Economics and risks of FDA’s Quality management maturity rating programme

The US Food and Drug Administration (FDA)’s Center for Drug Evaluation and Research (CDER) through the Office of Pharmaceutical Quality in 2021 embarked on an initiative to develop a framework for establishing a pharmaceutical manufacturing site quality rating system, the Quality management maturity (QMM) programme.¹ One of the recommendations in a report by the FDA’s Drug Shortage Task Force called for the implementation of such a ratings system that would provide pharmaceutical buyers greater transparency to differentiate the quality management of drug products among manufacturers.² Such transparency would incentivise pharmaceutical manufacturers to establish practices and processes consistent with broader-based risk management frameworks and pharmaceutical quality system (PQS) guidance as described in ICH Q10.³ 

Today, manufacturers of pharmaceutical products marketed in the US are required to comply with current good manufacturing practice (cGMP) standards, which represent a regulatory minimum on quality. cGMP standards promote manufacturing and process quality by ensuring that drug products meet the “safe and effective” criteria set forth by FDA.  QMM seeks to elevate quality management among pharmaceutical manufacturers beyond cGMP requirements relating to aspects of manufacturing design, development and operational processes. As such, quality management takes on a more holistic approach to promoting a process of continuous improvement in managing the drug product life cycle. QMM effectively attempts to measure a company’s adoption and implementation of ICH Q10 standards.

One of QMM’s expected benefits is to prevent the occurrence of a drug shortage. The Drug Shortage Task Force identified several contributing factors to drug shortages, including a lack of market and regulatory incentives for manufacturers to implement quality management systems in their processes. The Task Force noted that a general lack of transparency regarding the quality management processes established by pharmaceutical manufacturers, and negligible financial incentives among pharmaceutical purchasers to promote manufacturer quality management programmes can lead to drug shortage events due to deficiencies in underlying processes that lie beyond the detection of some manufacturers.

Another contributing factor to drug shortages cited by the Task Force was the economic landscape and market structure under which pharmaceutical manufacturing takes place. This market is characterised by a diverse array of products with varying degrees of profitability, demand and pricing uncertainties, market segmentation and concentration on the demand and supply side, as well as regulatory complexities that can at times lead to drug shortages for products due to a highly competitive market where investment in QMM manufacturing processes may not be of first order importance to a manufacturer pursuing a strategy of short-term profit maximisation.

The pharmaceutical industry is one of those industries that is critical to the welfare and health of society and as a result is highly regulated. The proliferation of drug products over the years, the globalisation of the pharmaceutical market, increasing complexity of drug products, manufacturing processes and supply chains warrant attention by both the FDA and the industry. Continued drug shortages worldwide are startling and concerning both to policymakers and also consumers and patients dependent on uninterrupted access to high quality drug products. The FDA’s safe and effective doctrine assures the American public that drug products consumed in that country meet a high standard of quality.  However, disruptions in the supply chain over the years have, in part, been attributed to deficiencies in manufacturing practices that could be addressed with a mature quality management programme. 

I conducted a study of the economics and risks from implementing a QMM rating programme to better understand  factors critical to the effectiveness of such an initiative on improving manufacturing quality management. This included an assessment of the industry’s market structure, economic incentives to invest in quality manufacturing processes, and risks and limitations to implementation of a rating programme. 

The structure of pharmaceutical markets is varied and complex. Multiple touchpoints on the demand and supply-side of the market introduce various risks. On the supply-side, supply chains are complicated and, in many cases, market pressures and other characteristics limit input and product diversification. Some drug products are susceptible to active pharmaceutical ingredient (API) shortages for a variety of reasons and bifurcation in the market for finished dosage form product between brand and generic drugs, for example, likewise can affect the degree of competition and product diversification in a market. The market is characterised by many large sellers and these firms can exert considerable market power in product negotiations. 

On the demand-side, multiple participants such as consumers, health plan sponsors and drug purchasing intermediaries such as Group Purchasing Organisations (GPOs) and Pharmacy Benefit Managers (PBMs) impact how the effects of a drug shortage are transmitted in the market, prices paid for products and their demand.  The critical nature of pharmaceuticals for end users explains why prices are relatively inelastic. The confluence of these characteristics in supply and demand, the presence of government pharmaceutical programmes for some markets in the US (Medicaid, Medicare and the United States Department of Veterans Affairs [VA], for example) portray a market that does not fit nice and neatly into one economic model from which to explain market behaviour with and without a quality rating system.

The current state of the pharmaceutical market is characterised by an asymmetric information problem that introduces several market imperfections. FDA’s safe and effective doctrine has effectively provided consumers and other demand-side participants with comfort that the drug products used meet a high minimum standard of quality; however, below the surface, differences among manufacturers exist in terms of their adoption of best practices in quality management.  This has significant implications for the likelihood of a drug shortage over time for companies unwilling or unable to go beyond cGMP standards.  Absent a standardised methodology to assess this differential in manufacturing quality, the market is unable to differentiate drug products based on manufacturing quality.  Costs imposed on pharmacies and healthcare providers during a drug shortage are not built into price negotiations directly. 

A quality rating was demonstrated in multiple economic models and numerical analyses in my study to allow for drug product differentiation which could affect equilibrium outcomes compared with markets lacking a quality rating system. Notwithstanding inherent price inelasticity in these markets, some degree of price differentiation could be realised as a mechanism for incentivising investment in manufacturing quality. A more likely incentive to come out of a quality rating system would be to use ratings in drug formulary tiering; manufacturers have economic incentives to have their products placed high on product tiering systems and so this might be a strategy for buying organisations to pursue. 

Looking at other industries, the viability of a quality rating system for the pharmaceutical industry seems bright. Ample precedent for ratings systems exists, demonstrating their utility in incentivising investment in quality from an examination of several use cases.  FDA’s Center for Devices and Radiological Health (CDRH) has experienced solid success and momentum in their implementation of voluntary assessments of medical devices.⁴ The Centers for Medicare and Medicaid Services (CMS) nursing home rating system, for example, was found to have facilitated significant price differentials between high and low-rated nursing homes.⁵ 

In the long-run, the success of the QMM rating programme will depend on several factors to widen participation among manufacturers. Making QMM ratings mandatory for API and finished dosage form (FDF) manufacturers would certainly achieve full industry participation, comparable to what banking regulatory agencies require of depository institutions regarding their CAMELS ratings (a rating system to classify a bank’s overall condition based on five critical elements of operations: capital adequacy, asset quality, management, earnings, and liquidity and asset-liability management).  Following this path has obvious trade-offs for the FDA, industry and consumers but would be a way to realise full adherence to QMM practices.  The costs to implementing this would clearly need to be weighed against the benefits.

A more pragmatic solution is to continue to evolve the QMM voluntary pilot programmes into a broader system of voluntary adoption.  There is evidence from other markets that with sufficient time and resources, what starts as a limited voluntary programme can blossom into a widely adopted program as demonstrated with ISO 14001.⁶  The FDA could target certain manufacturers likely to adopt a quality management process and, by linking a quality rating to differential regulatory requirements and flexibility, the FDA would not only be able to provide more efficient risk-based regulatory oversight, but also incentivise greater participation in this programme.  Ultimately, a transparent, standardised manufacturing quality rating, by way of a combination of economic and regulatory incentives has the potential to promote investment in manufacturing quality practices and thereby lessen the potential for disruptions and risks in the pharmaceutical supply chain.

References

1. US Food and Drug Administration, Center for Drug Evaluation and Research, Office of Pharmaceutical Quality. Quality Management Maturity: Essential for Stable U.S. Supply Chains of Quality Pharmaceuticals. April 2022. Available at: https://www.fda.gov/drugs/pharmaceutical-quality-resources/cder-quality-management-maturity
2. US Food and Drug Administration, Drug Shortage Task Force. Drug Shortages: Root Causes and Potential Solutions. October 2019. Available at: https://www.fda.gov/drugs/drug-shortages/report-drug-shortages-root-causes-and-potential-solutions
3. ICH Q10 pharmaceutical quality system [Internet]. Available from: https://www.ema.europa.eu/en/ich-q10-pharmaceutical-quality-system
4. US Food and Drug Administration, Center for Devices and Radiological Health. Case for Quality. Available at: https://www.fda.gov/medical-devices/quality-and-compliance-medical-devices/case-quality
5. Huang SS, Hirth RA. Quality rating and private-prices: Evidence from the Nursing Home Industry. Journal of Health Economics. 2016Dec;50:59–70.
6. Ozusaglam S, Robin S, Wong CY. Early and late adopters of ISO 14001-type standards: Revisiting the role of firm characteristics and capabilities. The Journal of Technology Transfer. 2017Mar8;43(5):1318–45.