, manufacturers, distributors, pharmacies, and health care organizations increase their own safety stock to buffer against trigger events.2,6,7,9,13,17-19 A few reports1-3 introduce inventory management models that supply chains could adopt, such as vendor-managed inventory, in which the supplier (for example, drug manufacturer, wholesale distributor) takes full responsibility for maintaining an agreed-upon inventory level of the product at the end-user’s location.1 Many reports recommend modernizing and optimizing inventory stockpiling management for SNS.1-3,8,9,14,15,17,22 In addition, several reports call for regional SNS’s to address regional shortages more effectively.1-3,14
Financing Resilient Supply
During the pandemic, government funds were deployed to underwrite selected prescription drug supply chain resiliency efforts. Numerous reports recommend providing similar financial incentives to private companies involved in resiliency efforts such as improving manufacturing quality;1-4,5,6,9,10,15,20-22 adopting dual sourcing (having multiple suppliers);1,2,5,10 diversifying suppliers and manufacturing sites;2,3,9 developing contingency plans;2,5,6 and installing advanced manufacturing technologies and holding more inventory.1-4,6,8,14,15,22 Other reports recommend updating government reimbursement policies for supplies to pull improved quality and resiliency.2,4,6,9,15,22
Recent Progress
There is progress toward implementing some of the recommendations in the reports, particularly within the Administration for Strategic Preparedness and Response (ASPR), which issued a national plan.3 We describe some of the recent progress in three areas: transparency, advanced manufacturing, and inventory and capacity management.
Transparency
The ASPR established a cross-sectoral joint supply chain resilience working group (179 industry and government partners) to facilitate information sharing and collaboration to tackle end-to-end supply chain issues. The Food and Drug Administration’s (FDA’s) Center for Drug Evaluation and Research (CDER) developed tools to gain greater visibility into the supply chain; for example, CDER expanded its surveillance capabilities to develop early warning signals of impending shortages. The FDA has been pursuing some legislative proposals to help lessen gaps in surveillance activities.
Other stakeholders have also been expanding transparency into supply chains. Suppliers have been providing greater information to buyers to increase upstream transparency. US Pharmacopeia, an independent, scientific, nonprofit organization that establishes standards for the quality and purity of prescription drugs, has used its data, coupled with other data sources, to map out many supply chains and assess their resilience.
A major element of transparency is related to manufacturing and product quality. The FDA’s Office of Pharmaceutical Quality is working to develop a system to measure and rate quality management maturity. RISCS, an independent nonprofit rating and certification organization, has been developing a rating system that uses non-public manufacturer-reported data at the National Drug Code level.
Advanced Manufacturing
The ASPR established an industrial base and supply chain management program and made investments in advanced, continuous, and platform manufacturing of some essential prescription drugs. The FDA has been running the Emerging Technology Program, which helps remove some of the regulatory uncertainty around new advanced manufacturing throughout the product life cycle.
Inventory And Capacity Management
The ASPR has been working with federal, state, local, tribal, territorial, and private-sector partners on stockpiling and vendor-managed inventory systems. The pharmaceutical industry has been developing an expansive list of different contingency scenarios and increasing flexibility to support more rapid shifts if needed. Manufacturers are diversifying suppliers, increasing the use of contract development and manufacturing organizations and surge capacity, and expanding digital tools for real-time tracking across the supply chain. Distributors report that they have been working on allocation practices based on better measures of demand. For instance, during the pandemic, distributors cooperated with the federal government for vaccine and therapeutic distribution.
Next Steps
When thinking about next steps, there are three important characteristics of US prescription drug supply chains that stakeholders should keep top of mind.
First, these chains are enormous and complex: There are more than 20,000 approved prescription drug products and more than 13,000 facilities registered to make either active pharmaceutical ingredients (APIs) or finished-dose drug products. More than three-quarters, 78 percent, of APIs are made outside the US. These statistics underestimate complexity as they do not account for raw ingredients, components such as vials, parts such as machine parts, or for that matter drugs that predate current FDA approval systems.
Second, the root causes of supply challenges are varied and interconnected. One implication of these characteristics is related to the policy of onshoring. Even if we move facilities to the US to address potential geopolitical risks, domestic manufacturing alone does not guarantee reliability. After all, production disruptions in US-based facilities are the most common cause of shortages.
Third, the social benefits from building supply chain resilience are much greater than the private benefits from such efforts. For a manufacturer, a shortage means lost sales and perhaps weakened market position relative to competition, but that cost pales compared to the cost faced by patients, providers, and society at large. Closing the private-social benefits gap cannot rely on goodwill from manufacturers alone; they have fiduciary responsibilities to their shareholders and therefore a drive to seek cost advantages that come with foreign sourcing, carrying limited inventory, forgoing excess capacity, and keeping the makeup of their supply chains confidential.
Taken together, these characteristics suggest there is an important role to play for the federal government in prescription drug supply chain resilience. The government can take on tasks where it is impossible or too costly to rely on the private sector, and it can prioritize and financially support specific supply chains that are most important to the health and well-being of Americans, including the most vulnerable. We describe how the federal government can apply these elements to improve transparency, inventory management practices, and onshoring. We also identify the role of other stakeholders in these efforts.
Transparency
The first step toward transparency is assessing who needs what information and for what purpose. For example, the federal government needs greater transparency into supply chains to prioritize which ones need intervention or support. The FDA needs greater transparency into when manufacturers face a demand spike to implement prevention or mitigation efforts. Group purchasing organizations need to assess supply reliability to choose vendors and to create contingency plans. Physicians need information to determine whether and how to change care protocols for their patients.
Much of the information these stakeholders need is business confidential. The government has the power to mandate some of this information be released. Alternatively, it can help process data in a way that confidentiality concerns are minimized, for example, through quality rating systems. For its own shortage mitigation efforts, the government can also ask manufacturers to provide information about demand spikes and supply disruptions similar to the executive order during the Obama administration asking companies to report shortages. Other opportunities include exploring payment models that reward greater transparency as well as information technologies such as blockchain that can make data exchange more secure.
Inventory Management
Just-in-time manufacturing makes good business sense but not good social sense. This is one reason the government maintains a national stockpile. But the sheer scope of US prescription drug supply chains suggests that the SNS neither can nor should undertake to solve all supply chain issues alone. The private sector is better suited to deal with more routine problems, which would enable the SNS to address emergent needs related to catastrophic events.
With its superior access to data, the government can set the stage for better inventory processes by collaborating with stakeholders to continuously identify and update which products should be prioritized, at which level (manufacturer versus wholesaler), and in which forms (raw material, API, finished product). The government is also in the position to mandate or financially encourage firms to hold sufficient inventories and to prepare “resiliency plans,” with auditing compliance as needed.
Setting up systems and frameworks for allocation of scarce inventory is also a ripe area for government engagement. There are many lessons learned from the distribution of COVID-19 monoclonal antibodies and vaccines that are worth exploring as templates for future disasters. The existence of transparent and agreed-upon plans is effective in responding to an event and also builds trust among stakeholders, discourages hoarding, and encourages sharing.
Onshoring
Onshoring as a resilience strategy highlights the importance of prioritization. Seventy-eight percent of API products are made outside the US and the rate for excipients (inactive drug ingredients such as coloring agents and preservatives) and raw materials may be even greater. It would be impossible to produce all these substances in the US, so assessing which supply chains are most important to the health and well-being of Americans is critical, as is assessing which are the most vulnerable.
As Congress and federal agencies consider onshoring incentives or mandates, they must assure that any such efforts are pursued in combination with other efforts, especially those that improve reliability of manufacturing. Both financial and regulatory incentives can be leveraged to increase public-private partnerships on onshoring and diversification. These efforts require leaders with unique multidisciplinary expertise in areas such as economics, operations management, trade policy, and pharmaceutical manufacturing.
Summing Up
The social costs of poor prescription drug supply chain resilience are tremendous, but we cannot rely on market forces alone to address gaps because current challenges are themselves a result of market forces. It is ultimately private industry that needs to take steps to create resilience. However, the federal government plays an important role in prioritizing industry efforts and providing the data, incentives, and mandates to steer the industry to make these investments. Congress plays a role in funding these steps.
Appendix: Reviewed Reports And Publications
Reports and publications written between 2017 and 2022 that provide specific recommendations related to pharmaceutical supply chain resilience were selected and reviewed for this article.
Note: Report number is used for citation in the text of the article.