William Fisher and Talha Syed, HARVARD LAW SCHOOL

Lead Author: William Fisher and Talha Syed
Organization: Harvard Law School
Country: USA

Abstract

We propose a novel regulatory system that would cause both a reduction of the prices charged by pharmaceutical firms for their existing drugs in developing countries and an increase in the firms’ investment in research and development aimed at creating new drugs for neglected diseases. The heart of our proposal is a requirement that each firm demonstrate compliance, annually, with a “social-responsibility index.” This index would consist of the ratio between (1) the total number of Disability Adjusted Life Years (DALYs) saved as a result of the consumption of the firm’s products during the year and (2) the firm’s global gross revenues during the year. The DALYs used to calculate firms’ ratios would be both tradeable and bankable. Over time, the mandatory ratio would be gradually increased, bringing the overall pattern of pharmaceutical research and sales into closer alignment with global social welfare. Our proposed system would have many advantages, including: capitalizing on the knowledge held by the scientists and executives of the pharmaceutical firms concerning which adjustments of their business practices would most efficiently contribute to alleviation of the global health crisis; rapid responses to the emergence of new technological opportunities or new disease threats; facilitation of reflection and debate concerning our collective moral obligations to address the plight of the global poor; and minimal expenditures of public resources. The principal drawback of the system – the heavy demand for accurate information that it would place upon the institution charged with its administration – could be mitigated through a combination of careful institutional design and augmented pharmacoeconomic research by universities and nongovernmental organizations. Adoption of this system would surely not be simple, but is politically and financially feasible and would address the health needs of the residents of developing countries effectively and efficiently.

Submission

Each year, infectious diseases cause approximately six million deaths in developing countries. Most of those deaths could be prevented if (a) existing vaccines and medicines aimed at infectious diseases were available at affordable prices in developing countries and (b) increased resources were devoted to creating and testing new vaccines and medicines aimed at the diseases in question. We propose a practicable and affordable regulatory system that would advance both of these goals simultaneously.

The system we advocate would work as follows: Each pharmaceutical firm would be required to achieve, each year, a ratio, which we call the social-responsibility index (SRI). The numerator of this index would be the total number of Disability Adjusted Life Years (DALYs) saved as a result of the distribution and consumption of the firm’s products during the year. The denominator would be a measure of the firm’s size, presumptively its global gross revenues during the year.

Such a requirement could be instituted worldwide in either of two ways. First, the U.S. Congress could adopt a statute instituting the requirement as a condition for the right to distribute pharmaceutical products in the United States. Because the U.S. market for drugs constitutes roughly 40% of the global market, few firms, regardless of where they are based, would refuse to comply. Most likely, Congress would delegate responsibility for implementing the system to an administrative agency – either the Food and Drug Administration or a new agency. Alternatively, a new multilateral treaty (or an amendment to an existing treaty) could authorize a global institution to impose such a requirement in all member countries. The most plausible candidate for this role would be the World Health Organization (WHO). Negotiation of the necessary treaty might be facilitated by the World Intellectual Property Organization (WIPO) – in much the way that WIPO recently facilitated the successful negotiation of the Marrakesh Treaty for the Visually Impaired.

The DALYs used to calculate the numerator of each firm’s index would be both tradeable and bankable. Thus, a firm that, in a given year, failed to earn enough DALYs to meet its target could purchase DALYs from a firm that had a surplus. For example, a firm specializing in so-called “lifestyle” products (such as erectile-dysfunction drugs, sales of which are lucrative but result in only modest health benefits) could buy DALYs from a firm specializing in vaccines or drugs efficacious in preventing or treating more serious diseases (such as malaria or dengue). Alternatively, a firm that, in a given year, earned more that enough DALYs to satisfy its obligations, instead of selling the surplus could apply it to the firm’s account for the following year.

Under this regime, each firm would decide how it could most efficiently comply with its obligation. A firm at risk of missing its target would have (at least) the following options:
1) It could reduce the prices charged in developing countries for drugs already in its portfolio, thereby increasing the number of persons able to afford the drugs and earning more DALYs.
2) It could alter the formulations of drugs already in its portfolio so that they could be distributed more easily in developing countries – for example, by making them more heat resistant and thus easier to distribute in areas without reliable “cold chains.”
3) It could increase its investment in research projects that promised to generate drugs with large health benefits (for example, an improved vaccine for tuberculosis or a better pediatric formulation for a particular AIDS drug).
4) It could alter its business-acquisition policies to purchase more small biotechnology companies that had developed products offering large health benefits (for example, one of the many small firms that are currently in the late stages of the development of vaccines for the Zaire strain of the Ebola virus or a similar firm beginning work on Zika).
5) It could collaborate with governments or NGOs in developing countries to improve the distribution systems for the firm’s drugs, thereby getting them into more mouths (for example, by providing financial and technical support for the networks of Community Health Workers already in place in several African and Latin American countries).
6) It could buy DALYs from other firms better positioned to improve public health in one of the ways sketched above.
7) Finally, it could reduce the prices of all of its products, thereby lowering the denominator of its ratio. (For obvious reasons, this is the option the firm is least likely to adopt.)
Some firms would pursue one of these paths exclusively; others would adopt a combination of the approaches. The net result is that more people in developing countries would be able to afford crucial medicines, and more research would be focused on serious diseases that currently get little attention.

The system would be introduced gradually. During the first year of its operation, the responsible administrative agency or global institution would estimate the total number of DALYs saved throughout the world during the preceding year as a result of the consumption of all pharmaceutical products, divide that number by an estimate of the global gross revenues of the pharmaceutical industry, and set the mandatory ratio slightly higher. The announcement of the ratio would prompt firms to begin trading DALYs, along the lines described above. Assuming the agency’s estimates were roughly accurate, the equilibrium price for DALYs during this first year would be very low. In each subsequent year, the agency would increase the ratio. The equilibrium price for DALYs would rise as a result, and the financial pressure on the pharmaceutical industry as a whole to redirect its aggregate energies toward improvements in global health would increase correspondingly.

A system of this sort would have many advantages. Most fundamentally, it would address simultaneously the “access problem” (the inability of poor countries and their residents to afford the drugs they need) and the “incentive problem” (the inadequacy of the financial motivations to develop new drugs for neglected diseases). Most reform proposals address only one of the two causes of the global health crisis and either leave the other dimension untouched or exacerbate it. By contrast, the social-responsibility index would lead to substantial gains on both fronts.

The second major advantage of the regime we propose is that it would capitalize on the informational advantages of the pharmaceutical firms. Their scientists and executives know better than government officials which of the seven paths enumerated above would generate, in a given year, the biggest health benefits for the least cost. By setting a target but not telling the firms how to hit it, our proposed regulatory regime would enable them to use that knowledge. The result would be increased efficiency in alleviation of the global health crisis.

Similar efficiency gains would result from the market in DALYs. The firms best positioned to improve global health would do so – relying partly on funds provided by firms less well situated.

The system we recommend would also prompt firms to respond rapidly both to scientific advances and to changes in the landscape of diseases. When scientific breakthroughs exposed new paths to the creation of efficacious drugs or when new diseases appeared (or old diseases suddenly became more virulent), the firms would alter course immediately. They would not need to wait for government officials to detect the changes and adjust accordingly the regulatory regime or the pattern of government subsidies for research.

Finally, the system would stimulate public discourse concerning the global health crisis as a whole. An indirect effect of the market for DALYs is that it would reveal the price that society as a whole places upon a year of healthy human life. Public discussion of the plight of the poor in developing countries is currently impeded by the difficulty of grasping the scale of the problem and the feasibility of solutions to it. By exposing, simply and accurately, the marginal cost of saving a year of someone’s healthy life, the system would facilitate reflection and debate concerning our collective moral obligations to do more – or less. That debate would help guide the institution that managed the system when determining whether (or how fast) to turn up the SRI dial. More broadly, it would strengthen the global moral community.

The principal disadvantage of our proposed system is that, to operate well, it would require a great deal of information. Some of the data necessary to implement it has already been developed for other purposes. For example, the World Health Organization already collects and publicizes annual mortality and morbidity data broken down by country and disease. And government agencies in Australia, Canada, France, Germany, New Zealand, Sweden, and the United Kingdom have already developed considerable data concerning the relative clinical effectiveness of the various drugs that target each of those diseases. Other data essential to the operation of the system could be provided by the pharmaceutical firms themselves. For example, to demonstrate achievement of the SRI, the firms could be obliged to submit, not just financial information necessary to calculate the denominators of their ratios, but also verified data concerning the distribution (and consumption) of each of their drugs during the preceding year. But, to run system accurately and fairly, the institution managing it would need to supplement these data with additional information. That would be difficult and costly, especially in the first year of its operation. This drawback could, however, be mitigated by asking universities (in particular, faculty in medical schools and schools of pharmacy) and other nongovernmental organizations, to augment their ongoing pharmacoeconomic evaluations of drugs. That such evaluations would not only have global social benefits (of the sorts we have outlined) but would also enhance the ability of individual doctors to prescribe the right treatments for their patients might also prompt foundations to fund increased research of this sort.

The version of the social-responsibility index outlined above is the most straightforward. But modified versions are readily imaginable. Some would advance our goals more precisely than the basic model; others might be more politically palatable. A few of them are described and assessed below.

(a) Safety Valves

One of the advantages of the SRI is that (unlike analogous systems currently used in some countries to curb air pollution) it would not expose either the regulated firms or society at large to serious risks caused by government officials misestimating social benefits and harms. As we have explained, during the first year of its operation, the system would require firms to achieve a ratio only slightly higher than the industry-wide ratio of DALYs saved to global revenues – the calculation of which would be time-consuming but not prone to serious error. In subsequent years, the mandatory ratio would be gradually increased, subjecting firms to slowly strengthening obligations. This incremental approach would pose little danger of forcing firms suddenly to make large – and potentially socially excessive – expenditures to meet their regulatory obligations. As a result, our proposed system would not need a “safety valve” of the sort commonly used to soften the impact of “cap-and-trade” systems for controlling greenhouse gases.

Adding such a valve to our system would, however, be simple. The institution administering the regime would offer to sell each year an unlimited number of (virtual) DALYs at a specified price – a price somewhat higher than the price at which the institution expected DALYs to trade on the private market. If the market price rose above this level, delinquent firms could and would purchase from the government the number of DALYs they needed to hit their targets.

There are two reasons why it might make sense to add this feature. First, the availability of the valve might reduce pharmaceutical firms’ opposition to the adoption of the regime. Second, a beneficial side-effect of the use of the valve would be to provide the responsible institution a source of money that it could use to fund (through grants or prizes) additional research on neglected diseases.

(b) Refining Measures of Health Impacts

In two ways, the mechanism we have outlined for measuring the health benefits secured through the distribution of drugs could be refined. First, the DALY metric, although widely and successfully used to measure health impacts, is imperfect. Because the incentives generated by our proposed system are tied to DALYs, the system would sometimes result in a pattern of pharmaceutical research and development that (although vastly better from the standpoint of social welfare than the current pattern) would fail to align exactly with our moral intuitions. This problem could be avoided (at some cost) by authorizing the institution charged with running the system to develop and apply a new metric that addressed the legitimate criticisms that some philosophers and public-health experts have directed at the DALY scale (for example, that it mistakenly assumes that the suffering caused by a given condition does not vary by country – that being blind in France is no more and no less burdensome than being blind in Ethiopia).

Second, the calculations used to determine the mandatory ratio for a given year could be adjusted to improve the distributional impact of the system. The regime we have outlined thus far employs a purely utilitarian criterion. It measures – and consequently would nudge the pharmaceutical industry toward maximization of – overall human welfare (measured by the values that people place on life and good health). Such an approach has the effect of giving equal weight to drugs designed to alleviate minor ailments that afflict large numbers of people and drugs designed to alleviate serious ailments that afflict small numbers of people. If we wished to tilt the pattern of incentives more toward serious ailments (as we currently do, clumsily, by creating special incentives for “orphan drugs”), we could adjust the way that the numerator of the SRI is calculated. For example, before multiplying the number of DALYs saved per person through the consumption of a given drug by the number of people to whom it had been administered, we could apply an exponential function to the number of DALYs saved per person (and then of course modify the mandatory ratio to maintain the overall pressure the system exerted on the industry). Such an adjustment would accommodate our moral intuition that, if the total misery caused by two diseases is equal, and they are equally susceptible to prevention or cure, more resources should be devoted to research aimed at the disease that causes acute pain to a few people than to the one that merely irritates many people.

(c) Offset Credits

Another possible adjustment of the regime would permit pharmaceutical firms to count, for the purposes of satisfying their obligations, benefits (for which they are responsible) other than those arising out of consumption of their products. To be sure, even the basic form of our model would accommodate a wide range of health benefits. For example, the administration of a vaccine to one person generates a benefit, not just to the person vaccinated, but also to everyone else with whom that person might come into contact. The resultant “positive externality” would certainly be included in the calculation of the DALYs saved through the administration of the vaccine.

But some kinds of health interventions would fall outside the model as we have described it thus far. Suppose, for example, that a pharmaceutical firm developed and deployed an improved technology for monitoring drugs in the distribution chain and thereby detecting (and enabling patients to avoid) counterfeits. The resultant increase in the consumption of authentic versions of the firm’s products would cause a rise in firm’s SRI. But, if the numerator of the fraction included only health benefits attributable to consumption of the firm’s products, the benefits accruing from the concomitant increase in the consumption of other firms’ products made possible by the new technology could not be counted by the innovator firm. Including such ancillary gains from innovations other than the creation of new drugs (analogous to the “offset credits” used in some “cap-and-trade” regulatory systems) would add to the complexity of our proposed regime, but would improve the pattern of incentives it sustained.

(d) Enlisting the Firms

A final possible variation on our plan is procedural, rather than substantive. Instead of imposing a regime of this sort upon reluctant pharmaceutical firms, it might be developed with their assistance and support. The major pharmaceutical firms are currently under considerable pressure to adjust their business practices to address the global health crisis. Some have already voluntarily initiated major programs designed to develop new vaccines and drugs or to lower the prices for their products in developing countries. They are hobbled, however, by the competitive nature of the industry. Under such circumstances, all of the firms could benefit from a regulatory regime that bound them all. Perhaps, recognizing this, the executives of the firms could be persuaded to help build and implement the system.

The obvious danger of this approach is “industry capture”; the resultant regime might serve the firms’ interests more than the interests of the public at large. But the histories of other industries confronting comparable challenges makes clear that, if the government officials participating in the planning process are vigilant, the public interest need not be sacrificed. (A reassuring example is provided by the automobile industry, where most major manufacturers helped craft – and now support – the recent sharp increase in the Corporate Average Fuel Economy standards in the United States.)

Adoption of such an approach would enhance the prospects of a treaty necessary to enable the World Health Organization (or a similar global agency) to implement the system. Many pharmaceutical firms are based in countries other than the United States. For various reasons, both symbolic and practical, they would likely prefer that such a regulatory regime be managed by an institution more attuned to their needs than the government of the United States. If so, their support would increase sharply the likelihood that a treaty giving the WHO the necessary authority could be negotiated in a reasonable period of time.

Bibliography and References

Our submission to the High-level Panel is a distillation of a proposal we advance in Chapter 6 of a forthcoming book: Infection: The Health Crisis in the Developing World and What We Should Do About It (Stanford University Press, forthcoming 2017). The current draft of the book, which includes a more detailed analysis of our proposal, is available at http://cyber.law.harvard.edu/people/tfisher/Infection.htm. The references for each portion of the book can be found at the end of the pertinent chapter. Set forth below is the set of references most germane to our submission to the Panel.

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