Healthcare Reform A Case For Government Intervention In The Pharmaceutical Industry

Healthcare Reform: A Case for Government Intervention in the Pharmaceutical Industry

Introduction

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Few topics are more pervasive in the current political climate as health care reform. In

particular, vaccinations for infectious diseases are responsible for the suffering and death of

hundreds of millions of people throughout the world. Pharmaceuticals have brought tremendous

health benefits to developing countries, but existing pharmaceuticals are often underused or

misused, and pharmaceutical R&D on health problems specific to poor countries is woefully

inadequate.

One would assume that this would prompt action of private enterprise to take

advantage of this situation by developing drugs to be sold to those millions of people who need

them and create value for themselves, in the form of monetary gain, and create value for the

customers of these vaccines, in the form of a health. One would expect capital to pour into an

industry that has such a large customer base and so few suppliers, especially considering the

science and technology needed to generate these drugs currently at our disposal are adequately

advanced. Unfortunately, these assumptions are wrong. Today’s research and development

(R&D) based pharmaceutical industry is reluctant to invest in the development of drugs to treat

the major disease of the poor, because a return on investment cannot be guaranteed.

Few new

drugs are developed as the pharmaceutical industry is hesitant to invest in drugs with uncertain,

or hard to quantify, returns on investment.

This policy brief will explore the incentive dynamics, or lack there-of, for pharmaceutical

companies to develop new drugs. The brief will explore possible solutions to this issue, including

those that warrant national and international government intervention and cooperation between

private enterprise and government entities.

The Issue

Kremmer 2002, p. 1

Patrice 2001

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Infectious diseases kill 14 million people each year.

More than 90% of these deaths

occur in developing countries.

Access to treatment for diseases such as malaria, or tuberculosis

are not affordable or have not been developed in a manner that makes them widely accessible.

At its core, the issue surrounding the pharmaceutical industry and its inability to bring

new drugs to market is one that can fairly simply have explained through economic theory,

something underestimated in traditional policy analysis. Today, drug development is confined

almost exclusively to a consolidated and highly competitive multinational drug industry driven

by profit.

This has created a monopolistic market that fails to supply the drugs needed by so

many at an adequate level. More simply put, the supply does not equal the demand.

Current Barriers to Drug Development

Several factors exist that are to blame for the undersupply of these drugs and ultimately

the pharmaceutical industries near zero investment into the R&D for medicines of infectious

diseases. The most commonly cited reason for the industry lack of investment is the extensive

cost of R&D to bring a drug to market. At the Tufts Center for the Study of Drug Development,

it was estimated that certain drugs might require up to $2.6 Billion in capital allocation to bring a

drug to market today, compared to $802 Million in 2003.

Regulatory barriers are another

obstacle pharmaceutical companies must maneuver through. These increasingly strict and

complex regulations contribute to an average of 8-12 years of development before drugs are

released.

Protection of intellectual property is another major concern of pharmaceutical

Patrice 2001

WHO 1990

Patrice 2001

Avon 2015

Patrice 2001

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companies when developing new drugs. Intellectual property rights play a large role in the ability

for companies to profit from the drugs they develop. If pharmaceutical companies cannot

successfully acquire patents for the drugs they develop and have a grace period for developing

those drugs, it is difficult for them to justify the costs of R&D when the expected revenues do

not pay for those costs.

Changing the Paradigm

Pharmaceutical companies have in some ways perverted the healthcare system and their

position within the system and turned public health into a commodity. It is undeniable that

pharmaceutical companies have added to societal welfare in the fact that they have brought drugs

to market and scaled drugs in a mostly efficient means, but this is not enough. Pharmaceutical

companies must continue to reinvest in R&D, as an investment in R&D is very much an

investment in the welfare of society. In its current state, the nature of the pharmaceutical market

is one that is characterized by the high risk of failure and the high costs of R&D that are funded

by the few successful, on-market products.

If we can successfully implement policies that

mitigate this investment risk, we can , in theory, increase R&D spend of the pharmaceutical

industry.

Accompanied by the necessary continued investment into R&D, pharmaceutical

companies should develop a means to make these drugs accessible to the millions of people who

need them in poor countries. It is clear that at the moment, the pharmaceutical industries decision

to invest in R&D is based purely on an economic premise. Left unaltered, the system is all but

certain to leave these people without the drugs they need, unless the incentive mechanics can be

Grabowski 2015

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updated for the needs of the 21

century. This will require a different approach and a different

framework to the current pharmaceutical-government relationships. This endeavor will require

the political will of international agencies such as the United Nations (UN), the World Bank, the

World Trade Organization (WTO), and the World Health Organization (WHO). With the

collaboration of various international and intergovernmental bodies, a mechanism can

successfully implement to stimulate drug development for these neglected diseases.

Goals

In short, we must explore options to create incentives for the pharmaceutical industry to

develop and scale medicines that are needed by a large part of society. Alternatives must be

found to the situation at hand that helps private enterprise overcome the shortsightedness that

often coincides with answering to stock holders. We will to present a case in which national and

international governments can somehow cooperate to provide the medicines needed by so many.

We hope to succinctly mend the market failure of drug development by adjusting the incentive

dynamics of the pharmaceutical industry.

Role of Government

The inability of private enterprise to provide drugs to a massive population of people who

are willing to pay for them is a massive failure of the market. This failure warrants government

intervention.

Pharmaceutical companies operate uniquely, in the fact that their role as an intellectual

monopoly hinders the free market.

In general, monopolies maintain power over the market they

operate within as there will be few to no competitors in that space. This creates a situation where

Boldrin 2008

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the monopolist is a “price setter” instead of a “price taker” as would be the case in a competitive

market.

In a competitive market, firms’ supply at the predetermined price of the market,

whereas in a monopolistic market, because the monopoly controls the market, they set the price

consumers ultimately pay. Theoretically, monopolies face downward sloping demand curves,

seen in Figure (a). This is a critical factor when determining how much of product firms will

bring to market. Firms will ultimately supply the market with their good of interest at the point

where marginal revenue is equal to marginal cost.

This marginal revenue equals marginal costs equation is particularly important when

comparing firms that operate in competitive markets to ones that operate in monopolistic

markets. Because of this fact, the monopolies will produce at a level beneath the market demand

for their good, which is less than what would be produced in a perfectly competitive market.

Pharmaceutical companies are the epitome of this monopolistic market and economic failure.

Intellectual monopolies operate in a market where a high waste of resources leads to less

efficiency, but barriers to market prevent competition from driving down prices and ultimately

increased societal welfare.

That said, there is hope, as governmental policies exist that can

remedy this market failure.

A great example of this is Martin Shkreli increasing the price of the drug Darprim, by a factor

of 56 from $13.50 to $750 per pill, something that otherwise would have been impossible in a

competitive market.

Intuitively this is where the revenue of one additional unit is equal to the cost of producing that

unit.

Boldrin 2008

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Figure (a) & (b) Demand in Perfectly Competitive vs Monopolistic Markets

The Alternatives

The pharmaceutical industry has reached a crossroads in its efforts to sustain the

productivity of drug discovery and development. When measured by the number of new drugs

approved by the unit of R&D investment, the productivity of pharmaceutical R&D is suffering a

long and slow decline. Several policy levers lay at our fingertips that may correct this market

failure and inefficiency.

Boldrin 2008

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Figure (a): R&D Efficiency

Maintaining the Status Quo

The most obvious and likely illogical solution to solving the pharmaceutical industries

inability to bring new drugs to market in a fair and accessible manner is to continue with the

current policies in place. Although the political feasibility of this is extremely high, the solution

is not very promising. Less than 1% of the 1223 new medicines launched on the international

market between 1975 and 1997 were destined specifically for infectious diseases.

This,

accompanied with the decrease in R&D efficiency depict the lack of incentives for private

companies to finance the discovery and development of these drugs

considering the lack of potential for profitability. These alarming facts act as illustrations as to

how the current model of drug development is not sustainable.

Trouiller 2002

Trouiller & Olliaro 1999

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If no new policy is implemented we can only expect pharmaceutical companies to point

towards the issues mentioned herein, including: R&D costs, regulatory barriers, and intellectual

property protection as reasons for their lack of investment in drug discovery and development.

Despite impressive advances in science, technology, and medicine, society has failed to allocate

sufficient resources to fight the infectious disease that particularly affect the poor.

This policy unequivocally serves as the most politically feasible, but certainly not the

most cost effective as it does nothing to address the millions of people, of low socio-economic

status, who are disproportionately affected by the pharmaceutical industries lack of incentives to

develop new medicines.

Public Purchase of Pharmaceutical Patents

Another solution at our disposal is to transition the government-pharmaceutical

relationship to one in which the government takes over the control of patent rights of drugs and

potentially the developing and distribution of those drugs. This argument is based on the premise

that public ownership would largely eliminate the monopolistic distortions caused by the patent

system, distortions that tend to be especially acute in the pharmaceutical context.

Economic

theory supports the idea that patents lead to monopolistic markets. If the public were to purchase

the patents to these drugs, they would, in essence, create a market of perfect information, in the

sense that everyone knows the chemistry behind developing the said drug and lead to a product

that is priced in a manner that allows for greater supply. This increased supply of the medicine,

at a lower price, would lead to increased societal health and arguably societal welfare.

Troullier 2002

Douglas 1997, p. 123

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Under this proposal, the government would pay patent holders a sum sufficient to reward

them for their research investments, and in turn, the patent holders would relinquish their

intellectual property rights, forming the way for formerly-patented pharmaceuticals to be sold in

fully competitive markets.

This solution acts as a balance between the incentives of developing

drugs in the first place, largely through public and private research, and making these drugs

widely accessible to everyone. It balances the twin goals of encouraging private research and

increasing the availability of new pharmaceuticals.

Purchasing pharmaceutical patents with public funds in an effort to create a freer market

for the drugs is an economically costly initiative but serves to be the most cost effective in

increasing societal welfare. As mentioned herein, 14 million people die each year from curable

infectious diseases. The ability to create a market in which the drugs these people need become

significantly more accessible is a benefit to society.

Increased Technology Transfer

Technology transfer is essential and important to drug discovery, and the development of

new medicinal products.

The potential to initiate administrative efforts in an effort to

perpetuate the transfer of technologies between organizations, is undeniably beneficial for the

industry and society. In its current state, the pharmaceutical industry has little initiative to fully

Douglas 1997, p. 123

Douglas 1997, p. 124

Mohite 2017, p. 1

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participate in technology transfer programs as secrecy and the hindrance of free information

prevent competitors from gaining any type of economic benefit.

Technology transfer may be very difficult to induce, particularly for products where

technology holders and demanders are likely to be market competitors.

Collaborative efforts

between organizations are essential to the success of this policy. Increasing technology transfer

efforts between institutions serves to be a very politely feasible initiative, but likely not the most

cost effective. The policy is not costly to implement and the largest burden comes with the

administrative realignment efforts of various intergovernmental organizations. That said, the lack

of incentives of large pharmaceutical industries to fully participate in these types of programs

make them difficult to pursue

Recommendations & Conclusions

As a society, we must determine whether health and access to healthcare is a private good

to be bought and sold as any other item by private enterprise or a public good to be administered

by the government, or somewhere in between. Pharmaceuticals have brought tremendous health

improvements to developing countries, and the international community could greatly increase

these benefits by implementing systems to provide better access to existing pharmaceuticals.

That said the market failures of monopolistic markets in which pharmaceutical companies plague

society and need to be addressed. This is particularly true for those in poor countries with

diseases that can be easily treated but no pharmaceutical companies have the incentive to

develop drugs necessary because of the significant costs associated with such costs. Government

intervention is warranted to correct the incentive mechanisms under which the pharmaceutical

WHO 2011, p. 55

Kremmer 2002, p. 87

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industry operates in an effort to make drugs for infectious diseases more accessible to those who

so desperately need them.

These realizations accompanied with investing in the global good of R&D for diseases

that disproportionately affect the poor could heavily benefit society. This will require

cooperation between governments, universities, and international agencies. In all, developing

countries, international organizations, and pharmaceutical companies will need to be

collaborative in their efforts as we transition the pharmaceutical industry into the 21

century.

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Works Cited

Avorn, J. (2015). The $2.6 billion pill—methodologic and policy considerations. New England

Journal of Medicine, 372(20), 1877-1879.

Boldrin, M., & Levine, D. K. (2008). Against intellectual monopoly (Vol. 78). Cambridge:

Cambridge University Press.

Grabowski, H. G., DiMasi, J. A., & Long, G. (2015). The roles of patents and research and

development incentives in biopharmaceutical innovation. Health Affairs, 34(2), 302-310.

Kremer, M. (2002). Pharmaceuticals and the developing world. Journal of Economic

Perspectives, 16(4), 67-90

Lichtman, D. G. (1997). Pricing prozac: why the government should subsidize the purchase of

patented pharmaceuticals. Harv. JL & Tech., 11, 123.

Trouiller, P., Olliaro, P., Torreele, E., Orbinski, J., Laing, R., & Ford, N. (2002). Drug

development for neglected diseases: a deficient market and a public-health policy failure. The

Lancet, 359(9324), 2188-2194.

Trouiller, P., Olliaro, P., Torreele, E., Orbinski, J., Laing, R., & Ford, N. (2002). Drug

development for neglected diseases: a deficient market and a public-health policy failure. The

Lancet, 359(9324), 2188-2194.

World Health Organization. (2011). Pharmaceutical production and related technology transfer:

landscape report.

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Healthcare Reform A Case for Government Intervention in the Pharmaceutical Industry

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