The Prices of Pills

Medical innovation, now and later
Conventional wisdom dictates that, to the extent that health care reform lowers drug prices, it will reduce profits for pharmaceutical companies and limit their incentives to develop new medical innovations. While this common criticism is, perhaps, founded, the effects of reform on medical innovation may not be wholly negative. Although reductions in Medicare spending and changes in insurance structures may limit corporate-led innovation in the United States, publicly funded advances are likely to continue unabated. Moreover, there is reason to think that private pharmaceutical companies are not actually the most efficient drivers of medical innovation. This counterintuitive possibility suggests that increasing governmental involvement may not even be a net negative in terms of overall medical innovation.
The Current State of Innovation
 
As Dr. Raymond Raad, who is publishing with the Cato Institute a paper on medical innovation, told the HPR, there are four categories of medical research and innovation: basic research into fundamental scientific principles, research into new or improved diagnostic tools, innovations in therapy and treatment, and business model improvements “in the way health care is organized and offered.” Raad suggested that the United States is the world leader in basic science research, diagnostics, and therapeutics, but claims that no country has made significant progress in the business model department in recent years.
But not all experts agree. As Dr. Joseph Newhouse, a professor of health care policy at Harvard Medical School, noted, “Whether innovation occurs at a lab in New Jersey or a lab in France is hard to know.” David Cutler, a Harvard economics professor, added that “America is the major market for most of the world’s innovations,” but is not necessarily the major innovator.
America’s Innovators
Although scholars disagree about America’s role in worldwide medical innovation, they largely agree in their assessment of the innovations that do occur in the United States. Raad noted that most basic science innovations are made by academic researchers at private universities. Cutler explained that these activities are usually funded by the National Institutes of Health, an agency of the Department of Health and Human Services. On the other hand, Newhouse added, the process of developing and marketing actual medical products, whether diagnostic or therapeutic, typically involves innovations of private pharmaceutical companies, perhaps building on academic basic research.
In examining the effects of health care reform on medical innovation, some scholars are pessimistic. Echoing a common concern, Raad worries that “health care reform is most likely going to decrease Medicare spending on diagnostic and therapeutic [innovations].” But Aaron Kesselheim, an instructor in medicine at Harvard Medical School, told the HPR, “The most transformative or newest innovations and the most useful public health innovations tend to come from publicly-funded science rather than privately-funded science.” In other words, hurting the incentives of private companies may not be as catastrophic as Raad suggests. Clinical innovation might decline under a new system of health care, but the most important innovations are likely to still be made by American researchers whose public funding and incentives to innovate will not decline, regardless of drug prices under a reformed health care system.
Business Model Innovation
 
Opponents of reform are also worried about its potential impact on insurance companies and their relationship to medical innovation. When innovations in medical technology and care are introduced, most insurance companies are initially unwilling to cover them. As a general rule, one company blazes a trail by picking up the charges, and then others follow suit until the practice is nearly universal. According to Raad, by compelling insurance companies to adhere to a common set of standards, reform is “going to make it harder for outlying insurance companies to cover outlying procedures.” Common standards, then, may make it less likely that insurance companies will cover costs associated with new innovations, which would limit patients’ ability to capitalize on these advances.
Furthermore, innovation in insurance delivery systems may decline after health care reform. Raad argued, “If insurance has to adhere to common standards, then there won’t be as much new innovation in the way health insurance is delivered.” But liberals argue that the much-disputed public option is designed precisely to encourage insurance innovations; they believe that competition with the public option will force private companies to improve their offerings.


Patent Problems
Despite arguments to the contrary, strong evidence suggests that health care reform might enhance our capacity to achieve medical innovation. The private pharmaceutical industry is plagued with systemic issues that limit capacity for advancement. For example, according to Kesselheim, strong patent rights can encourage wasteful research by allowing companies to develop “incremental follow-on innovations” while reaping significant financial reward. He said that, under current patent standards, a very minor addition to an already-developed drug can enable a company to receive an entirely new patent – and considerably augmented profit.
Under the current system, pharmaceutical companies compete to develop innovations and gain patents before their rivals, competition that may not be entirely productive. Because pharmaceutical companies compete directly with one another, they typically do not share studies, which means that researchers in different companies may be conducting similar tests to develop similar medicines, but remain unaware of the duplication. As Dean Baker, co-director of the Center for Economic and Policy Research, told the HPR, the patent system “encourages a lot of copycat research that’s not particularly useful – and possibly worthless.”
Perhaps, as Baker believes, the government should take more responsibility for funding medical innovation, rewarding useful improvements while discouraging duplicative efforts. For instance, the government could directly fund private companies and then put their results into the public domain for other companies to access. The government could buy back patent rights to useful innovations, enabling all pharmaceutical companies to develop generics and compete for customers in an effort to drive down prices. Ideally, such schemes would push private companies away from unnecessary add-on changes and toward the transformative improvements that come to mind when we think about medical innovation.
How Can Health Care Reform Help?
 
Health care reform along the lines of Baker’s ideas could help to eliminate wasteful research in the future, but the current plans do not incorporate his proposals. Nevertheless, reform can engender further reform, and Baker’s suggestions represent the potential of health care reform to eliminate wasteful spending and to encourage a more cost-effective system of medical innovation in the United States.
Thus, although the current health care reform proposals focus on reshaping the insurance industry, there is a broader potential for change in the overall health care system, including in the way we achieve medical innovation. Although reforms might limit business model and clinical innovation, the downside could be offset – at least partially – by reducing wasteful practices in the private pharmaceutical industry and by expanding the government’s role in funding medical research.