New on the Human Capital Web Site: RWJF Investigator Awardee Takes Closer Look at Market Incentives for Drug Manufacturers

Jan 6, 2011, 6:34 PM, Posted by

To casual observers, two facts about the U.S. pharmaceutical industry seem to be at odds. On one hand, the industry as a whole is very profitable: It had a 2008 profit margin of 19 percent, and it is regularly at or near the top of Fortune 500 rankings of the most profitable industries. On the other hand, the industry is the beneficiary of extensive market incentives from the federal government, incentives designed to encourage companies to develop drugs that address particular conditions or that meet the needs of specific groups of patients.

But do those incentives accomplish what federal policy makers had in mind? Aaron Kesselheim, M.D., J.D., M.P.H., a 2009 recipient of an RWJF Investigator Award in Health Policy Research, has taken a close look, and in a new article in the New England Journal of Medicine reviews his findings.

After examining the effects of five separate laws that relied on such market incentives as tax credits and research grants, full control of intellectual property discovered with government resources and extended periods of market exclusivity for their prescription drugs, Kesselheim concludes that the record for such incentives is “a bit of a mixed bag.” He says that “myths” have arisen around several of the most significant pieces of incentives legislation, including the 1980 Bayh-Dole Act and the 1983 Orphan Drug Act, and that some of the claims of success about the laws and those that followed don’t hold up under careful scrutiny.

In an interview for a newly posted story on the RWJF Human Capital Web site, Kesselheim explained that he worries that the market incentives, as currently structured, are open to abuse by industry. “Incentives can be very powerful,” he explains, “and there are definitely examples where they’ve worked as anticipated. But there are too many examples where drug developers have taken advantage of the system, or where the incentives have provided undeserved windfalls for work that would have happened anyway. So, in general terms, what we’re doing is creating relatively inefficient programs that can be easily gamed. We see a lot of unanticipated consequences, because the legislation as written didn’t anticipate these collateral effects.”

Kesselheim’s work on the subject was supported by RWJF Public Health Law Research project and his 2009 RWJF Investigator Award in Health Policy Research.

Check out the RWJF Human Capital Web site story, and read an abstract of his NEJM article.

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This commentary originally appeared on the RWJF Human Capital Blog. The views and opinions expressed here are those of the authors.