MORE ON THE ECONOMICS OF R&D, AND RELATED TOPICS: HEALTH

This entry focuses on health related R&D. It is in fact hard to quantify the benefits from biomedical research.

Final Report of the Commission on Macroeconomics and Health
See especially the section titled: “The Supply of Global Knowledge in the Fight Against Disease” This section of the report focuses on the ratio of R&D funding to DALY’s (disability adjusted life years) for different diseases. The implicit assumption is that equity concerns suggest that health and survival should be equally available to all, and that the low ratios found for tropical diseases and other diseases of poverty indicate inequitable global allocation of R&D funding.

The Benefits of Medical Research and the Role of the NIH
This is a report prepared for the U.S. Senate, and while U.S.-centric, provides some indications of the rates of return on biomedical research and other economic issues. There is an extensive bibliography. May 2000. (PDF, 64 pages.)

Medical Innovation in the Changing Healthcare Marketplace: Conference Summary
This is the summary of a conference held in June, 2001 at the U.S. National Academy of Sciences. Chapters include discussions of the “The Costs and Benefits of Medical Innovation” and “Cost-Effectiveness Studies: A Key to Innovation Development”. The report can be read online (in the format provided by the National Academy Press) or purchased in hard copy.

Pharmaceuticals:

The pharmaceutical industry of course has an idea of the returns to investors from its research and development. One should note that only one in 5,000 compounds discovered makes it to market, and only 30 percent of those products brought to market generates profits that exceed its R&D costs. Thus the profitability of the industry is based on perhaps 20 percent of its products, or perhaps one in 25,000 compounds that are discovered. To understand the average internal return to investment in R&D, then one has to look at the profitability of the company or industry as a whole, not just single products. As one might expect, Pharmaceutical Industry profits are only slightly higher than other industrial profits. If they were much higher, the market and diminishing returns would be expected to rebalance the situation. It seems likely that the higher profits are more related to a risk premium than to high rates of return to R&D. One way that the pharmaceutical industry estimates the social rates of return to R&D is to look at the reductions in medical costs related to newly introduced drugs. It is not the pharmaceutical companies that enjoy these benefits, but rather those who save on the costs that would otherwise have been incurred. Some of these topics are discussed in the following papers:

Why Do Medicines Cost So Much?
This is a publication directed at a general audience by the U.S. Pharmaceuticals Research and Manufacturers Association. It focused on the U.S. industry and market, and of course represents the industries position. The U.S. industry is the most important source of innovation in pharmaceuticals, and the report has both interesting data and a useful discussion of the situation. March 2001. (PDF, 22 pages.)

The Best Value in Medicine Today: How Prescription Drugs Account for a Fraction of Health Cost Increases While Helping to Offset Other Health Costs
Another publication of PhRMA, November, 2002) (PDF, 15 pages.)

Benefits And Costs Of Newer Drugs: An Update
Abstract: “We update and extend our previous study of the effect of drug age -- years since FDA approval --on total medical expenditure, in several respects. The estimates indicate that, in the entire population, a reduction in the age of drugs utilized reduces non-drug expenditure 7.2 times as much as it increases drug expenditure. In the Medicare population, a reduction in the age of drugs utilized reduces non-drug expenditure by all payers 8.3 times as much as it increases drug expenditure; it reduces Medicare non-drug expenditure 6.0 times as much as it increases drug expenditure. About two-thirds of the non-drug Medicare cost reduction is due to reduced hospital costs. The remaining third is approximately evenly divided between reduced Medicare home health care cost and reduced Medicare office-visit cost. We also found that the mean age of drugs used by Medicare enrollees with private Rx insurance is about 9% lower than the mean age of drugs used by Medicare enrollees without either private or public Rx insurance. By Frank Lichtenberg, June 2002. (PDF, 13 pages.)


For public goods, the income from sales of the goods are generally not the best indication of the value of the goods. So cost-benefit calculations based on sales may be inadequate. For example, the benefits that come from mass immunization that eliminates (or greatly reduces) the incidence of an infectious disease will generally exceed the total of what people are willing to individually pay for immunizations. In general we approach this problem by regulation (requiring children to be immunized before entering school), by subsidizing immunization services with public funds, or by reducing the costs to the producers of vaccines (by tax financing R&D, limiting financial risks related to vaccine failure, etc.)

Moreover, poor people simply might not be able to pay as much for pharmaceuticals as public policy suggests they should consume. Pharmaceutical companies indeed have apparently been unwilling to invest in developing new products for diseases specific to poor people in poor nations because the markets for such products were unlikely to generate sufficient income from successful new drugs to provide adequate return on R&D investments. Some interesting approaches to this problem involve tax breaks as subsidies for R&D expenses for such products, or efforts by donor organizations to provide guarantees or subsidies to increase the markets for successful products. Some of these ideas are discussed in the following paper.

World Bank Pharmaceuticals
This paper reviews World Bank financing related to pharmaceuticals, and makes recommendations for improvements in its programs related to pharmaceuticals. Govindaraj R, M.R. Reich and J.C. Cohen, September 2000. (PDF, 42 pages)


Inflation

If funding for biomedical research increases faster than the capacity to carry out biomedical research, one would expect inflation. This webpage, maintained by the U.S. National Institutes of Health suggests that inflation of biomedical research costs in the U.S. has generally been higher than inflation in the GDP.
Biomedical Research and Development Price Index


Some useful websites in the field:

Commission on Macroeconomics and Health
The Commission on Macroeconomics and Health (CMH) was launched in January 2000. Over a two-year period, the Commission is to analyze the impact of health on development and examine the appropriate modalities through which health related investments could have a positive impact on economic growth and equity in developing countries. It will recommend a set of measures designed to maximize the poverty reduction and economic development benefits of health sector investment.

World Bank: Health, Nutrition and Population Publications
The World Bank HPN website has a number of publications dealing with the economics of health care, many of which deal directly or tangentially with information and knowledge issues:

The Global Forum for Health Research
The Global Forum's central objective is to help increase research efforts on diseases representing the heaviest burden on the world's health, which is underfunded, and facilitating collaboration between partners in both the public and private sectors. The website has a number of publications on biomedical research funding.

The Economic Studies Program of the Office of Science Policy and Planning
The Economic Studies Program (ESP) of the U.S. National Institutes of Health (NIH) includes analysis and support of studies in four general areas: 1. The influence of disease burden and research opportunities on the allocation of funds within the NIH budget; 2. The contributions of NIH research to increasing life expectancy, maintaining or enhancing health-related quality of life, and reducing the costs of illness and injury; 3. The contributions of NIH to other national goals, such as economic growth and international competitiveness; and .4. The cost and efficiency of conducting NIH-sponsored research and providing an adequate long-term supply of high-quality scientific investigators, equipment, and facilities.
On the topic of knowledge and information for health:

Global Information Needs for Health
This is the abstract for a working paper of the Commission on Macroeconomics and Health by P. Musgrove. “The paper will draw on national and international data collection system experience, but also on case studies or small-scale examples of how information can be made more useful locally and in real time. Manipulating, transmitting and displaying data have all become much easier, thanks to computers and electronic transfer; accurate collection has also become absolutely easier, but relatively more difficult. The implications of these changes for investment in information will also be examined.


Inequalities In Knowledge Of HIV/AIDS Prevention
From the Abstract: “This note presents a summary overview of information about socio-economic and gender inequalities in knowledge of HIV/AIDS prevention, produced by a series of country studies undertaken by the World Bank’s thematic group on health, nutrition, population and poverty.….The principal general findings are:
· Knowledge of HIV/AIDS prevention is distinctly higher among the better-off than among the disadvantaged in almost every country with available data…..
· The poor-rich differences just noted are distinctly smaller, and knowledge among the poor is distinctly higher in Sub-Saharan Africa than in Latin America……
· Distinct gender differences in HIV/AIDS prevention also exist in most countries, with knowledge among men averaging around 75%, compared with an average of roughly 65% among women……
· If knowledge about HIV/AIDS prevention is seen as an ultimate outcome of communication and education programs and compared with comparable data for other
types of health program, the record of HIV/AIDS prevention knowledge efforts look
relatively favorable….. “
By Davidson R. Gwatkin and Garima Deveshwar-Bahl, November 2001. (PDF, 12 pages.)