Financing drug and medical device R&D

We should run parallel systems: the current system driven by the promise of monopoly rents via patent, and a new system of direct public expenditure via public-benefit corporations, grants, and prizes.

Megan McArdle worries that, since some of the absurdly exorbitant cost of health care in the United States goes to finance research and development into new drugs and devices, cutting back on that expenditure is likely to cut into the R&D activity. It’s hard to argue that her worry is unreasonable, though the quantitative relationship is hard to guess.

I’d put the case more strongly: in effect, the United States is helping to finance the development of knowledge that is a global public good. (It’s odd that the people who think it horribly unjust that the U.S. pay more than a fair share of the costs of protecting the planet from global warming are fine with having us pay more than a fair share of the costs of medical advancement, and vice versa.)

John Holbo responds: Yes, but pumping money into a wasteful health care system in hopes that some of it will trickle through to R&D is a classic case of feeding the horse in order to feed the sparrows. If we need more R&D for health technology, why not pay for it publicly? After all, we already spend $30B on the National Institutes of Health.

Megan replies that she’s willing to try it – she mentions the use of prizes, in lieu of patents, which seems like a great idea – try it, but not willing to give up the profit incentive for health R&D unless and until we know that the public version works with comparable efficacy.

Fair enough. Presumably you want both systems at work: no public agency is going to spend money developing a cure for male pattern baldness. But what I don’t see is the argument that we have to wait. It’s not as if long-term changes in health care revenue streams mean an immediate shut-down in the new-drug pipeline. Why not try to squeeze some of the quasi-rents out of current pharmaceutical pricing while at the same time putting money into drug development: via one or (preferably) more public-benefit corporations devoted to developing new drugs and putting them on the market at roughly the marginal cost of production and distribution, via grants to existing or newly-created medical-research outfits, and via prizes for specific accomplishments? (A billion dollars for a malaria vaccine with 90% efficacy and no greater side effects than the tetanus vaccine? A bargain!)

Then we can look up in five or ten years and see if the changes, net, have so reduced the flow of new technology development that we need either more public R&D or greater market incentive through patent-generated monopoly rents. The basic economic point is that monopoly pricing is grossly inefficient, since the gain to the manufacturer is smaller than the losses to consumers. So the government-based mechanisms could operate far from optimally and still outperform the current system.

And while we’re at it, we might ask the EU and the rest of the G-20 to start spending as large a share of GDP on medical research as we do.

Author: Mark Kleiman

Professor of Public Policy at the NYU Marron Institute for Urban Management and editor of the Journal of Drug Policy Analysis. Teaches about the methods of policy analysis about drug abuse control and crime control policy, working out the implications of two principles: that swift and certain sanctions don't have to be severe to be effective, and that well-designed threats usually don't have to be carried out. Books: Drugs and Drug Policy: What Everyone Needs to Know (with Jonathan Caulkins and Angela Hawken) When Brute Force Fails: How to Have Less Crime and Less Punishment (Princeton, 2009; named one of the "books of the year" by The Economist Against Excess: Drug Policy for Results (Basic, 1993) Marijuana: Costs of Abuse, Costs of Control (Greenwood, 1989) UCLA Homepage Curriculum Vitae Contact:

4 thoughts on “Financing drug and medical device R&D”

  1. What we need is a better break-down of how R & D spending is spent, what type of drugs it is spent on, and where it is being spent. Is most research being done in private laboratories independent of any public financing? Are there joint projects, like working with universities and medical schools in "Research Parks"?

    Thanks for the new comment section. Some advice, though – if possible, you might want to add some type of thing like what Kevin Drum and the Foreign Policy blogs have, that require you to enter a "CAPTCHA". That'll keep out the spammers, although it won't keep out the trolls.

    In the meantime, testing




  2. If you wish to see how badly most Pharmaceutical companies conduct research,

    take a look at the forums on Cafe Pharma:
    There is plenty of scope to improve the way research is conducted in this industry.

  3. The problem with using the profit motive as an incentive to conduct medical research is that…companies will only spend on the development of drugs and devices that will make them a profit.

    They won't look for ways to stop diseases and conditions that not very many people have, however deadly or debilitating. They will also not work on ways to fight more widely spread diseases and conditions if most of the people suffering are poor.

    Instead they will spend their money looking for better and better ways to improve the sex lives of wealthy middle aged men.

  4. "…(It’s odd that the people who think it horribly unjust that the U.S. pay more than a fair share of the costs of protecting the planet from global warming are fine with having us pay more than a fair share of the costs of medical advancement, and vice versa.)"

    I've said this on numerous blogs, that right-wingers seem to support 'subsidizing' the rest of the world in only two areas – healthcare and military spending. Odd, that.

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