Are We 'Paying Twice' for Pharmaceuticals? The use of prizes could resolve concerns that drugmakers receive improper rents for their discoveries.

• Author: Hyman, David A.
• Position: HEALTH & MEDICINE

Pharmaceutical companies charge high prices for branded products, but in most instances the research that results in these drugs is supported financially by the National Institutes of Health (NIH) or other public sources. This leads many patient advocates to contend that Americans "pay twice" for drugs: once when tax dollars support research and development, and the second time when patients buy the drugs for personal use.

The paying-twice critique is a common lament. It appears in statements by politicians, opinion journalists, historians, and progressive economists. The policy implications of this critique are straightforward: we should stop paying twice.

Is paying twice really a problem, and if it is, what should we do about it? To answer those questions, one must work through complicated factual, legal, and philosophical puzzles. In this article, we lay out some basic facts and highlight the difficulties.

THE PAYING-TWICE CRITIQUE

In the pharmaceutical context, the paying-twice critique surfaced during debates over the 1980 Bayh-Dole Act. Bayh-Dole was a response to the perception that government-funded research was being commercialized too slowly, if at all. The act authorized nonprofit institutions (including colleges and universities) to retain ownership of inventions that resulted from government-funded research. Specifically, government kept a nonexclusive license for its own use and "march-in" rights to grant licenses to other parties under four specified circumstances.

One of those circumstances involves the failure to take "effective steps to achieve practical application of the subject invention," with "practical application" defined, in part, as requiring that the "benefits are, to the extent permitted by law or Government regulations, available to the public on reasonable terms."

Bayh-Dole effectively privatized the rewards of research done by universities at public expense. That strategy was controversial; Sen. Russell Long (D-LA) gave voice to the paying-twice critique on the Senate floor when the legislation was being debated:

There is ... absolutely no reason why the taxpayer should be forced to subsidize a private monopoly and have to pay twice: First for the research and development and then through monopoly prices.... This proposed legislation is one of the more radical, far-reaching giveaways that I have seen in many years. This criticism has resurfaced repeatedly. Indeed, the paying-twice critique prompted the Department of Health and Human Services to require "reasonable" pricing of products that relied on a subset of government-funded basic research from 1989 through 1995. HHS abandoned that policy after concluding it was more trouble than it was worth, despite the now-familiar criticism from Sen. Ron Wyden (D-OR) that taxpayers would be "forced to pay twice for their medicines--through their taxes and again at the pharmacy."

GOVERNMENT INVOLVEMENT IN DRUG R&D

The government can contribute in a variety of ways to drug R&D. It can conduct the research itself, and it can (but need not) patent the resulting inventions. It can help fund basic or applied research in an area, and any resulting invention might (but need not) be patented by a private entity. It can invest a little or a lot in any given disease, molecule, or drug regimen. And the government's investments can be tightly linked or be quite remote to a given treatment.

In a more extended version of this article recently published in the Yale Journal on Regulation, we present detailed case studies of two high-profile medications whose histories illustrate the complex interaction of public and private institutions and funding during the drug-development process. In this piece, we briefly review the literature on government involvement in drug R&D. Both approaches highlight the difficulty of disentangling public and private contributions to pharmaceutical development.

The conventional wisdom is that the government funds basic research while pharmaceutical companies fund clinical trials. The conventional wisdom supports the policy of allowing pharmaceutical companies to secure the exclusive right to sell new medicines because it implies that private companies shoulder the substantial costs of conducting "translational research." In reality, financial responsibility for basic research and translational research is divided less neatly than the conventional wisdom posits. Businesses have long sponsored a good deal of basic research, and in recent decades their share of the burden has increased. Drug-company investment in basic research soared from $3 billion in 2008 to $8.1 billion in 2014, according to the most recent National Science Foundation data by business sector. The second component of the conventional wisdom--that the private sector bears most of the cost of translational research--appears to be sounder. In 2015, the pharmaceutical and biotech industry spent $102 billion on R&D, according to Research!America, an Arlington, VA-based advocacy group.

Researchers have also used patents to study the contributions made by public funding to the creation of new drugs and found a trend toward increasing public-sector involvement in translational research. The researchers wrote...