Mass Medias Influence on Social Identities

Healthcare Reform: A Case for Government Intervention in the Pharmaceutical Industry
Evenson 1
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
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
Evenson 2
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
Protection of intellectual property is another major concern of pharmaceutical
Patrice 2001
WHO 1990
Patrice 2001
Avon 2015
Patrice 2001
Evenson 3
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
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
Evenson 4
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.
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
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
Evenson 5
the monopolist is a “price setter” instead of a “price taker” as would be the case in a competitive
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
Boldrin 2008
Evenson 6
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
Evenson 7
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.
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
Evenson 8
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.
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
Evenson 9
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
Evenson 10
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
Evenson 11
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
Evenson 12
Works Cited
Avorn, J. (2015). The $2.6 billion pillmethodologic 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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