Comment on Orphan Drugs and Intellectual Property-BECKER

I agree with most of Posner's discussion that as usual is presented very clearly. But I appear to differ on one issue that I believe is important. The Orphan Drug Act of 1983 greatly expanded research on rare disease that has resulted in the discovery of many more drugs that successfully treat such diseases. Yet R&D spending on these drugs still takes only a small share of total spending on R&D by biotech and pharmaceutical companies. This is why I doubt, but cannot prove without much additional research, whether the R&D spending on orphan drugs stimulated by this Act significantly affected spending on finding treatments for more common diseases. It probably mainly increased total spending on medical R&D by a modest amount. If this conclusion is correct, is it a mistake to have the Orphan Drug Act give greater intellectual property protection for drugs that treat rare diseases because these diseases would attract little research effort without better protection? I follow Posner initially and ignore the tax benefits and research subsidies provided by the Act. Suppose that only because of the better patent protection provided for seven years, a biotech company develops a drug that treats a rare disease with a small market, and charges a high price-as in some examples given in the Wall Street Journal articles. Assume to start the analysis that persons with the disease treated by this drug pay for treatments from their own resources, and enough of them can pay so that the biotech company can cover, perhaps more than cover, their development and production costs. Surely not only the biotech company, but also persons with the disease are better off that the drug was developed due to the Act, even though they have to pay a lot. If they were not better off, they would not be willing to pay the high price demanded. Since it is a win-win situation, in such cases it is obviously helpful to persons with rare diseases to have an Act that stimulates the development of drugs that treat their diseases. The analysis is not greatly different if private health insurance providers voluntarily cover rare diseases, as discovered with great effort by the woman with Gaucher disease chronicled by the Wall Street Journal. As Posner indicates, insurance companies might be willing to cover rare diseases since such coverage does not raise premiums very much for other persons who are insured. This would be a strictly business decision by the insurance industry if made without political pressure. So voluntary private insurance coverage of persons with rare diseases does not materially change my favorable evaluation of the Orphan Drug Act. The hard cases arise when the high prices charged for drugs that treat rare diseases are paid not by persons with the diseases, but by the government through Medicaid, Medicare, or other publicly funded health programs. Then taxpayers rather than persons with these diseases or private insurance companies may foot most of the cost of developing drugs that treat rare diseases. Should taxpayers be asked to pay $100,000 per year (Posner's estimate of the average cost of the drugs developed for rare diseases) for drugs that can keep persons with rare diseases alive for many years? The answer is not obviously yes, although as Tomas Philipson has argued, government coverage might be justified if taxpayers are concerned about the welfare of persons who are unfortunate to have these diseases, or as a way to provide insurance protection against the risk of being born with rare genetic defects. Medicare pays enormous sums to hospitals, nursing homes, and drug companies to keep elderly persons alive sometimes for only a few additional months. Yet the justification for doing this seems weaker than using government funds to pay for expensive drugs that enable young persons with rare diseases to live fairly normal lives for many years rather than dying at young ages. Perhaps Medicare should not pay a lot to keep elderly persons alive for a short period, but I do not believe the case for government payment of the cost of treating persons with rare diseases can be analyzed in isolation from a more general consideration of what type of health care should be provided out of government funds. The Act also would look less favorable if, as is likely, biotech and other drug companies sometimes reclassify the markets for new drugs to help them qualify for the Act's benefits. I also have doubts about the wisdom of the provision that allows drug companies to immediately write off their R&D spending on orphan drugs. So an overall evaluation of the Orphan Drug Act is not easy. Still, it might well be desirable to give stronger patent protection to drugs with small markets that treat rare diseases in order to induce the development of such drugs.

Comments

[ben]

N.E. Hatfield

That is, to realize a profit and too maximize that profit by any means necessary.

Absolutely, and rightly so. You might have noticed that a by-product of this pursuit of profit has been the production of a range of drugs that have produced extraordinary improvements in quality of life and longevity for millions. Since the expectation of financial reward is demonstrably integral to these tremendous innovations, why begrudge it?

[W]

BECKER: The answer is not obviously yes, although as Tomas Philipson has argued, government coverage might be justified if taxpayers are concerned about the welfare of persons who are unfortunate to have these diseases, or as a way to provide insurance protection against the risk of being born with rare genetic defects.

The government, thinking long-term, could simply provide to its citizens insurance protection against the risk of being born with rare genetic defects. Any child born with such defects would benefit. The problem with this, of course, is that fetuses do not pay taxes. Taxpayers are generally workers; workers, due to child labor laws and compulsory schooling, are usually 18 and up. In other words, the persons who pay into the insurance scheme for protection already know that they are not genetically defective, so they have no interest in continuing to pay. Why pay to avoid a risk that will never materialize? It's like playing yesterday's lottery. And government does not exist independent of the interests that is serves; government is largely responsive to political realities, including the desires and limits of taxpaying voters. To plenty of able-bodied taxpayers the Oprhan Drug Act probably sounds like "government waste." (Nevermind that if the government is setting up insurance schemes for fetuses prior to birth, it calls into question any legal justification for abortion.)

On the other hand, it is true that if citizens care about it, they may be inclined to pay for inefficient laws to provide relief to the ailing. That, of course, will last only so long as their compassion is of greater value to them than the prospect of putting those federal monies to other uses. If it is justified to provide government succor of this kind so long as the majority wants it, then it should be justified to deny it so long as the majority wants it. That is a problematic argument. Since when is it justified to renounce care once it is extended to those who depend on it to exist? Isn't that the definition of cruelty?

[N.E.Hatfield]

ben, Who says I'm begrudging it? I'm just pointing out that there needs to be a balance between "profit" and social benefit. Otherwise, life becomes cheap and degrading. Besides, the "sharks" need to have a close eye on them at all times. ;)

[N.E.Hatfield]

ben, In terms of the Wyeth example, there is more going on than meets the eye in terms of price controls. If it was, why is Aventis still producing the stuff along with Glaxo-Smith. It may have something to do with lawsuits involving side effects of its vaccines over the years and the resultant reduction in profit margins for these types of products. As opposed to a meddling government.

[W]

"tort immunity", not tort liability

[Ed Darrell]

When the Orphan Drug Act was passed into law in 1983 the U.S. health delivery system was substantially different than it is now. Prescription drug benefits were much more limited. The intent of the sponsors of the Act, chiefly Rep. Henry Waxman and Sen. Orrin Hatch, were more altruistic than economic. Indeed, as a staffer to Hatch's Labor and Human Resources Committee, I and my colleagues found it refreshing to find an issue where Waxman and Hatch could agree and work together, and where the interests of the drug companies tended to parallel the interests of a target population. The economics of orphan drugs has worked out much as we thought it would at the time.

The issue of what government should do to create incentives for the creation of new drugs is still with us -- have we got it right? It might be interesting to compare government actions with regard to orphan diseases with another health issue where creation of new drugs was a priority, but where the population to be treated was significantly larger; and in fact exactly that comparison was done between HIV and orphan diseases. Frank R. Lichtenberg of Columbia did the work, published in NBER (abstract here: http://www.nber.org/papers/w8677).

HHS's inspector general reported on the success of ODA in 2001: http://www.oig.hhs.gov/oei/reports/oei-09-00-00380.pdf

In terms of lives extended with reasonably good health, I think ODA has been quite a success. The Act has been a great success socially, and in the improvement of health. In any analysis of the efficacy of the legislation, I hope that the patients who are helped can be factored in.

[ben]

W

Perhaps you could re-state your argument. The line between your argument and your interpretation of N.E. has become unclear.

[W]

Ben,

Perhaps you should admit you had no idea what you were saying in the first place. That has become very clear.

[ben]

W,

I have no idea. I admit it.

But I do know the difference between an oligopoly and a cartel.

[W]

Ben,

So: your argument is that a cartelized market is one where no oligopoly is present.

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