Description: A proposal to separate R&D companies and pharmaceutical production companies at a regulatory level, and create a public, non-profit intermediary called the Drug Development Corporation (DDC). The DDC would license manufacture with price caps, and reward R&D companies with royalties proportionate to social impact.
Start date: Proposed in 2008.
Status: Proposed.
In a book published in 2008, Finkelstein and Temin propose that the R&D function and the production and sales function be disintegrated, and that a DDC be created as a public, non-profit intermediary.1
First, R&D and production would be separated at a legislative level. To ensure compliance, the Food and Drug Administration would cease to accept applications from R&D firms which also produced and sold drugs.2
Next, the DDC would buy patent rights for drugs from the R&D firms and auction them to the production firms with a cap on the final price that the drugs could be sold for.3 The DDC would be funded through public funds, the proceeds from auctions, and the savings made through cheaper drug prices.4 Developers would be paid from the auction proceeds, multiplied by a multiplier smaller or greater than one, according to the priority and potential health impact of the drug.5
It is worth raising a few points of uncertainty in the proposals set forth by Finkelstein and Temin.
Firstly, they claim both that the auctions will generate revenue6 and that the price paid to the developer will generally exceed that generated through auction.7
Secondly, they claim that their scheme will reduce drug prices substantially.8 However, they also recognise that the way the scheme is designed, there is a direct tradeoff between capping the price of drugs and incentivising bidders to actually produce the drugs.9 They imply that the DDC would have to take an incremental approach, initially reducing prices only a small fraction.10
Scope: The DDC would apply to all aspects of drug-related R&D undertaken in the US.
Access: The DDC would reduce the price of drugs somewhat. However, the more drugs prices were reduced, the less incentive there would be to actually manufacture and distribute them, so there is an inherent conflict in the system.
Innovation: The DDC would provide good incentives to developers, remunerating them more than today and in proportion to the expected health impact of their discoveries. However, the DDC would provide poor incentives for drug manufacture and distribution.
Efficiency: The DDC would cost around \$30 billion annually, its proponents estimate.11 It would be partially market based, in that the remuneration paid to developers would relate to the auction value of their drug. However, there would also be non-market based elements, namely the price cap and the health impact multiplier.
Governability: The DDC would be a new public body, and would wield significant power over drugs, particularly through setting the price caps on drugs and the multipliers applied to developers’ remuneration to align with health impact.
Political Feasibility: DDC does not seem to have generated any interest, and the substantial restructuring of the pharmaceutical industry that it calls for is likely to be unpopular and impracticable.
No other proposal that we have considered suggested splitting the function of R&D from the function of production and sale.
Finkelstein and Temin compare their scheme to the Medical Innovation Prize Fund (MIPF), arguing that DDC is a more thoroughgoing version of MIPF and sets the level of remuneration for developers using a more market-based mechanism.12 Seen from the point of view of access and innovation on the other hand, MIPF seems likely both to provide more sustained incentives to drug production and distribution, and greater price reductions.
Targeted at:
US government
US academica
US policy makers
Stakeholders on board:
Finkelstein, Stan N., and Peter Temin. Reasonable Rx: Solving the Drug Price Crisis. Upper Saddle River, N.J.: FT Press/Pearson Education, 2008.
