The Much-Feared FDA Form 483, Part 3

Generic Drug Issues

Hal Gatewood/Unsplash

This is the third in a three-part series on the FDA’s Form 483, a tool that the agency uses to notify firms that an investigator has found evidence for lack of adherence to quality regulations related to the manufacturing of regulated products as well as research intended to support marketing approval or postmarket evaluation of those products. The first installment discussed general issues with Form 483, while the second presented my personal views on why some uses of form 483 have given rise to additional layers of bureaucracy that have had a significant negative impact on clinical trials by misdirecting quality efforts. I also addressed how it could be used as a part of a more comprehensive system, potentially with the help of systems combining AI and human effort to make the clinical trials enterprise more efficient.

This final installment offers an example of how the misperception of the 483 as a surrogate for overall quality of a firm can lead to policy errors in attempting to mitigate pricing problems with generic drugs. I hope the example reinforces the key points of the first two segments in a different context.

---

Amid all the talk about the high cost of drugs in the U.S., pundits often omit a salient fact about the importance of the generic drug supply. For the five to seven percent of prescriptions that are for patent-protected, “innovator” drugs, U.S. residents do pay a price that is, in my opinion, too high on average. And make no mistake: these prescriptions are especially important because they include the new breakthrough therapies that anyone would hope to be able to use if they had a significant illness. So, I’m all in favor of an appropriate focus on finding the right price for innovator drugs.

However, for the vast majority of prescriptions that are for generic, off-patent drugs, Americans pay a lower price than do residents of most other high-income countries. These include important lifesaving drugs such as statins, medicines for controlling blood pressure, many types of sterile injectable drugs, and the older mainstays of cancer chemotherapy such as cisplatin (a key therapeutic for ovarian cancer, among others).

Hatch-Waxman, Generic Drugs, and the Role of GPOs

How did this paradoxical situation come about? In brief, the enormous benefits of the 1984 Hatch-Waxman Act, which established the current framework for approving generic drugs, largely stem from its creation of a low-cost market in which generic drug manufacturers are able to make essentially the same drug as the innovator drug after the original patent has expired. After a brief period of marketing exclusivity in which the innovator has protection from other generic competitors, anyone can manufacture the drug if they can pass FDA review with an Abbreviated New Drug Application (ANDA).

Importantly, the FDA’s Office of Generic Drugs, supported by user fees collected from the generic drug industry, actively helps generic manufacturers meet the required quality standards. Manufacturing quality is an essential issue, because the generic firm is undertaking to make a copy of the innovator firm’s drug. Pricing is then set by competitive bidding, typically managed by intermediaries known as Group Purchasing Organizations (GPOs).

Many years ago, hospitals, pharmacies, and health systems realized that by banding together, they could apply enormous leverage to the generics industry by virtue of their combined purchasing power. The GPOs formed to provide this function were so successful that they were “spun off” into for-profit businesses. The industry has now consolidated, with three dominant GPOs reportedly accounting for 80% of the market. Similarly, retail pharmacies have consolidated into four large purchasing groups, accounting for > 90% of that market.

Over time, the market power of this consolidation has resulted in contracting practices that some consider unfair. In private conversations I’ve had, sources have often characterized them as “one-sided” arrangements in which the manufacturer is locked into a price, but the GPO can drop the manufacturer quickly if a lower-cost alternative is found. Furthermore, if the manufacturer’s costs increase due to upticks in the cost of goods or labor, they cannot increase the price. This is especially egregious for at least two reasons: first, because planning and constructing a facility and manufacturing a generic drug is a multi-year process; and second, the cost of goods can go up, sometimes dramatically, after a contract is signed.

The end result of this situation is that the price of generic drugs in the U.S., especially for older generics, often falls below the total cost of manufacturing, quality control, and safe distribution. Initially, this was handled by moving large segments of the industry abroad, particularly to India, where labor costs are lower. However, in many cases, this advantage is not enough. Faced with financial losses, manufacturers will then be tempted to skimp on quality or simply stop making the drug. If poor quality is caught by FDA investigators, the facility or product line can be shut down through regulatory action.

This is not a common occurrence. Still, when combined with the pricing issue, hundreds of drug shortages occur every year in the U.S. While other factors do play a role, the probability of a drug shortage is directly related to the drug’s price—the lower the price, the greater the likelihood of shortages. Several predictive models for drug shortages have been developed as reviewed in a Health and Human Services policy document in 2024.

Solutions for Clashing Incentives?

Generic drug purchasing organizations have major incentives to drive the price of generics as low as possible, but the industry does not have a balancing method to justify differentially higher pricing by proof that the higher-priced product has superior quality. Instead, the industry has depended on FDA approval of a generic as an adequate quality metric. The drug shortages are to some extent the practical result of this approach to contracting: getting the lowest price without allowance for the underlying expense of ensuring high-quality manufacturing – a dynamic characterized as “a race to the bottom.”

So, how does the Form 483 fit into this equation?

There are two possible approaches to this situation. In the first, we depend on the government to vouch for and enforce the quality of generic drugs, in which case the presence of a Form 483 would serve as a signal for quality but would not substitute for a comprehensive quality assessment. As I noted in the previous two posts, a 483 is a one-time, temporary marker. It is important but not sufficient for the overall assessment of quality. When all is said and done, an assessment of quality is multidimensional and based on many factors, a point that was embodied in the FDA Center for Drug Evaluation and Research’s Quality Management Maturity Model. If we are to rely primarily on government oversight and action to ensure quality, we will need options other than simply a Form 483 to encompass the complexity of the undertaking.

The second option is that, as in other industries, generic drug manufacturers develop standards and requirements for contracting that would require evidence of quality, enforced by the purchasers, to win and sustain a contract to manufacture and sell generic drugs, perhaps including a mandatory “floor” on pricing to avoid variations that drop below the cost of quality manufacturing. They would then have to build these assessments into their costs.

However, until one of these approaches is adopted, we can expect to continue the basic standoff between the generic drug industry and the GPOs and their customers, including large health systems and other entities that fill prescriptions. The generic industry has made the case that if the price is below the cost of manufacturing, distribution, and investment in people and technology, then rational businesses will stay out, and shortages will continue to occur. The purchasers respond by claiming that price is the only metric they have: they have no way to justify paying more for quality when quality metrics don’t exist. The result is that patients are deprived of needed low-cost therapies and hospitals and health systems deploy some of their best pharmacy talent to scramble to provide an equivalent therapy when a shortage occurs.

Whether Congress eventually passes laws requiring FDA to move more quickly, including an adequate budget and collaboration with other parts of the Department of Health and Human Services, to ratchet up its assessment of both the quality of the generic drugs and management, or requires industry to implement quality systems, there will be a cost. Simply relying on 483 issuance to serve as a proxy for quality issues writ large won’t suffice. Firms with great quality and one slip-up can receive a 483; additionally, a 483 could be issued due to a misunderstanding that gets corrected in the firm’s response.

---

Whether the focus is on clinical trials, generic drugs, or other parts of the enterprise, the public depends on an industry that provides high quality at a reasonable price. The FDA oversees regulated industries, but in order to make the kind of progress that is needed, a more holistic view of shared accountability for quality is essential. The FDA’s Form 483 is an important part of such a quality system, but it’s not an all-purpose surrogate for all the parameters of quality.