WhatifEN

What If: A Health Impact Fund Rewarded Innovation and Managed Spending on New Drugs?

Aidan Hollis, Department of Economics, University of Calgary

The policy option presented here was chosen to stimulate discussion, but is only one of several options examined by the author in the report Managing Pharmaceutical Expenditure: An Overview and Options for Canada.

Summary

About the presenter

Aidan Hollis is professor in economics at the University of Calgary, and vicepresident of Incentives for Global Health; a U.S.-based non-governmental organization focused on the development of the Health Impact Fund proposal to pay for pharmaceutical innovation. Hollis studied at Cambridge University and the University of Toronto, where he obtained a PhD in economics. His research focuses on innovation and competition in pharmaceutical markets. He has published widely in economics. In 2003-2004 he served as the T.D. MacDonald Chair in Industrial Economics at the Competition Bureau of Canada.

Main concern/problem

Canadian federal legislation rewards drug innovation by using the patent system. Innovating firms receive market exclusivity of their patented drug for a period of time during which prices are set high to enable firms to recover their investment in R & D and to encourage firms to create new drugs. Firms are motivated to invest in the products that will be the most profitable, not necessarily those that will benefit society most in terms of improvements to health. The value of patent protection is also affected by insurer policies. Insurers often demand confidential rebates (as is the case with Ontario). However, if all drug plans constrain drug reimbursement, there will be reduced incentives for drug companies to innovate. Canada needs to strike the right balance between managing costs and adequately rewarding the development of valuable new drugs to sustain a continuing flow of investment into pharmaceutical R&D.      

Proposed Option

The health impact fund (HIF) would be a new way to pay for pharmaceutical innovation. The HIF would encourage the development and delivery of new medicines by paying for performance. Pharmaceutical innovators would have the option of registering new medicines with the HIF. By registering, a firm would agree to provide its drug at cost anywhere needed in countries participating in the HIF. In exchange for foregoing the normal profits from drug sales, the firm would be rewarded based on the HIF’s assessment of the actual global health impact of the drug in each of ten years. Governments would finance the HIF. The total payout of the HIF would be fixed for each year, and the reward payments for each registered product would be proportional to that product’s share of the total assessed health impact for all registered products.

Benefits

The HIF is designed to allow the market to set the rate of payment made to innovators: the greater the number of patented medicines registered with the HIF, the lower the payment for any given health impact. This mechanism creates incentives for R&D to be conducted for important diseases, even if the beneficiaries are themselves not funding the reward payments. Firms have little incentive to conduct this type of R&D under the current patent system. In addition, the HIF could provide incentives to develop new uses for older drugs for which there would otherwise be no significant reward.

Experience/evidence of success

Over the past thirty years, there has been increased analysis of the effectiveness of drugs, especially with cost-effectiveness studies. The HIF simply builds on this approach. However, no jurisdiction has implemented an HIF so there is no evidence for evaluation.

Challenges

Pilot projects would be required to demonstrate that it is feasible to base rewards on assessed health impact. It would be difficult to achieve international consensus to contribute to funding the HIF. The HIF is not designed to reduce total expenditures but to reorganize expenditures to achieve better outcomes.

Considerations for Canada

Canada could explore running a pilot project, rewarding a new indication for an existing generic drug.

Presentation