The outbreak of fungal meningitis has exposed more than one dangerous weakness in the U.S. drug supply network. The need for better oversight of large-scale compounding pharmacies might be the most glaring; it was such a facility that produced the moldy steroid injections that have caused, at last count, 23 deaths and 297 illnesses.

Yet the outbreak also calls attention to the growing problem of drug shortages. A shortage in the generic form of the steroid injection may have encouraged health-care providers to buy the drug from state-regulated compounding pharmacies.

From 2005 to 2011, the number of drug shortages in the U.S. rose from 61 to 251, according to the Food and Drug Administration. Until federal regulators can bolster the supply chain without compromising quality, we can’t be assured of reliable access to safe medicines.

Methylprednisolone, the drug that has caused the meningitis outbreak, was not technically in short supply. A brand-name form made by Pfizer Inc. is on the market. The cheaper generic kind ran out, however, because the two companies that make it, Teva Pharmaceuticals Industries Ltd. and Sandoz AG, stopped doing so, at least temporarily. Some hospitals and clinics may have turned to compounding pharmacies for the drug to keep their costs down.

Now, even as the FDA continues to investigate the tainted drug behind the meningitis outbreak, policy makers should find out what exactly motivated Teva and Sandoz to stop making their generic versions of the steroid.

To get a sense of what might have happened, consider the forces that cause drug shortages. In most cases, the medicines in tight supply are, like the steroid involved in the meningitis outbreak, older generic injectables, the kind that are typically administered by a nurse, doctor or other health professional. They also include antibiotics and cancer and nutrition drugs.

In an ordinary market, when one company’s production lines shut down, competitors step in to meet demand. The generic injectable drug business is different, however, in that it is greatly influenced by the practices of Medicare, the largest U.S. purchaser of health care. As a Bloomberg Government study points out, Medicare rules from 2005 prevent reimbursement to providers for injectables and other drugs that health-care workers administer from rising more than 6 percent above the average sales price. The cap has reduced suppliers’ incentive to expand capacity when shortages happen.

This price limit ― well intended to prevent Medicare from overpaying for drugs ― also puts pressure on generic drug makers to stint on quality control.

Concern for quality can make any production process more expensive. So it isn’t surprising that an increase in inspections of drug-making facilities by the FDA in the past few years has also contributed to shortages. Most drugs that were hard to come by as of February were made by facilities where the FDA had flagged quality problems, including findings of glass shards, metal filings and fungal or other contamination. When regulators raise such issues, the easiest and least expensive response for drug makers is often to stop production.

Although some politicians and commentators have thus blamed drug shortages on overzealous FDA policing, it makes little sense for the federal government to try to solve a drug quantity problem by letting down its guard on quality. Consider, for example, the 80 deaths caused by contaminated batches of heparin (an injectable blood thinner) in 2007 and 2008.

A new federal law signed by President Barack Obama in July requires drug companies to notify the FDA six months in advance of anticipated problems that might lead them to shut down production of a drug. (In the past, such action was required only of sole-source manufacturers.) This was a strong step, and could be made even stronger if drug makers were penalized for noncompliance.

Of course, by giving public warning of impending shortages, this new requirement runs the risk of encouraging some hospitals and clinics to hoard drugs, further constricting the supply. The FDA will need to look at ways to discourage this response.

Still more helpful would be a change in the Medicare price controls ― to either raise the cap above 6 percent or, as Ezekiel Emanuel, a former adviser to the Obama administration on health-care policy, recommends, at least do so when a shortage develops.

Congress is in no mood to boost Medicare spending, of course. But shortages come with costs of their own. Hospitals spend about 1 percent of their drug budgets dealing with them, Bloomberg Government estimates, or about $3 billion a year. Often the extra money is spent purchasing drugs through the so- called gray market, in which drug buyers hold and ultimately resell scarce medicines for many times their original price.

Strict adherence to Medicare’s price caps on injectable drugs may be penny-wise and pound-foolish. And it stands in the way of ensuring Americans’ constant access to safe, injectable drugs of every kind.

(Bloomberg)