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The Monopolies Behind the Adderall Shortage
The 3 big drug wholesalers who fostered the opioid crisis are now causing a shortage of a key medicine for children with behavioral disorders. Why? It's a problem called absentee ownership.
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For a few months, I’ve been hearing about a shortage of a drug called Adderall, which is used primarily to treat attention-deficit/hyperactivity disorder (ADHD), but can also address other conditions such as autism and narcolepsy. People with ADHD have trouble focusing, and sometimes even doing routine tasks like telling the time. Adderall addresses this problem, and has improved the lives of millions of people with this disorder. Yet since August of last year, the drug has been in shortage.
There are several reasons for the shortage and lots of reporting around it. But one problem that I haven’t seen described is how the oligopoly that controls drug distribution in America has been slowly cutting off access to Adderall to people who need it. So that’s what I’m writing about today. But first…
Cloud Computing Inquiry
The Federal Trade Commission is looking for public feedback on market power problems in cloud computing. So if you’re in that area or know people who are, tell the government what you think or send the link onward to your colleagues/friends.
Frankenstein’s Monster Shows Up in a Brandeis Dissent
In 1933, Supreme Court Justice Louis Brandeis penned one of his most famous dissents on a case, Liggett v Lee, involving a Florida law prohibiting the expansion of chain stores. Brandeis was writing at the height of the Great Depression, during the worst wave of bank failures in American history, as Germany was falling into fascism and democracies collapsed worldwide. It was a moment of total paralysis, not only economically but psychologically as well. Citizens had stopped believing they could govern themselves. They hungered for someone, anyone to step up. No one was in charge, and a spiral downward, of banks, of prices, of lives, of hunger, continued.
In that moment, the Supreme Court made it slightly worse. The court eroded the ability of the Florida legislature to control its own commercial destiny, a democratic body attempting to stop the depression and the ever lower prices that people felt fostered it. Brandeis, noting the threat to democracy of a rogue court system disallowing self-government, struck back, in the best way he knew how. With his pen.
The citizens of Florida, he argued, sought to reign in Wall Street-financed chain stores, and big business more generally, for many reasons. There was dramatic wealth inequality these firms fostered, and that helped cause the Great Depression by depressing prices and purchasing power. But more than that, Brandeis noted, chain stores had a destructive effect on the character of the citizen. These institutions tended to “convert independent tradesmen into clerks” and “sapping the resources, the vigor, and the hope of the smaller cities and towns.” It wasn’t just that far away financiers sucked up profits, but that the decision-makers didn’t live near the people whose lives were affected by their choices.
Brandeis made two powerful analogies about chain stores. The first was to call the giant corporation a ‘Frankenstein monster.’ The blockbuster film Frankenstein had come out just two years earlier, and Americans knew what it meant, a force that was powerful, beset with energy, and yet not in control of its actions, and so likely to do harm to innocents, almost at random. This was the chain store, the big corporation, powerful and dangerous.
The second was an Anglo-American legal concept called ‘absentee ownership,’ which traditionally meant someone who owned land, did not live on or near it, yet drew income from it regardless. The English tenant system imposed on Ireland that caused the Irish potato famine was an example of absentee ownership. And just ten years before Brandeis wrote his dissent in Liggett v Lee, famed economist Thorstein Veblen had updated this concept to include the industrial corporation, showing a big business might have control but not responsibility, leading to grave, and unexpected harm, even without intent.
To stop absentee ownership and gain some control of their lives, Brandeis noted, is one reason the citizens of Florida wanted to block the expansion of chain stores. And it was wrong, a grave threat to liberty and self-government, for courts to disallow such a choice, especially in 1933, at the height of an economic, political, and cultural catastrophe. “The citizens of each state,” he argued, should still be “masters of their destiny.” Over the next ten years, the New Deal broke apart this system of distant control. But it never fully went away. And since the 1980s, with the erosion of antitrust enforcement and the return of monopolies in force, it has come back.
Indeed, the pervasiveness of absentee ownership is one of the most important business problems we face today. It’s a term I’ve tried to resurrect in discussing why big tech firms allow the sale of counterfeit goods, and it’s one a core problems in private equity. Absentee ownership is one of the most dangerous consequences of monopolization, because a firm that is too big to manage but nonetheless has immense power, can correspondingly do immense harm. And this concept brings me to the opioid crisis, and to the shortage of a medicine called Adderall, both of which are rooted in the same problem that Brandeis noted in 1933.
I won’t go into the suffering around opioids, as I assume most people know it is one of the biggest domestic tragedies in modern American history. And though it’s not nearly as bad, there is also suffering over the lack of Adderall, which has been in shortage since August. The Center for Disease Control estimates 10% of kids have ADHD, and without their prescriptions, children are experiencing everything from “getting suspended from school to having trouble sleeping.” The panic among adults who rely on this medication is intense.
Like a lot of drugs, Adderall has properties that are addictive if misused, and people do abuse it. In that sense, it’s a lot like Fentanyl, morphine, or oxycodone, which are prescription drugs that have very similar properties to heroin, and are used to legitimately treat cancer and other forms of severe pain, but could be funneled into a black market. Drugs with potential for abuse are called scheduled drugs or controlled substances, and the Drug Enforcement Agency places them on a schedule with special regulatory limits and criminal sanction, which vary depending on both the drug’s medical value and its potential for abuse/addiction.
Now, America has a prescription drug abuse problem, where people who shouldn’t get prescription drugs are abusing them. And in many cases, dying. We had over 100,000 deaths last year from fentanyl and other opioids (not all are prescribed drugs at this point, but the crisis started that way). Here’s a chart from the CDC, you can see the lines point the wrong way.
At the same time, we also have a prescription drug shortage, where people who should get prescription drugs like Adderall can’t get them.
There’s a lot of really good reporting on the Adderall shortage. There are discussions of supply chain fragility, DEA regulations, demand spikes during the pandemics due to telehealth rule relaxation, and so forth. The New York TImes today has an oped excoriating, rightfully, the DEA for bad policy. That said, it seems very difficult to figure out what’s going on. This headline on CNN characterizes the reporting.
This shortage is complicated, and has several causes. Teva Pharmaceuticals, for instance, which is the largest producer, had problems with its factory. And yet, Teva today has Adderall to sell, as do many other producers, but the shortage persists. What is going on? I suspect that we aren’t hearing about one part of the problem. Monopolization. Indeed, monopolies often leads to shortages, which we’ve seen with baby formula, hospital medicine, ammunition, and military equipment. And they are a part of the problem here.
A few months ago, I got a text from one of the smartest pharmacists I know, who owns an independent pharmacy that has been in his family for three generations. He knows the business, cold, and consults for many other independent pharmacies. He told me, somewhat panicked and despondent, that big distributors are no longer allowing most pharmacies access to controlled substances, which is between 10-15% of the business. His pharmacy was dispensing various controlled substances, as every pharmacist does, and one day was simply cut off from this class of drugs by the wholesaler/distributor he buys medicine from, which is a firm named Cardinal Health. So he had to send many patients elsewhere, and explain to them that he had little to no Adderall (or any other controlled substances like key pain meds) in stock. This isn’t just a financial hit, telling, say, a cancer patient you may have helped for years to go elsewhere is awful.
He went digging to find out why. And as the Adderall shortage stretches on endlessly, I figured I’d share what he told me. After all, while a temporary shortage makes sense sometimes - there aren’t enough Taylor Swift tickets - persistent shortages of easily produced medicines that are not patented shouldn’t exist in America. I mean, if you can sell medicine for a lot of money, you would think someone would be doing it. They certainly do for all kinds of branded medicine, but not for off-patent stuff like Adderall. That doesn’t make sense. My contact’s story, however, filled in some of the details.
So why would a company like Cardinal Health cut off a customer from buying an entire class of products? Doing so reduces Cardinal’s profit, it annoys the customer base, and it denies medicine to patients. It would certainly, in a competitive market, cause my contact to shop at other distributors who don’t arbitrarily blackball him.
To understand why Cardinal did what it did, and why my contact actually can’t find a different source of medicine, we have to get into how the industry is organized, and why this highly consolidated model intersected with the legal fallout from the opioid crisis.
Distributing medicine is a conceptually simple business. A wholesaler buys medicine or supplies from pharmaceutical companies or producers, puts it in a warehouse, and then sells it to pharmacies, hospitals, or providers, with some sort of mark-up. Oxycodone and fentanyl, the two key drugs that helped hook America, were distributed via this model. So is Adderall. But so are most antibiotics, asthma inhalers, sleep machines, anti-fungals, and tens of thousands of other medicines and devices that aren’t controlled substances.
There is some advantage to scale in the drug distribution business. There are network effects in having lots of warehouses, relationships, and expertise. So size matters. Still, concentration in drug distribution is at an extreme level, far beyond what you’d expect. Three corporations - McKesson, AmerisourceBergen, and Cardinal Health - collectively control, according to a Senate report in 2018, roughly 85% to 90% of the market in the U.S. These three wholesalers sell the whole range of stuff needed for a pharmacy to operate, from anti-fungals to oxycodone.
The key to the wholesaling business is the ability to monopolize. There are a host of classic tactics here that I’ve written about that allow wholesalers to do so. Corporate mergers matter; the big one here was the formation of AmerisourceBergen in 2001 that shrunk the industry to three players, though there were many smaller acquisitions as well. But in this industry, the bigger issue is exclusive contracting arrangements with pharmacies that make it impossible for rival distributors to come into the market.
Recall my contact is a Cardinal Health customer, which means that to stock his shelves, he has a deal where he is obligated to buy 90% of his generic pharmaceuticals from Cardinal. He’s not sure what will happen if he doesn’t meet that threshold. He’s not allowed to read the contract that he’s a party to, as it’s secret (which in and of itself is crazy). But he tries to buy as much through Cardinal as possible.
Exclusive dealing is fairly common, and there are a bunch of carrots and sticks that wholesalers have to enforce such exclusive dealing arrangements, from loyalty rebates that return more money the more you buy, to penalties for shopping elsewhere. The cloak and dagger nonsense is also routine. As the Senate Finance Committee wrote in a staff report in 2018, “the opaque nature of the current system… allows for little insight into how the price of a drug changes, or is otherwise affected by, the terms of these financial relationships.” Secrecy of pricing, often under the guise of trade secrets or non-disclosure agreements, characterizes the business of medicine.
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And that brings me to opioids. This dysfunctional and consolidated business, in which people who run these firms focus on pricing games and mergers instead of providing good quality products for a reasonable profit, is a key reason for the addiction epidemic ravaging America. It’s easy to blame Purdue Pharmaceuticals, and the Sackler family, who invented Oxycontin, for the opioid crisis. And that is correct. But just as it takes a village to raise a child, it takes an entire pharmaceutical industry to addict a nation. And as the opioid crisis was growing, Cardinal Health, McKesson, and AmerisourceBergen distributed Purdue’s medicine aggressively, unlawfully, and neglectfully.
For more than ten years, all three were caught not paying attention to who they were selling to, multiple times. Cardinal Health, for instance, was nabbed in 2008, 2012, 2016, and 2017, for distributing oxycodone pills to pharmacies that were clearly fronts for organized crime. It was so egregious that in 2012, the DEA decertified one of its facilities for selling 12 million oxycodone pills to four Florida pharmacies. McKesson and AmerisourceBergen were just as bad. For instance, in 2007, the DEA noted that “the continued registration of [AmerisourceBergen] constitutes an imminent danger to public health and safety.”
In the late 2010s, policymakers realized that tens of thousands were dying every year from opioids, and the politics of the crisis changed. State enforcers took the lead, driving Purdue into bankruptcy and the Sackler family into disgrace. And other players in the industry didn’t emerge unscathed. In 2021, the wholesaler oligopoly, along with all of the large players in the industry, from Teva pharmaceuticals to Walmart to McKinsey, settled with state attorneys general for tens of billions of dollars, which the states are using to deal with the gruesome consequences of the addiction epidemic.
I read one of the suits filed by a state AG, Bob Ferguson of Washington state, and it’s quite a compelling read. Ferguson is probably one of the most impressive, if not the most impressive, state enforcers in the country at this point. And what he laid out about the wholesalers is devastating.
The story Ferguson told is one of neglect. He didn’t try to prove the wholesalers intended to sell opioid pills to addict America, but that despite the legal obligations involved in distributing controlled substances, the big wholesalers just didn’t pay attention. Cardinal was too big to know its customers, or even its employees, and allowed lawlessness and random bureaucratic rule-making to rein. It was a classic case of absentee ownership, though Ferguson didn’t use that term.
In suing the different players in the industry, all of whom were too big and together comprised a Frankenstein monster, enforcers and plaintiff’s lawyers went after money. In 2021, there was a national settlement. Distributors agreed to pay $21 billion over 18 years to resolve all state litigation involving opioids, and Teva paid $4.5 billion over 13 years. This was partly about justice, to disgorge illicit profits. The public officials needed resources to address the gruesome consequences of the addiction crisis they are confronting.
But it wasn’t all about money. The settlement also had a bunch of rules that the distributors had to follow. These rules were strict in trying to ration what controlled substances wholesalers could sell, and the wholesalers had to implement a compliance regime where officials - usually ex-DEA - had to look for ‘red flags’ among their customers, like if your pharmacy has been sanctioned by the authorities, if you’re up to date on your licensing requirements, if you take a lot of cash payments, and if you are responsive to requests for information. But also, red flags include things like if the amount of controlled substance you dispense has grown, or if the ratio of controlled substances vs normal medicine has increased above an average amount for pharmacies in your area. (The ratio overweighted controlled substances like opioids and Adderall, which are higher on the DEA schedule list and more easily resold in the black market than drugs like Ambien.) That seems reasonable, on first glance, but it’s the cause of the the Adderall shortage, as I’ll get to in a moment.
In one sense such a settlement makes sense. Enforcers get cash, and mandate that the corporations who did wrong change their behavior. But in another sense, it was fundamentally misguided. McKesson, AmerisourceBergen, and Cardinal were treated as legitimate enterprises, instead of drug dealers of illicit narcotics. The problem is that most people involved in structuring the settlement missed the key dynamic underpinning *why* these distributors were doing what they were doing. Enforcers assumed that these big institutions are good at what they do, and just sought extra profits by selling more pills.
But this assumption, that the wholesalers were competent and simply chose to ignore their obligations, is wrong. What distinguishes Cardinal, AmerisourceBergen, and McKesson is not their ability to distribute medicine, which they may not be very good at doing. It’s that they have *market power* and can block rival distributors who don’t engage in illicit drug dealing from getting into the market. The goal of the opioid settlement shouldn’t have just been to disgorge profits and give these firms compliance homework, it should have been to displace these bad actors entirely from the market and let non-corrupt wholesalers take their market share. Breaking the exclusive contracts and market power of the Big Three wholesalers, in other words, should have been a core part of the settlement.
The new harsh rules and the failure to restructure the industry, fostered, in part, the Adderall shortage, because of how the settlement itself works. What happens if a big wholesaler finds a red flag in a pharmacy buying a controlled substance? Well, the distributor is supposed to do some due diligence to make sure the pharmacy isn’t just part of a scheme to dispense pills for illegal resale. If it is, the wholesaler should cut it off from controlled substances. But if the pharmacist is trying to get people medicine in good faith, keep selling. Of course, wholesalers are absentee owners, and they don’t actually have close relationships with the pharmacies they sell to. The wholesalers are simply too big.
So instead of doing due diligence, they arbitrarily cut off pharmacies who increase the amount of controlled substance they dispense. According to the New York Times:
The distributors use algorithms that cap the quantities of controlled substances a pharmacy can sell in a month. Before the settlement, pharmacists said, they could explain to a distributor the reason for a surge in demand and still receive medications past their limits. Now the caps appear to be more rigid: Drugs are cut off with no advance notice or rapid recourse.
The net effect of this change, of organizing business via an impersonal algorithm, is that if a pharmacy fills too many Adderall prescriptions, it is cut off and can no longer buy any controlled substances, from Ambien to Sudafed to Fentanyl to Percocet to Ritalin. That’s a big financial hit. So if you’re a pharmacy, every time a new patient comes to you with a legitimate prescription for a painkiller or ADHD medication, you have to weigh whether it’s worth cutting off a lot of your business to fill it.
And the problem for pharmacists is worse than it appears. “A lot of people that take pain medicines and Adderall,” my contact noted, “ALSO take other drugs, and most people want to use one pharmacy, not 2-5. If you can't dispense their controlled substances, they probably won't stay for their blood pressure medicine or their diabetes meds.”
When a pharmacy is cut off, legitimate demand doesn’t go away. Those customers go elsewhere, and the remaining pharmacies willing to fill legitimate prescriptions end up increasing their ratio of controlled substances to normal medicine. And then they get cut off. And so on and so forth, in a downward spiral.
So what has happened is that most pharmacists have concluded that it’s just not worth it to prescribe any controlled substances unless a patient buys a lot of other normal medicines as well, so that your ratio of controlled substances to normal medicine doesn’t get out of whack. Gradually, it’s becoming more and more difficult to get a prescription filled, especially for a common yet highly stigmatized medicine like Adderall (though apparently certain opioids are also difficult to get now too.)
There are other problems that make this situation worse. The DEA, the Centers for Medicare & Medicaid Services, and state licensing boards can be harsh. And the DEA was embarrassed by its own failures during the opioid crisis, and is now too tough on providers prescribing legitimate medicine. But at least public agency rules are public. The more difficult problem is the wholesalers and their secret rules. A pharmacist can’t call up and find out whether they are violating them.
Indeed, that’s what happened to my contact. He was seeing more and more Adderall patients, because pharmacies near him stopped serving them. This was legitimate demand. He and his Dad talked about it, and decided that it was important to help people who needed this medication, even if there was a risk. Then his pharmacy got cut off from all controlled substances by Cardinal, after one cancer patient had his or her painkiller dose increased.
Cardinal asked him to reapply in three months. He did. And Cardinal told him no dice, they wouldn’t reinstate his pharmacy and allow him to buy controlled substances. Why? Well as it turns out, he also got blacklisted by Teva, the manufacturer of many of these medicines. Contact Teva, they said. So he called Teva, and Teva told him that they blacklisted him because Cardinal had blacklisted him. It’s bureaucratic hell.
Now, it would be easy to say "oh this is all so complicated and bureaucrats just do what they do.” But here’s the thing. My contact has been able to obtain some supply of controlled substances from smaller wholesalers - none of the smaller ones have, in his words, “looked at us funny.” They asked for information to make sure he’s serving real patients, and then told him, “your policies and procedures look legitimate.”
These are the distributors that have the other 5-15% of the market. They didn’t addict America in the opioid crisis, and aren’t under sanction. They don’t use algorithms or blunt force, and they don’t assume that every person who uses such prescription drugs is a criminal and every pharmacist that prescribes them is a drug dealer. In a lot of cases they have more reasonable prices. But he can’t buy that much from them, because he’s locked into his 90% purchasing requirement from Cardinal.
But the smaller distributors can’t get into the market because pharmacists cannot buy from them. McKesson, AmerisourceBergen, and Cardinal have exclusive contracting arrangements that prevent rivals from trying to take business. So while he dispenses some controlled substances (especially the less stigmatized stuff like testosterone, Ambien, Xanax), he can’t meet the demand from his patients.
What’s become increasingly clear is that the DEA needs to relax its strictness against dispensing of controlled substances. But it’s also critical to fix the market structure here, because absentee ownership in distribution fosters both addiction and shortage, depending on what’s easier for Frankenstein’s monster. And there are laws that should let us deal with the problem: the exclusive dealing arrangements that foster a corrupt oligopoly. The Clayton Act Section Three bars exclusive dealing contracts in commodities. There are also other laws that bar the kinds of price discrimination and conflict of interest games that the wholesalers and others in the pharmaceutical supply chain play, like the Robinson-Patman Act. But we haven’t enforced them for a long time, and the courts have made it hard to bring cases. (This is, of course, changing.)
Going forward, there are lots of non-antitrust hooks to use to fix the situation. Officials could try to break up firms like the distributors when they do deals like the opioid crisis settlement, or change their exclusive contracting practices, rather than giving these big incompetent organizations homework they won’t do. Regardless, given the serious problems with both the opioid crisis and now the opioid crisis settlement, it’s time to examine what went wrong and fix it.
Would the opioid crisis, or this Adderall shortage, have happened without these giant distributors and producers of generic Fentanyl and oxycontin? Maybe. Maybe not. The problems probably would have been a lot less meaningful. After all, if you’re a pharmacist who wants to buy from a distributor who didn’t kill lots of Americans, you pretty much can’t. It’s in the contract you can’t read. Meanwhile, the wholesaler monopolist algorithms continue, run by absentee owners, addicting people or shortchanging them, almost at random, like Frankenstein’s monster.
This week, Scott Barshay, chair of the corporate department at law firm Paul Weiss and one of the top deal-making attorneys in the world, attacked Antitrust Division chief Jonathan Kanter and FTC Chair Lina Khan for using "in terrorem" scare tactics to stop deals. "They're just anti-deal, and they're in a sense anti-the law,” he said. "In this very narrow context of who's going to be running the DOJ antitrust division and the FTC in the future, our business will be a lot better if it's somebody else.”
These comments are quite meaningful, and show that the 76% drop in merger activity in 2022 is a result of more assertive antitrust policy. Interestingly, the bitter commentary from Barshay is also somewhat personal. Kanter used to work at Paul Weiss, but was pushed out because the lawyers there wanted to represent Big Tech firms, and Kanter didn’t. Barshay is now saying that enforcing antitrust law is equivalent to abusive bullying and saying he’s hoping his former colleague gets fired. Still, what matters here is that Barshay isn’t an antitrust attorney, he’s a top deal-maker.
He’s complaining about the practical impacts of antitrust enforcement on the overall ability of corporations to consolidate, and his firm to profit from that consolidation. Barshay's attack means Kanter and Khan are doing a great job.
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