From NCPA

The number of prescription drug shortages reached record levels in 2011, far surpassing the same figure for even recent years. These shortages have been costly and have disrupted chemotherapy, surgery and care for patients in various states of health. Not surprisingly, government price and output controls are largely to blame for shortages, as they cause distortions within the market and adverse motives among market participants, says Investor's Business Daily.

• There were 267 prescription drug shortages in 2011 -- the highest this figure has ever been.
• This number is up from 211 in 2010.
• As recently as 2004, just 58 drugs were in short supply.
• Since 2010, at least 15 people have died as a direct result of these drug shortages.

Medicare practices and protocol serve as an excellent example of how government regulation distorts the market for prescription drugs. Because Medicare's Plan B reimbursements to drug makers often don't cover the cost of a drug, or shrink profits to such low levels it's no longer worth making it, they often price drugs out of the market completely.

However, because hospitals still need those drugs, they are forced to use non-market means in order to obtain them.

• A recent survey found more than half of hospitals routinely buy scarce drugs on the black market, which often demands exorbitant prices.
• Additionally, many hospitals respond to government-sponsored uncertainty in the market by stockpiling what drugs they can obtain.
• This causes further shortages and further drives up prices.

Regulation in the drug market also harms innovators and drug creators by contributing to uncertainty and increasing risks associated with drug development. It costs nearly $1 billion and takes 12 years to bring a new drug to market, according to Pharma, the drug makers' industry group. Because of the large investment of both funds and time, in addition to compliance costs with onerous U.S. Food and Drug Administration standards, innovation in the prescription drug market has been suppressed irreparably.

Moreover, according to John Goodman, president and CEO of the National Center for Policy Analysis, "[A] drug manufacturer must get approval for how much of a drug it plans to produce, as well as the time frame. If a shortage develops (because, say, the FDA shuts down a competitor's plant), a drug manufacturer cannot increase its output of that drug without another round of approvals."

Source: "Vast Web of Federal Regulation Causing Drug Shortages," Investor's Business Daily, January 4, 2012.