I can understand why that process would restrain competition and drive the price up. What I can’t understand is why those generic companies which are in business would sell the product at such a low price that there is a shortage. Why not jack up the price and eliminate the shortage? The only explanation I have is that their ability to jack up the price must somehow be restricted by non-competitive factors. My suspicion is that either the insurance companies, the government, or both have basically told them, “This is what we’re going to pay for it, and nothing more. If you can’t sell it for that, then so be it.”
In other words, it’s not the supply side that is the problem, but the demand side.
I'm going to guess that the drugs aren't made continuously -- that the same production facilities are used to make several drugs. If a particular drug runs out of inventory before another production batch is scheduled to be made, or a batch run for drug A is delayed while an order for a more profitable drug B is filled, then a shortage happens.
The solution would be for hospitals and distributors to maintain a bigger inventory, but it makes for a better news story to blame manufacturers.
You are correct. The biggest purchasers leverage their size against the manufacturers. It is in a sense price controls and you are already aware that they cause shortages. The medical marketplace has not been a free market since the intrusion of Medicare in the 1960s.