A Response From The Authors Of The Health Impact Fund 03/10/2011 by Intellectual Property Watch Leave a Comment Print This Post The views expressed in this column are solely those of the authors and are not associated with Intellectual Property Watch. IP-Watch expressly disclaims and refuses any responsibility or liability for the content, style or form of any posts made to this forum, which remain solely the responsibility of their authors.By Incentives for Global Health In reaction to the recent post “Health Impact Fund – Raising Issues of Distribution, IP Rights and Alliances,” by Sakiko Fukuda-Parr and Proochista Ariana, we offer this response on behalf of Incentives for Global Health (IGH), the non-profit organization that is developing the Health Impact Fund (HIF) proposal. For ease of exposition, we address their criticisms in reverse order. Alliances Our critics are correct to point out that IGH has not done well in forging alliances with civil society organization in the global North. The main reason for this has been the hostile reaction to the HIF proposal by Knowledge Ecology International (KEI). We have tried hard, within our tight resource constraints, to persuade global health activists to examine our proposal first-hand (at www.healthimpactfund.org) rather than to rely on KEI’s inaccurate characterizations of it. Perhaps we deserve to be criticized for not trying hard enough. But this criticism has a strange ring when it comes from the chair of KEI’s Board of Directors, Sakiko Fukuda-Parr. Providing a list of efforts and successes that exemplify alliances aimed at protecting global health, the critics complain that our HIF proposal is “oddly out of sync with this global network.” This cannot mean that we have opposed those other efforts, because we have, as individuals and as an organization, supported nearly all of them in published work or through donations. Instead, it likely means that we have persisted in developing a proposal even after it had been attacked by KEI. We have done this because we believe that the serious objections to our proposal can be met and that the HIF, suitably designed, constitutes a politically feasible reform that would inaugurate revolutionary improvements in global health. Our confidence in the HIF proposal may, of course, be misplaced. If so, we’d prefer to know sooner rather than later. We are therefore most grateful for any well-informed criticism of our work, no matter how severe. We are committed to the HIF proposal only because and only insofar as we are convinced that it can actually bring massive improvements in global health. This is not about intellectual contests or academic egos but about achieving a morally imperative goal. Committed to this goal, we stand ready to abandon the HIF proposal if it is shown to be unworkable. Committed to this same goal, you should stand ready to study the HIF carefully and to support it if you find it compelling. This critical search for the best ideas is the very least we owe to the poorer half of humanity who, living on less than three percent of global household income, are far more vulnerable to disease and far less able to cope with it. Social Determinants of Health Fukuda-Parr and Ariana are right to claim that poverty and disease can be more cost-effectively addressed by ensuring adequate supplies of clean water, nutritious food, sanitation, housing and (we would add) education especially for women and girls. We fully and actively support these efforts. But does this mean that we should not seek improved medical care as well? Here it would seem to be Fukuda-Parr and Ariana who are oddly out of sync: with the scientists and companies that develop new medicines, with the health systems and staff that deliver those medicines, and with the global movement that has been fighting for access to essential medicines and to antiretrovirals in particular. The activists of this movement are a great inspiration to us, and we do not think that their immense energies would be better spent fighting for clean water. Why not? Because access to medicines is a cause we can win, politically, and in the short-term. This is so because the injustice is so egregious and so evident. Medicines that can be mass-produced for pennies are, under patent protection, sold for dollars and those who would manufacture and supply cheaper versions are shackled by laws, courts, and police. The resulting deaths and hardships manifest not merely a passive failure to assist but an active exclusion of the poor from advanced medicines. Confronting their fellow citizens with this massive injustice, health activists around the world have greatly contributed to putting issues of global justice on the public political agenda, in their respective countries and worldwide. We can try to overcome this injustice with a piecemeal approach, fighting highly resourceful pharmaceutical companies across thousands of products in hundreds of jurisdictions year after year. Or we can try a revolutionary approach, turning the incentives of such companies upside down so that their interests become aligned with those of patients. The HIF exemplifies this latter strategy: changing the rewards of pharmaceutical innovators to give them substantial financial incentives to achieve the competent delivery of important medicines at very low prices to even the poorest patients. Financed primarily by willing governments in proportion to gross national income, the HIF would offer innovators the option to register any new medicine, thereby undertaking, during its first decade on the market, to make it available at no more than the lowest feasible cost of production and distribution and, once these ten years have elapsed, to waive any remaining patent protection so as to allow free generic production and distribution of the product. In exchange, the registrant would receive, during that 10-year period, annual reward payments based on its product’s worldwide health impact assessed in quality-adjusted life years (QALYs). Each reward payment would be part of a large annual pay-out – initially about USD 6 billion – with every registered product receiving a share equal to its share of the assessed health impact of all HIF-registered products in the relevant year. The HIF would foster the development of new high-impact medicines against diseases that are now neglected because innovators cannot recover their R&D costs from sales to the poor. It would also promote access to new medicines by limiting the price of any registered product to the lowest feasible cost of production and distribution. In addition, the HIF would motivate registrants to ensure that their products are widely available, perhaps even below the price ceiling, and that they are competently prescribed and optimally used. The HIF does not stake a claim on development aid funds and so does not compete with other uses for such funds. Rather, the HIF is a better way of paying for pharmaceutical innovations, which affluent populations are in any case determined to pay for. It is better morally because it allows HIF-rewarded innovators profitably to provide new medicines to the affluent without having to exclude the poor. It is better medically because, when innovators profit not from mere sales but only from actual therapeutic benefits, all patients are more likely to receive the medicines that are best for them. It is better economically because the HIF avoids the extreme wastefulness of the present system under which large mark-ups cause huge deadweight losses (as innovators cannot take advantage of profitable sales at lower prices) and most of the money spent on patented medicines goes not into new research but into intensive marketing efforts that mostly neutralize one another, into filing clever patents in dozens of jurisdictions, into protracted litigation, into lobbying and gaming activities aimed at extending market exclusivity and to counterfeiters. This gross wastefulness presents a golden opportunity to formulate and implement a reform that mitigates a horrendous injustice to poor patients even while it also benefits the other stakeholders: affluent patients, governments, taxpayers, pharmaceutical innovators, generic firms, insurance companies, international organizations and NGOs. Intellectual Property Our critics censure that the HIF would allow registrants to retain intellectual property rights in their registered products and that this would lead to higher prices and impede collaborative research. It is true that under the HIF, as currently proposed, registrants retain the right to control, during the patent period, the use of their patented knowledge for follow-on innovations and are required to offer zero-cost licenses for the manufacture and sale of their product only at the end of the 10-year reward period. Our critics suggest that such intellectual property rights lead to higher prices and heavy concentration in the pharmaceutical industry. In response, we strongly agree that the HIF ought to aim for low prices of registered products and hence for low manufacturing costs. How best to achieve this goal may vary according to type of product and market (see Aidan Hollis’ paper at www.yale.edu/macmillan/igh/files/papers/DP1_Hollis.pdf [pdf]). Open licensing is not always the best method for achieving low prices: in small markets with inadequate competition, for instance. It may often be better to require the innovator to put the manufacture of the product out for tender with 2/3 of manufacturing going to the lowest bidder, perhaps, and 1/3 to the second lowest. The innovator would buy the medicine at these lowest bid prices and sell it on without mark-up. The tender process could be repeated every few years to capture any new price advantages afforded by improved manufacturing technologies. In many circumstances, this tender method would likely be a more effective way of organizing competition among generic manufacturers because of improved economies of scale: instead of many firms gearing up to produce the product in many countries, only two (the winners of the tender) will do so and then produce much larger quantities. Moreover, generic firms will be more willing to compete, and to cut their price to the bone, when they can hope to win a large share of the entire global market rather than merely a slightly increased share of some national market. In yet other circumstances, if there is inadequate competition even within a tender, using an administered maximum price may be the best strategy. The choice among these options depends on the technological characteristics of production in a specific market; there is no reason to suppose that a single mechanism will fit every circumstance. Though our concern is for the lowest price, we might add that the tender system would, if anything, be an improvement for smaller firms as they could take advantage, in the manufacture of one or two medicines, of the same substantial economies of scale that larger firms exploit for several dozen products. In the current system, by contrast, small companies labor under a handicap as they must compete with larger firms that manufacture the same products in much larger quantities for a global market. There are further reasons for wanting innovators to retain the option to control distribution. First, assessing the impact of the introduction of a new product becomes much easier and cheaper when there is only one authorized seller rather than many others as well who may not want to provide accurate sales data to the HIF. Second, a firm which is being rewarded based on impact will have an incentive to keep prices low wherever consumers are price sensitive, because the firm can profit from achieving health impact even among those poor patients. Such a firm may well drop prices below cost – something generic firms will never do because they obtain no separate reward based on volume. Third, with only one authorized seller, the timing of HIF rewards can be adjusted for the special case of medicines whose long-term utility is endangered by the development of resistance. For example, the important goal that new anti-infectives should be used sparingly, only in cases where the older products fail, is best promoted when distribution is controlled by a single agent incentivized to maintain the medicine’s efficacy for as long as possible. (We explore this important theme in a forthcoming paper authored with Kevin Outterson: “Combating Antibiotic Resistance through the Health Impact Fund.”) Fourth, the more registrants are required to give up as a condition for participating in the HIF reward pools, the more reluctant they will be to register and the higher the reward rate will therefore tend to be. This means that requiring open licensing would come at the expense of achieving health impact. In some cases it is worth paying this price – we support, for example, a requirement that HIF-rewarded products be manufactured under decent labor conditions even though this might raise the reward rate and thereby reduce the Health Impact Fund’s own health impact. It is not worth paying this price, however, for open licensing which brings no significant benefits relative to the tender method. Should the HIF pay this price by requiring registrants to relinquish their rights to control follow-on innovations? We believe that this requirement would be costly in terms of raising the reward rate and that, even without it, the HIF would give a substantial boost to open science (as discussed in our September 2010 Newsletter, www.yale.edu/macmillan/igh/newsletters.html). Distribution of Costs and Benefits A similar response can be made to our critics’ complaint that “there are no guarantees that the manufacturer, the company who offers the most competitive bid, would be from the global South.” Incorporating such a guarantee would entail higher prices, to the detriment of patients, and would also make the HIF proposal less acceptable in more affluent countries. Nonetheless, even without any guarantee, it is likely that most manufacturing of medicines would end up in the global South, where many firms (especially in India) are already far more cost-effective than manufacturers in affluent countries. By shifting R&D toward the heretofore neglected diseases of poverty, the HIF would bring relative benefits to innovators in the global South as well. Such innovators find it difficult and expensive to compete in the development of drugs against global diseases, where “Big Pharma” has already spent untold billions. They have much better prospects, however, when competing in developing drugs for neglected diseases, which “Big Pharma” has ignored and where they have easy access to patients. Our critics worry that the poorest of the poor might still not get access to advanced medicines because the HIF’s “estimates may allot less weight to the gains for, or entirely overlook, the poorest or most needy populations.” This is incorrect: the HIF assigns equal weight to therapeutic benefits, regardless of the patient’s income or wealth. Referenced by our critics, Ingrid Robeyns in fact expressed a different, more plausible worry: that firms might not find it profitable to deliver their HIF-registered products to remote areas because the additional health impact rewards so earned might be smaller than the cost of such delivery (especially when the potential patients can be reached only by selling even below the HIF-mandated price ceiling). But in such a case, the local health ministry or international organizations or NGOs can step in and bridge the funding gap – much more cheaply than with drugs that are sold with high, patent-protected mark-ups and earn no health impact rewards. So the creation of the HIF would benefit even the poorest people in the most remote areas: by making it much more likely that medicines relevant to them would be developed and then made accessible to them. Our critics further contend that “there is … no objection made by the HIF proposal to the very high profits for healthcare innovations.” In fact, the HIF addresses excessive profits in two ways. First, it is designed so that its reward rate (dollars per QALY) is self-adjusting: the HIF won’t generate windfalls for pharmaceutical innovators because an overly lucrative reward rate would quickly be reduced by the additional product registrations it would elicit. Second, the existence of very cheap HIF-registered medicines will have a dampening effect on the prices of other products still sold with patent-protected mark-ups. Nonetheless, we think that profits are a suitable innovation incentive: successful innovation requires large, risky investments in research and clinical trials and will occur only insofar as innovators find such investments worthwhile. We do not object to firms being rewarded handsomely for delivering proportionately large benefits to humanity. Our critics greatly overstate the projected cost of the HIF: we propose that it be commenced with annual reward pools of USD 6 (not 60) billion. Costing only about 0.7 percent of what humanity now spends on medicines, the HIF would bring savings that are vastly larger: savings from cheaper medicines, savings from avoided hospitalizations and operations, and gains from higher productivity. Moreover, the HIF would relieve the world’s poor from some of their massive disease burdens. Once the HIF works smoothly, its annual reward pools could be scaled up to attract an increasing share of new medicines. It is true that we have not acknowledged health as a public good; we simply don’t know what this would mean. The HIF transforms pharmaceutical innovation into a public good, financed by all and freely available to all. It thereby achieves massive efficiency gains (through reductions in lobbying, gaming, litigation, patenting, excessive marketing, counterfeiting and deadweight losses) which ensure that affluent populations will benefit even if initially much HIF-inspired research will target neglected diseases. The HIF faces serious challenges regarding the reliable assessment of health impact and the attraction of long-term funding commitments. Let us explore together whether the HIF is a worthy idea and, if so, whether we can overcome these challenges. We encourage interested readers to examine the Health Impact Fund proposal at www.healthimpactfund.org and to contact us at firstname.lastname@example.org. Incentives for Global Health is the team that is developing the Health Impact Fund proposal. The authors of this piece are Thomas Pogge, Leitner Professor of Philosophy and International Affairs at Yale University and a Director of Incentives for Global Health, and Jake Hirsch-Allen, an intellectual property lawyer and a consultant to Incentives for Global Health. Related Articles: Health Initiative Proposes Rewarding Innovation On Impact Results; Some See Hurdles Health Impact Fund – Raising Issues Of Distribution, IP Rights And Alliances WIPO Seminar Discusses Impact Of TRIPS On Pharmaceutical Innovation "A Response From The Authors Of The Health Impact Fund" by Intellectual Property Watch is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License.