Innovation and Healthcare Reform

Earlier today I was part of a panel discussion on the topic of ‘Health-care Reform and its Effect on Innovation.’  I focused my talk on the effect on innovation in terms of pharmaceuticals (with a nod to medical devices).  It’s an interesting issue, one that I’ll flesh out a bit over a couple of posts.

Generally, the question of effect here is one of profitability:  whether the decrease in consumer costs, as a result of reform, will drive profitability down to such a level that pharmaceutical companies will be forced to devote less to innovation.  In terms of health-care reform, I view this as a quality of delivery issue:  How do we balance the need to reform a system that is quickly becoming untenable (if it’s not already) with the desire to maintain high standards in quality of health-care delivery (here, pharmaceuticals)?  

The answer must be multi-faceted, I believe.  There are a number of considerations; profit/cost, my focus in this post, is but one factor.  As I’ll discuss later, patent terms, barriers to generics entering the market, and potential changes to both regulatory processes and incentive schemes also warrant examination. 

The potential profit loss drug manufacturers face would stem from a reduction in price-per-unit as a result of health-care reform.  The concern is that that will not be compensated by the numbers of newly insured individuals, thus limiting the funds that can be directed to innovation and ultimately slowing the output of novel drugs.  This raises the question of the manner in which drug manufacturers direct their spending:  what is classified as ‘innovation,’ and how much capital is devoted to it?

As it happens, the development of truly innovative drugs—novel products that provide previously unavailable benefits—is perhaps less than we might wish.  Pharmaceutical companies have limited innovative productivity, instead focusing on profit-bearing ‘me-too’ drugs:  relatively easy ‘spin-offs’ that are highly similar in effect to preexisting treatments and provide a follow-up monopoly right once the patent terms of preexisting drugs expire (although these efforts are profitable, one questions the wisdom of creating a product that will compete with generics; a blockbuster drug, if focused upon, seems a better goal for post-patent expiration).   

Further, it’s not clear that the industry is spending nearly as much on R&D as one might imagine.  As a commentator in the NYT recently put it, ‘only naïve politicians and academics really believe that pharmaceutical companies are always greedy and egregious in pricing drugs far in excess of manufacturing costs.’  Certainly, innovation is expensive; industry studies estimate over $1.3 B for singular, novel drug development.  This number encompasses years of research, drug failures, and the high cost of a heavily encumbered regulatory approval process.  But the pharmaceutical industry also pours money into advertising (almost twice as much as spent on R&D, according to one study) and into lobbying efforts—the latter to the tune of over $600,000 a day in the first six months of 2009 .  The amount of monies sent to R&D?  According to a study published in the British Medical Journal (note: registration required), as of 2005 it was 1.3 cents per dollar of sales (accounting for research-based tax incentives). 

In terms of the profit/cost dilemma, how is the health-care reform/quality health-care delivery balance to be struck?  Keeping in mind that this is just one factor among several to be deliberated, the initial focus should be on the type of spending done by drug manufacturers—and what of that spending is going to be rewarded by government incentives to encourage R&D.  The industry needs incentives, to be sure, but there should be an accounting of what is actually being spent on developing novel advancements in treatment—and those efforts alone should be incentivized (thereby perhaps limiting inefficiency in drug development and perhaps curbing the ‘me-too’ practice).