Fed up with drug companies, some hospitals will start their own.

Nonprofit to supply generics amid huge price hikes, shortages

For years, hospital executives have expressed frustration when essential drugs like heart medicines have become scarce or when prices have skyrocketed because investors manipulated the market.

Now, some of the country’s largest hospital systems are taking an aggressive step to combat the problem: They plan to go into the drug business themselves, in a move that appears to be the first on this scale.

“This is a shot across the bow of the bad guys,” said Dr. Marc Harrison, chief executive of Intermountain Healthcare, the nonprofit Salt Lake City hospital group that is spearheading the effort. “We are not going to lay down. We are going to go ahead and try and fix it.”

While Intermountain executives would not name the drugs they intend to make, hospitals have long experienced shortages of drugs like morphine or encountered sudden price increases for old, off-patent products like the heart medicine Nitropress. Hospitals have also come under criticism for overcharging for their services, including for some drugs.

‘A huge threat’

Several major hospital systems, including Ascension, a Catholic system that is the nation’s largest nonprofit hospital group, plan to form a new nonprofit company that will provide a number of generic drugs to the hospitals. The Department of Veterans Affairs is also expressing interest in participating.

In all, about 300 hospitals are included in the group. Other hospitals are expected to join.

Harrison said they planned to focus only on certain drugs. “There are individual places where there are problems,” he said. “We are not indicting an entire industry.”

Dr. Kevin Schulman, a professor of medicine at the Duke University School of Medicine who has studied the generic drug market and is advising the effort, said: “If they all agree to buy enough to sustain this effort, you will have a huge threat to people that are trying to manipulate the generic drug market. They will want to think twice.”

The idea is to directly challenge the host of industry players who have capitalized on certain markets, buying up monopolies of old, off-patent drugs and then sharply raising prices, stoking public outrage and prompting a series of congressional hearings and federal investigations. The most notorious example was Martin Shkreli, the former hedge fund manager who raised the price of a decadesold drug, Daraprim, to $750 a tablet in 2015, from $13.50.

Problem accelerating

Hospitals have also struggled to deal with shortages of hundreds of vital drugs over the past decade, ranging from injectable morphine to sodium bicarbonate (the medical form of baking soda), shortfalls that are exacerbated when only one or two manufacturers make the product.

“We’re seeing an acceleration of both shortages and escalation of prices,” said Dr. Richard Gilfillan, the chief executive of Trinity Health, a large Catholic system that operates in nearly two dozen states and is part of the group. “There’s not been any effective push back on either of these.”

Intermountain executives would not discuss many details of the project, citing fears that competitors could shut them out of the market by quickly dropping the price of the drugs in question, then raising them again later. They said they would focus on drugs whose prices have risen sharply or that have been in short supply.

“We’re going to have to hold that very close to our vest,” Harrison said. The company will either rely on third-party manufacturers or decide to make the drugs themselves.

The new company will initially focus on selling to hospitals, but officials said they may eventually expand to offer the products more broadly.