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Volume 4 | Issue 1 | Mar 2013
Binding Market and Mission: Pharmaceuticals for the World’s Poor
Novartis
Current patent law, which protects intellectual property, can hinder the distribution of life-saving medications in the developing world. The Health Impact Fund offers a parallel market system to address this challenge.
The Health Impact Fund (HIF) is a project aimed at expanding access to life-saving drugs worldwide and incentivizing pharmaceutical companies to invest in research and development for neglected diseases. The HIF would invert the existing patent framework by rewarding ideas through their diffusion rather than protecting against this diffusion, by encouraging a collective rather than privatized wealth scheme. The basic idea behind the HIF is the creation of a new competitive market that centers on individuals who, under normal circumstances, exert very little force on the tide of market demand. The HIF does not operate on standard market measures of demand, but instead measures demand as a product of needs, while in conventional market scenarios, private citizens and national welfare states pay for needs. The idea is that the HIF would create a functional, competitive market in which pharmaceutical profit is determined by the actual health impact of each new drug, a measure born from pharmacological and distributive efficacy. In this article, the basic features of and main challenges to the HIF are addressed.
  • Approximately 18 million people die each year from diseases we can prevent, cure, or treat. This is the equivalent of 50,000 avoidable deaths per day—two deaths every three seconds—or one-third of all human deaths.
  • Equally problematic, the lack of purchasing power in extremely poor populations and developing countries leads to an absence of market demand at the root of the “neglected diseases” phenomenon.
  • The global reform proposal addressed in this article—known as “Health Impact Fund” (HIF)—aims to solve the two related challenges sketched above.

"He who receives an idea from me, receives instructions himself without lessening mine; as he who lights his taper at mine, receives light without darkening me."
Thomas Jefferson1

"Our common history is deeply pervaded by the most grievous wrongs. And these wrongs taint the huge inequalities this history has resulted in."
Thomas Pogge2

Approximately 18 million people die each year from diseases we can prevent, cure, or treat. This is the equivalent of 50,000 avoidable deaths per day—two deaths every three seconds—or one-third of all human deaths.3 How is it that, in 2008, 1.3 million people died from tuberculosis, a disease that in most cases is easily curable through low-cost antibiotics? Equally problematic is the fact that extremely poor populations and developing countries lack purchasing power. Their poverty leads to an absence of market demand. The Health Impact Fund (HIF), proposed by philosopher Thomas Pogge and economist Aidan Hollis, aims to solve these two, related challenges.

Alongside other HIF proponents, Pogge and Hollis argue that the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)—essentially an international patent regime first negotiated in 1994—has dramatically curtailed the access poor people have to medicines. (Compulsory licensing offers limited mitigation of this effect by allowing governments to pay a single fee to manufacture patented products generically in the case of emergency.) HIF proponents also argue that the TRIPS system creates an absence of competition that allows pharmaceutical companies to multiply the prices of advanced medicines—often 10- to 15-fold—effectively excluding the poor from the market. In addition, this globalized, monopolistic patent regime tends to discourage pharmaceutical innovators from doing research and development focused on diseases concentrated among the global poor—neglected diseases that kill millions each year,4 but offer little in the way of profit.

In response to this market failure, Pogge and Hollis have designed the Health Impact Fund, a project aimed at expanding access to life-saving drugs worldwide and incentivizing pharmaceutical companies to invest in research and development for neglected diseases. The HIF would invert the existing patent framework by rewarding ideas through their diffusion rather than protecting against this diffusion—by encouraging a collective rather than privatized wealth scheme. But the HIF need not exclude or trample on traditional patent markets. Instead, it is designed to simply run in parallel to the TRIPS system.

The Basics of the Health Impact Fund

The Health Impact Fund is a proposed new way of paying for pharmaceutical innovation. The HIF would incentivize the development and delivery of new medicines by paying for performance. All pharmaceutical firms worldwide would have the option of registering new medicines with the HIF. By registering, a firm agrees to provide its drug at cost anywhere it is needed, and in exchange for foregoing the normal profits from drug sales, the firm is rewarded based on the HIF’s assessment of the actual global health impact of the drug. Governments and other donors would finance the HIF.5

The basic idea behind the HIF is the creation of a new competitive market that centers on individuals who, under normal circumstances, exert very little force on the tide of market demand. Given the tremendous economic inequalities within the global marketplace, there is little hope for building internal demand from the bottom up in the world’s poorest regions. In most of these areas, people simply have no bargaining power.

And while it might be said that global capitalism is actually creating internal demand in new areas—countries such as India, China, and Brazil—and is on track to create demand in the poorest areas of the world, one clear objection exists: rising gross domestic product (GDP) and internal demand tell nothing about trends in the absolute number of extremely poor people living in these areas; they illuminate nothing about inequality in distribution, which lies at the core of gaps in medical access.6-8

Fea_Botti_Figure2.jpg
Anil Gulati/Photoshare
The Health Impact Fund is designed to surmount the “last-mile” problem—that is, when lack of infrastructure creates a roadblock to pharmaceutical delivery.

The HIF does not therefore operate on standard market measures of demand, but instead measures demand as a product of needs. In conventional market scenarios, private citizens and national welfare states pay for needs. The HIF instead promotes a system in which competitors are rewarded based on their success in fixing a problem of global social injustice. But the HIF is not conceived as a global welfare state, in which rewards and incentives are given a priori, but would instead be based on performance outcomes. In other words, the HIF would not create demand from the top by injecting money into a chosen territory. The idea is that the HIF would create a functional, competitive market in which pharmaceutical profit is determined by the actual health impact of each new drug, a measure born from pharmacological and distributive efficacy.

Once in place, the HIF would promote a pay-for-performance scheme that, on the one hand, solves the problem of lack of access and, on the other, provides incentives to pharmaceutical companies to invest in research, development, and distribution of new drugs for (commonly) overlooked diseases. The TRIPS system, it is worth stressing, would remain unaltered by the HIF. It is understood that attempts to radically reform TRIPS would be met with stiff and unproductive resistance from those sectors that benefit from the system.

The first step of the HIF is to establish a pool of money through government contribution. The HIF proponents estimate need for an initial annual budget of $6 billion (roughly 0.01 percent of global income): “$6 billion is easily affordable if countries accounting for one third of global income were willing to join the partnership, as each partner country would then need to commit only 0.03 percent of its GNI [gross national income].”9 The goal is to maintain a portfolio of not less than 20 drugs at a time and an average reward pool of $300 million per drug per year. Reward funds unspent in any year would be rolled over into subsequent years. To stimulate countries to join the HIF program, proponents have already envisaged an exit option to withdraw from the partnership.9 (Challenges to raising these funds are described below.)

Once the pot of rewards is in place, pharmaceutical companies are faced with the option to register a new drug either under TRIPS or the HIF, an option that would fold a new dimension into traditional market analyses. If registered under the HIF, then firms agree to supply their product globally at a price no higher than average cost of production. In return, registered products share in the annual reward pool for ten years. These rewards are divided in proportion to the measured health impact of each product in the pool.10 Essentially, firms that enter into the HIF maintain exclusivity of rights, which entitles that firm to reward, but, unlike under TRIPS, the firm abdicates its freedom to monopolistic pricing.

This system addresses a number of problems impeding the distribution of life-saving medications in the developing world:

First, under registration with the HIF, big pharmaceutical companies do not need to divert revenue toward attractive packaging, marketing strategies, advertising campaigns, political lobbying across the world, multimillion dollar litigation against generic producers, and so forth. Bypassing these expenses, which amount to approximately six-sevenths of the total spending on medicines, pharmaceutical companies cut out a substantial percentage of the fixed costs attached to drug registration under TRIPS.11-13

Second, the HIF creates competitive pressures where there otherwise wouldn’t be any. If a company does not pursue pharmaceutical development through the HIF, then it leaves this annual pot of $6 billion open to its competitors. This is especially true in the case of orphan drugs, or drugs abandoned along the development path due to their relatively low potential for revenue generation.14-16 Pharmaceutical companies therefore face a bifurcated profit motive during drug development, with earning potential either through how many pills are sold or how many people are saved. In this way, pharmaceutical companies have nothing to lose. On the contrary, they, better than anyone else, know which drugs would better fit under the TRIPS system and which under HIF. In both cases, pharmaceutical companies are treated as agents chasing the highest possible profit.

Third, registering a drug under the HIF carries a positive marketing message at no cost, affirming mission-based profit criteria alongside conventional market-based criteria. This is particularly important in the pharmaceutical industry, where a dissonant tension now separates the explicit mission of most companies—saving lives—from their implicit operations—selling treatments for profit. A quick look at only two pharmaceutical mission statements makes this abundantly clear:

As a global health care company, Johnson & Johnson has a responsibility to help create a world where people across all economic and social circumstances have access to the treatments they need... We continually offer support that works to increase access to care in medically underserved communities both in the United States and abroad.17

Roche is aware that patents—and the level of drug prices required to sustain economic development in the industrialized world—can present one of the many barriers to providing basic medical care in the world’s poorest countries. That is why we have adopted patent policies for the Least Developed Countries that are designed to give their populations better access to our medicines.18

The HIF would help draw the reality of rewards closer to the aspirational missions of most pharmaceutical companies.

Fea_Botti_Figure3.jpg
K. Danetzki/Deutsche Welle
The idea for a Health Impact Fund originated with philosopher Thomas Pogge, pictured here, and economist Aidan Hollis.

Fourth, and perhaps most critically, because the HIF rewards on the overall health impact of a drug, one of the fundamental (and obvious) requirements is that the product actually reach the patient. In this way, the fund provides a potential solution to the “last mile problem.” Lack of access to essential drugs often results not from a lack of innovation or research and development, but a lack of infrastructure and human resources needed for drug delivery. This is known as the last mile problem. “Even if you make these drugs available for free, the systems to deliver them are not there,” explains public health expert Josef Decosas, director of the South African Aids Training Program.19

Proponents of the HIF have acknowledged that it is not enough to simply invent new medicines. To have an impact on global health, patients must gain access to the medicine and they must follow the appropriate regimen. In poor countries, as well as poor regions of middle-income or affluent countries, there are many barriers to the appropriate use of medicine by those who stand to benefit from it. These barriers include a paucity of trained and available medical personnel, poor administrative capacity, nonexistent or poorly maintained infrastructure, and corrupt or ineffective government bureaucracies.20

It is precisely this challenge, the comprehensive picture of what’s required to have the greatest impact—a challenge essential to effective treatment of any illness—that the HIF addresses. Under the status quo, companies profit at the time of sale, rather than at the effective administration and conferral of health benefits. Instead, for every HIF-registered product, the registrant would recognize a powerful profit motive to lift its product over any last-mile barriers and maximize the measured impact and distributive performance of its drug. (Online material about the HIF provides detailed discussion of costs associated with the last-mile problem, including the large challenge of consistent and comparable data collection.)20

Fifth and finally, an important ancillary benefit from the HIF is new rationale for collaboration between firms. Though research and development would remain a competitive enterprise, it would ultimately prove more convenient for these same firms to work together and share the fixed costs of distribution, a process that would lead to shared benefits through the HIF. This outcome would both make the market more efficient, and free up revenue for drug development.

It is important to stress that the HIF reward system is characterized by a “pull” mechanism. Unlike the “push” model, in which governments and grant-making organizations decide who gets money before the project proposal is implemented, the pull mechanism hinges on competition and performance. The reward is not given to the most promising idea yet-to-be implemented, but to the best result achieved.9

One main concern is that the HIF, by reducing mortality but not fertility, may increase the burden of overpopulation in the poorest areas of the planet. The HIF is not presently designed to address the problem of overpopulation. In order to be effective at improving well-being, it must be employed in close coordination with programs that alleviate conditions of extreme poverty, a process that often coincides with lowered birth rates.3 By addressing the problem of access to life-saving medicines, the HIF is but one piece in a system of reforms. Absent parallel measures to reduce fertility (e.g., by reducing poverty and improving education, especially of women), the HIF could exacerbate problems of overpopulation and resource scarcity. It is therefore essential to embed the HIF in a broader agenda of reform in order for it to be effective.

Fea_Botti_Figure4.jpg
Novartis
Under this parallel patent regime, pharmaceutical companies would be able to weigh the costs and benefits of drug development under two entirely different economic frameworks.

The major lingering question at this point is how to equitably calculate the health impact across a diverse array of treatments. Though not an easy metric to devise, nor is it any more difficult than other synthesized numerics applied to health or lifestyle. In fact, the HIF calculation would be modeled on the widely used public health measure, disability-adjusted life years, or DALYs. Impact of a company’s performance is calculated based on Quality-Adjusted Life Years, or QALYs. For example, a drug that extends a single person’s life by 10 healthy years would be recognized as having created 10 QALYs.9

The HIF proponents acknowledge the difficulty of fair and robust QALY assessment. A multidisciplinary team of experts, including Nobel prize-winning economists Joseph Stiglitz and Amartya Sen, are currently working to develop a reliable health impact assessment methodology that involves evidence on the incremental effect on health of the average consumer. When a drug registered under HIF displaces an existing medicine, assessment may be relatively easy. Otherwise, the HIF proponents recognize that

There is no perfect metric for health or disease and no perfect algorithm for health impact assessment, and that any such assessment will inevitably rely on imperfect data. Perfection, however, is not the relevant standard. What matters is that pharmaceutical firms should have strong new incentives to deliver health improvements—and no strong new incentives to try to capture HIF rewards without health impact.9

As one critic has rightly noted, the reliability and trustworthiness of both the health impact measurement and the reward mechanism is pivotal to the success of the HIF.21 To avoid risks of corruption and conflict of interest, the HIF would be an international agency unattached to national bureaucracies and pharmaceutical administrations. Those who create the rules for assessing health impact would be independent from those who apply the rules, and both groups would be subject to a third, separate auditing branch. All three of these components are, in turn, governed by a board that includes the financing governments, who naturally possess strong interest in ensuring their money be well spent.20

That said, a simple question looms large in the backdrop: is this division of responsibility sufficient to guarantee an administrative architecture immune to corruption and external pressures? The answer is, of course, no. But the counter-question stands, what human institution is immune from corruption? As Immanuel Kant famously said, “out of the crooked timber of humanity no straight thing was ever made.”22

The practical answer to this challenge is commonly, and only partially, found in the separation of powers. The HIF would be structured in such a way that the committees or agencies involved would be accountable to at least three different audiences with divergent interests: those interested in rescuing the global poor, those interested in monitoring how government funds are spent, and those interested in rewarding pharmaceutical companies fairly, based on a solid health-impact assessment methodology.

The HIF institutional architecture is only a starting point. The need for future revision is certain, and reform will be driven from inside as well as from traditional outside forces, like the press, and growing data publicity and accessibility. Regardless, the only resource we have when designing and implementing new institutions is, necessarily, human beings. Current alternatives to the HIF for managing global healthcare needs are welfare and philanthropy—that is, faith in the goodwill of wealthy donors and powerful corporations. The promise of either of these approaches remains questionable.

Conclusion

Amid global financial crisis, fiscal debate seems stuck in the severe dichotomies of big versus small government, public versus private investment, and bureaucratic centralization versus decentralization. This economic impasse, largely played out in arguments over the healthy reach of free-market capitalism, rests on a widespread and obdurate ideological division. The Health Impact Fund attempts to bridge this gap, merging competition with cooperation, profit with social benefit, and freedom of trade with equal market access and opportunity.

Proponents of the HIF argue that the exclusion of the global poor from access to life-saving drugs is due to the particular design and orientation of global institutions like the World Trade Organization. Without adopting a naive optimism about the possibility, or even the value, of abolishing global frameworks designed to protect corporate profits, the HIF simply adds a parallel market system based on unconventional incentives: social benefit, rather than individual advantage.

In June of 2010, the Social Democratic Party (SPD) of Germany officially endorsed the HIF and called on the German government to actively support a pilot program. Although SPD is not currently in power, it is plausible that the HIF rationale might be widely accepted in the context of the European Union. And while U.S. political culture might be skeptical about, and reluctant to take part in, the HIF, the U.S. accounts for almost half of the global pharmaceutical market.23 The U.S. government might therefore finance the HIF with the realistic hope that American pharmaceutical firms will recuperate most of the rewards—an indirect return on investment. In this way, the HIF might be promoted in the American political arena as an incentive to gain leadership in a virtuous global competition. Similar rhetoric could also apply in the European scenario. Other countries—especially developing countries like Brazil, China, and India, in which access to medicines for the poor would be extremely valuable—might accept and finance the HIF in the hope of benefiting from its outcomes. Of course, these theoretical prospects do not solve the practical problem of eliciting governments’ financial commitments. Fundraising has so far remained one of the prominent challenges for the HIF.

Conveniently, the model of the HIF can be projected on to similar markets in which the inherent value of a product lies in its widespread diffusion, but the value added through patenting serves to inhibit this diffusion. An ecological impact fund has already been described in the interest of spurring wider distribution and piloting of green technologies. Ultimately, the HIF promises the potential, across sectors, to align the innovative spirit, so often sparked by a desire to right wrongs and correct ills, with market outcomes.

References

  1. Jefferson, T. Letter to Isaac McPherson, August 13, 1813, in The Writings of Thomas Jefferson Vol. XIII, 334 (Thomas Jefferson Memorial Association, Washington DC, 1903).
  2. Pogge, T. Access to medicines. Public Health Ethics 1, 74 (2008).
  3. Pogge, T. World Poverty and Human Rights 2nd edn 222 (Polity Press, Cambridge, MA, 2008).
  4. Pogge, T. Politics as Usual: What Lies Behind the Pro-Poor Rhetoric 20–21 (Polity Press, Cambridge, MA, 2010).
  5. Health Impact Fund. [online] http://healthimpactfund.org.
  6. Milanovic, B. True world income distribution, 1988 and 1993: First calculation based on household surveys alone. The Economic Journal 112, 51–92 (2002).
  7. Milanovic, B. Worlds Apart: Measuring International and Global Inequality (Princeton University Press, Princeton, NJ, 2005).
  8. Anand, S & Stiglitz, J, eds. Measuring Global Poverty (Oxford University Press, Oxford, 2008).
  9. Pogge, T & Hollis, A. The Health Impact Fund [online] 44 (2008). www.yale.edu/macmillan/igh/hif_book.pdf.
  10. Pogge, T & Hollis, A. Epilogue: New drugs for neglected diseases. Cambridge Quarterly of Healthcare Ethics 20, 329–334 (2011).
  11. Celermajer, D & Pogge, T. A cure for all ills of the pharmaceutical benefits scheme. The Sydney Morning Herald (March 2012).
  12. Silverman, E. Global drug spending is forecast to rebound. Pharmalot (July 2012).
  13. Barnard, D. In the High Court of South Africa, Case No. 4138/98: The global politics of access to low-cost AIDS drugs in poor countries. Kennedy Institute of Ethics Journal 12, 159–74 (2002).
  14. Musgrove, P & Hotez, PJ. Turning neglected tropical diseases into forgotten maladies. Health Affairs 28, 1691–1706 (2009).
  15. Anderson, GF. Spurring new research for neglected diseases. Health Affairs 28. 1750–1759 (2009).
  16. Geraghty, JA. Expanding the biopharmaceutical industry’s involvement in fighting neglected diseases. Health Affairs 28, 1774–1777 (2009).
  17. Johnson & Johnson [online]. www.jnj.com/responsibility/ESG/Social/Global_Health/Access_to_Medicines.
  18. Roche [online]. www.roche.com/corporate_responsibility/business_ethics/patents.htm.
  19. Friedman, T. It takes a village. New York Times (April 2001).
  20. Peterson, M, Hollis, A & Pogge, T. A critique in need of critique. Public Health Ethics 3, 178–185 (2010).
  21. Sonderholm, J. A reform proposal in need of reform: A critique of Thomas Pogge’s proposal for how to incentivize research and development of essential drugs. Public Health Ethics 3, 161–177 (2010).
  22. Kant, I. Idee zu einer allgemeinen Geschichte in weltbürgerlicher Absicht (1784), in Kant’s Werke, Berlin Academy Edition, Vol. VIII, 19–22 (Walter de Gruyter, Berlin, 1968).
  23. Kasapi, Z & Mihiotis, A. Management as applied to new products penetration in the competitive environment of pharmaceutical industry. Interdisciplinary Journal of Research in Business 1, 73–85 (2011).
Daniele Botti Fellow, Global Justice Program at Yale University
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