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In their paper “The Big Idea: Prizes to Stimulate R&D for New Medicines,” Love & Hubbard discuss the current system of financing R&D for new medicines. They say that this system: “is deeply flawed by the impact of high prices on access to medicine, the wasteful spending on marketing and R&D for medically unimportant products, and the lack of investment in areas of greatest public interest and need.” I couldn’t agree with them more, and I think that our current health care system is flawed in many more ways than just the funding of R&D.
For instance, last week Anthem Blue Cross of California announced that they were raising health insurance premiums across the state of California. As a New York Times (NYT) piece entitled, “In California, Exhibit A in Debate on Insurance” pointed out, healthy insureds with no known health problems are facing egregious increases to premiums, like the 34 percent increase that Bernhard Punzet is facing for no apparent reason. Sadly as the article points out, Mr Punzet is just one of “nearly 700,000 other Anthem customers in California who have received notices of increases that average 25 percent.”
President Obama used this opportunity last week in a news conference to warn Americans that “[i]f we don’t act, this is just a preview of coming attractions. Premiums will continue to rise for folks with insurance; millions more will lose their coverage altogether; our deficits will continue to grow larger. And we have an obligation — both parties — to tackle this issue in a serious way.” Furthermore, this week the NYT reported that “President Obama will propose…giving the federal government new power to block excessive rate increases by health insurance companies, as he rolls out comprehensive legislation to revamp the nation’s health care system.”
I think that Obama is taking a step in the right direction, and I believe that Love & Hubbard who argue for government intervention with pharmaceutical company practices would agree. Even while Love & Hubbard’s paper focuses on the cost and limited availability and research of drugs as opposed to health insurance premiums, the main idea being discussed in their paper is that drug companies need to be incentivized to act in the best interest of the general public. They argue that the best way to make this happen is to encourage R&D through government-backed funding. I think their proposal to use prizes instead of patents is an excellent idea, and I believe that in combination with government regulation on health insurance providers, Americans might actually see some relief from the increasing cost of healthcare.
Still, the biggest opponents of government funded R&D for new drugs — and indeed government intervention with healthcare in general — comes from the health insurers and pharmaceutical companies themselves. They have a clearly vested interest in keeping the Government from regulating their industry and maintaining the current patent system.
As a 2006 Forbes piece written by Scott Wooley entitled “Prizes Not Patents” points out: “Not surprisingly, the prize idea does not sit well with the pharmaceutical industry, which is reliably one of the nation’s most profitable. ‘There is nothing that shows the patent system is broken,’ says Mark Grayson, a spokesman for the Pharmaceutical Research and Manufacturers of America (PhRMA ).” Wooley continues by pointing out that “PhRMA’s chief objection to a prize system seems a reasonable one: Relying on the government to decide what diseases it wants to cure and at what price is asking for trouble. ‘It basically leads to central planning.’” Furthermore, Wooley points out that another concern of PhRMA is that the government would not get the amount of the prize right– ultimately setting it too high or low.
While I think that both of PhRMA’s concerns are legitimate, the alternative (patents and self-regulated health insurance premiums) doesn’t seem to be working. And the argument that centralized planning will lead to limited options in new drugs seems to be of little concern since pharmaceutical companies are only releasing a fractional number of new drug formularies every year under the currrent system. Moreover, a prize-based system would provide new incentives for scientists to create major breakthrough drugs, as opposed to the current practice of continually releasing slight variations on current drugs.
As Love and Hubbard point out, today’s pharmaceutical companies are spending less than 9% of their roughly $600 billion annual profits on R&D (mind you, these numbers are from 2005 and are likely much higher today). Essentially, Americans who pay far more on average (roughly 12 times as much) in comparison with countries who use similar generics are not even benefiting from their spending in the form of new and innovate drugs.
To compound the issue, a NYT piece entitled, “Drug Firms Apply Brand to Generics” that was released this week discusses the recent move of the big pharmaceutical companies into the generics market. Basically, “[s]ome drug makers are pursuing a two-tiered strategy in developing markets: selling their own lines of more expensive name-brand products to the more affluent, as well as offering midpriced branded generic lines that include prescription and over-the-counter medicines for the broader market.” Under this new model, affluent Americans will continue to pay outrageous prices for new drugs during the drug’s infancy, and other countries will benefit from higher quality generic medications. Such moves make it clear that the pharmaceuticual companies have no interest in providing innovative medications at cost-effective prices to Americans. As such, I hope that Obama and the government continue to consider the kinds of prizes discussed by Love & Hubbard when they are looking to reform healthcare in the coming years.
