Focus on Stronger IP Incentives: Price Setting is Not the Cure for Healthcare Spending

As healthcare costs continue to rise, intellectual property rights are increasingly under attack. This is currently playing out through the World Health Organization’s narrow focus on just one component of national healthcare budgets could put at risk incentives that drive discovery of new treatments and cures for patients. With the cost of certain drugs in the headlines around the world, the WHO is gathering governments, academics and activists in Amsterdam next month to discuss price setting options for medicines. But the so-called Fair Pricing Forum ignores the main driver of higher healthcare spending and will do more harm than good. While there is a pressing need to balance access to affordable medicines and the incentives to innovate, a reactionary focus on prices is misdirected and could have dire consequences for pharmaceutical innovation.

Today, the growing prevalence of chronic diseases, like cancer and diabetes, is the primary driver of global healthcare costs. As noted by the WHO itself, the “burden of chronic diseases is rapidly increasing worldwide. It has been calculated that, in 2001, chronic diseases contributed approximately 60% of the 56.5 million total reported deaths in the world and approximately 46% of the global burden of disease. The proportion of the burden of [chronic diseases] is expected to increase to 57% by 2020. . . In five out of the six regions of WHO, deaths caused by chronic diseases dominate the mortality statistics.” [1] Arbitrary price controls on just one input to an effective national healthcare system will not solve the broader problem and could make it worse. Tackling the challenges of chronic diseases will require cost-effective investments in prevention, new treatments and better care.

The WHO’s exclusive focus on price setting also misses the mark on another issue – medicines are working to extend lives and even to lower overall healthcare spending by eliminating the need for more expensive interventions, such as surgery and hospitalization. Consider the following examples from the past several decades. It is the case that new medicines have increased longevity, accounting for 40% of the two-year increase in life expectancy achieved between 1986 and 2000 in 52 countries.[2]   In addition, since the mid-1990s with the development of new medicines to treat HIV/AIDS, the death rate in the U.S. from AIDS dropped approximately 70 percent.[3] Finally, in the period since 1971 the number of cancer medicines has tripled. These new treatments account for 50–60% of the increase in six-year cancer survival rates since 1975.[4] In particular, data shows that in 2003 the total number of people who died of cancer went down for the first time in more than 70 years.[5]

For decades the United States has led the world in the research and development of innovative medicines and the payoffs have been tremendous. The increase in life expectancy achieved from 1970 to 1998, a large share of which is attributable to medical advances, is estimated to have a social value of $73 trillion dollars. This equates to close to $2.6 trillion per year, while U.S. GDP in the same period was measured at $5.8 trillion per year, on average.[6] Further, American innovators are “testing more potential medicines in clinical trials than all other companies from the rest of the world combined.”[7] Indeed, the United States accounted for over 5,000 of the close to 7,000 medicines in global development in 2015.[8]

Fundamentally the goals of improving global health, making medicines more available, and reducing the burden of disease must be addressed by the development and distribution of new medicines, and that is a process that must be incentivized. Accordingly, to foster the innovation necessary for improving global health, countries should strengthen the incentives that strong, effective intellectual property protections provide. Pharmaceutical research and development is inherently difficult, expensive and risky. Effective patent protection and other forms of intellectual property rights are essential for attracting the necessary investment of time, talent and financial resources to drive innovation. This is supported by tens of thousands of empirical economic studies, and not one that convincingly refutes it. Consider that, in a study of 60 countries over the period 1960-1990, Park and Ginarte (1997) find that the strength of intellectual property rights was positively associated with research and development (R&D) investments.[9],[10]

It is worrisome that one of the world’s leading multilateral organizations has so narrowly focused on price setting for just one part of national healthcare spending, which simultaneously ignores wider and more pressing global health challenges and threatens to undermine the incentives for the development of new treatments and cures. To truly make progress and deliver on the potential of global health, the next WHO Director-General should move beyond the finger pointing and blame games that undermine progress and instead promote investments and reforms that enable lower costs and ensure greater, more rapid, access to new medicines.

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[1] http://www.who.int/nutrition/topics/2_background/en/

[2] Lichtenberg, F.R. (2003). The Impact of New Drug Launches on Longevity: Evidence from Longitudinal, Disease-Level Data 52 Countries, 1982-2001. National Bureau of Economic Research Working Paper No. 9754 (June).

[3] CASCADE Collaboration (2003). Determinants of Survival Following HIV-1 Seroconversion after Introduction of HAART. The Lancet 362: 1267-1274.

[4] Lichtenberg, F.R. (2004). The Expanding Pharmaceutical Arsenal in the War on Cancer, National Bureau of Economic Research, working paper 10328 (February).

[5] Hoyert, Donna L., Melonie Heron, Sherry L. Murphy, and Hsiang-Ching Kung (2006). Death: Final Data for w00e. NCHS Health E-Stat web page (January 19). Centers for Disease Control and Prevention.

[6] Murphy, Kevin M. and Robert H. Topel. “Diminishing Returns? The Costs and Benefits of Improving Health,” Perspectives in Biology and Medicine, 46, 2003.

[7] Atkinson, Robert D. “The U.S. has been the World’s Medicine Cabinet for Too Long,” Forbes, 23 February 2016. Available at: https://www.forbes.com/sites/realspin/2016/02/23/the-u-s-has-been-the-worlds-medicine-cabinet-for-too-long/#760a57293719

[8] Lybecker, Kristina M. “Intellectual Property Protection for Biologics: Why the Trans-Pacific Partnership (TPP) Trade Agreement Fails to Deliver,” Journal of Commercial Biotechnology, 22, 2016.

[9] Park, W.G., and J. C. Ginarte. “Intellectual Property Rights and Economic Growth,” Contemporary Economic Policy, XV, 1997, pp.51-61.

[10] This finding holds true for countries with above median incomes (like the United States), but not for the less-developed countries.

The Author

Dr. Kristina Lybecker

Dr. Kristina Lybecker is an Associate Professor of Economics at Colorado College in Colorado Springs. She earned a B.A. from Macalester College, with a double major in Economics and Latin American Studies, and received her Ph.D. in Economics in 2000 from the University of California, Berkeley.

Dr. Lybecker's research analyzes the challenges surrounding intellectual property rights protection in innovative industries: incentivizing pharmaceutical research and development especially on neglected diseases, addressing the difficulties of strengthening intellectual property rights protection in developing countries, battling the problems related to pharmaceutical counterfeiting and the unique nature of protection for biotech therapies. Recent publications have also addressed alternatives to the existing patent system, the balance between pharmaceutical patent protection and access to essential medicines, and the markets for jointly produced goods such as blood and blood products. Kristina has testified in more than a dozen states on the economics of pharmaceutical counterfeiting. She has also worked with US Food and Drug Administration, Reconnaissance International, PhRMA, the National Peace Foundation, the OECD, the Fraser Institute, the Macdonald Laurier Institute, and the World Bank, on issues of innovation, international trade, and corruption.

CLICK HERE to contact Dr. Lybecker.

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