Abstract
The first rule of the new drug reimbursement game is to recognise it is a game and that the regulator makes the rules. The economic expression of this game is the Political Economy of New Drugs (PEND). The global PEND is driven and shaped primarily by the US: its pharmaceutical industry; its government via trade-negotiations with the Organisation for Economic Cooperation and Development (OECD); and US-based academic pharma-economists and the evidence they generate. In this chapter I use the PEND to illustrate the characteristics of this game. What is the political economy of new drugs? How does it influence the research agenda? Does it change over time? As the US starts to address issues such as whether it should use evidence of cost-effectiveness to make decisions about drug reimbursement, the global PEND must adapt to respond to the new forms of evidence and decision rules. I demonstrate how OECD regulators outside the US could use this time of change to reframe the global PEND. The reframed PEND would facilitate a strategic and economically meaningful choice in the decision threshold and allows regulators to respond optimally to the primary strategy of the pharmaceutical industry; the threat that lowering the price below a firm’s preferred price is not in the best interests of the population.
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Notes
- 1.
See page 1178 in Comanor (1986).
- 2.
A UK example of the political economy of new drugs and the appropriation of surplus appears in a commentary on proposed changes to the UK pricing scheme (Towse 2007). Towse refers to the positive relationship between surplus appropriation by the innovator and the incentive for future innovation. Towse also recognises that if a higher share of this surplus is available to the health budget, immediate health gains increase. Towse also refers to the “high societal gains” from pharmaceuticals and new technologies but does not consider whether they are the best option available for improved future health gains nor does he consider how increasing the share appropriated by innovators impacts on the return to consumers.
- 3.
The term “rent seeking” was coined by Kruger and her original paper remains a significant milestone in the economics of lobbying and the associated deadweight social loss (Krueger 1974).
- 4.
While improved quality of life is also an outcome of improved pharmaco-therapy, the US literature and lobbying is dominated by the evidence supporting the claims of improved longevity at the population level. This situation is probably a consequence of the preference in the US economic literature for population based analysis of the benefits of pharmaceutical innovation rather than CEAs of individual new drugs. The complexity of measuring quality of life at the population level, without a control group, is far greater than that of measuring quality of life in a controlled clinical trial.
- 5.
“Non-capital market funded R&D” is a term used in this book to refer to the strategy by pharmaceutical firms of funding their investments in R&D through “internal funds” (economic rent) and publically financed health research such as the NIH (Vernon 2003; Keyhani et al. 2005; Santerre and Vernon 2006). This term distinguishes this strategy from the strategy of funding R&D by borrowing from the capital market.
- 6.
Comanor identified one study that estimated this return for three drugs but he found that the author had inflated this return by estimating the total social welfare from a given drug rather than the incremental social welfare from the innovation of this drug.
- 7.
See page 1180 in Comanor 1986.
- 8.
To the extent that the almost 50 % increase in expenditure on pharmaceuticals as a percent of GDP reflects growth in the US sector (see following footnotes), it is reasonable to surmise that the role of the US pharmaceutical sector as a percent of GDP has also increased since 1986. But how big was it in 2009? In 2009 an input output analysis of the US pharmaceutical sector prepared by consultants (Battelle Technology Partnership Practice) for the PhRMA (an industry lobby group formed by manufacturers that also conduct research) found that the output of the US biopharmaceutical sector represented 917B annually, with $382B in direct contribution (a multiplier of 2.4). Given that the US GDP was estimated at $14,043B this suggests that the pharmaceutical sector contributes (directly and indirectly) around 6.7 % of the total GDP and around 2.3 % for its direct contribution. It is in the interests of lobby groups to overestimate the role of their sector to the economy. For example, the authors write that: “A $10 billion change in US biopharmaceutical revenues would have the following effect on the U.S. economy: $29.7 billion in total output; 130,000 total jobs; $9.2 billion in personal income” PhRMA (2011).
- 9.
Total pharmaceutical expenditure increased from 8.8 % in 1986 to 12 % in 2009 Total Health expenditure increased from 10.6 % in 1986 to 17.4 % in 2009 (OECD Health Statistics 2013).
- 10.
From around 1,300 in 1997 to 2,995 in 2010 (PhRMA 2010).
- 11.
Life expectancy increased from 74.7 years at birth in 1986 to 78.2 in 2009 (OECD Health Statistics 2013).
- 12.
The proportion of the population who are obese, in the US increased from 23.3 % in 1991 to 33.8 % in 2008. These proportions are based on measured height and weight, not self-report, which tends to be lower. Obesity is defined as a BMI > 30 kg/m2 2009 (OECD Health Statistics 2013).
- 13.
Chandra et al. (2011) describe cost-effectiveness analysis as “the half sibling to comparative analysis”. The latter term appears to be used in the US in the same sense that HTA is used throughout counties that use economic evaluation.
- 14.
A summary of the range of OECD institutions that used economic evaluation in the mid 2000s is presented in ITA (2004). All countries have offices or institutions that place their local conventions in the public domain.
- 15.
Research such as that presented in Lakdawalla et al. (2009) is a good example of how the pharmaceutical policy issues faced by the US are far removed from the methodological debates that occupy countries such as the UK and the associated institutions such as National Institute for Health and Clinical Excellence (NICE). The commentary on this piece by the eminent pharma-economist Scherer (2009) should be read in conjunction with that study; it summarises the technical reasons why their estimate of the health gains from new drugs are likely to be overestimates. The opinion piece by Weinstein (2008) shows how the US is still struggling with the question of whether or not they should use a CEA at all in decision making. Weinstein was a co-author of one of the seminal papers that sought to formalise CEA (Weinstein and Stason 1977). More than thirty years later, Weinstein (2008) observed that Americans still have not come to terms with the resource constraint in health care.
- 16.
For example see the policy document on the bioeconomy (OECD 2009).
- 17.
Sloan and Hsieh provide a comprehensive summary of this literature (Sloan and Hsieh 2007).
- 18.
For example, $75,000 per incremental QALY.
- 19.
For example, the report on OECD price controls prepared by the US International Trade Administration (2004).
- 20.
- 21.
An excerpt from the Joint Hearing of the Finance Committee of the US Senate in April 2004 is reproduced in Attachment 2 and contains a number of variations of this theme. This characterisation is a synthesis of the extensive literature on this topic, much of which is summarised in Comanor (1986) and Scherer (2000). Specific examples include: “Greater access to today’s medicines… through drug price controls at a cost of fewer new drugs in the future” and “Understanding this tradeoff is imperative for sound public policy.” (Vernon 2004). Another example is Vernon et al.’s (2006) analysis of a change in pricing policy in the US in which the authors state that the policy debate on lower prices should consider the “hidden potential costs” of lower prices (less innovation). They state that their analysis does not provide evidence of the “relative costs and benefits of pharmaceutical importation (or price regulation).” But then go on to infer that these “hidden potential costs” are so significant that they dominate policy choices.
- 22.
The reference to reduction in health today as a consequence of increased expenditure on more costly drugs was originally part of this trade-off. Typically this was expressed as the trade-off between access (lower priced drugs so that everyone, particularly the uninsured could afford them) and more health in the future. See for example Scherer (2000). However, increasingly the US literature expresses this as a trade-off between savings today and health in the future. For example, see Santerre and Vernon (2006). The critical question then is to compare the financial value of future health effects against these savings. For reasons discussed and demonstrated in Chap. 3, this particular framing results in a higher ratio of the gains in the future compared to the loss today.
- 23.
The contrast between framing a problem to “find” rather than “fit” the solution comes from Birch and Gafni (1993).
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Pekarsky, B.A.K. (2015). Reframing the Political Economy of New Drugs. In: The New Drug Reimbursement Game. Adis, Cham. https://doi.org/10.1007/978-3-319-08903-4_2
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