1 Health Impact Fund Aidan Hollis University of Calgary February 24, 2008 University of California seminar on Designing Strategies for Neglected Disease Research

2 Outline Background to the problem The Health Impact Fund (HIF) Characteristics of the HIF Comparison to other prize-type systems Questions

3 The Access Problem Millions of people die or receive sub- optimal care because the price of patented medicines is higher than manufacturing cost.  This affects primarily the poor.  It occurs also in rich countries when the patentee raises prices to levels that even insurers and national health systems refuse to pay.

4 Access in the US NYTimes: “People are having to choose between gas, meals and medication,” said Dr. James King, the chairman of the American Academy of Family Physicians, a national professional group. “I’ve seen patients today who said they stopped taking their Lipitor, their cholesterol-lowering medicine, because they can’t afford it.” “Scaling Back Medications as Economy Grows Sour” Oct

5 The Innovation Problem The investment in developing medicines for diseases and conditions which primarily affect poor people is relatively low.  In general, the correlation between profitability of a drug and its health impact is imperfect leading to incorrect incentives Many proposed solutions to the access problem can aggravate the innovation problem. We need a solution that addresses both problems at the same time. ◄

6 Patents Patents are good for drug development, but not perfect:  They incentivize the profitable, not the medically valuable  They work, if at all, through enabling high prices, which inhibit access

7 The economics of drug development Current estimates of average drug development costs vary substantially, from $200m per product to $1.3bn per product Clearly, firms are only willing to invest in R&D when they expect meaningful returns. Any solution must accept the fact that drug development is expensive, and that the rewards need to be large enough to pay for the unsuccessful products.

8 The standard solutions Solutions which can weaken the incentive for R&D:  Compulsory licenses – esp. when applied to neglected diseases or to emerging economies  Arbitrary price reductions Solutions which are partially effective, but limited:  Price discrimination across countries Arbitrage and high income sub-markets in developing countries limit profitability of this strategy Ineffective for neglected diseases Solutions which rely on government’s ability to pick winners:  Research grants Direct government funding of research is and will continue to be extremely important

9 Health Impact Fund Proposal is for a fixed sum to be paid annually for pharmaceutical innovations. Patentees could choose to exercise their usual monopoly rights, or to opt in to the HIF. Opting in would mean that the product would be sold globally at a low price (= variable cost), and would earn its profits through direct payments from the HIF based on health impact.

10 Proposed reward mechanism The HIF would offer a fixed annual reward of $6bn financed by governments Each participating firm would be given a share of the fixed reward in each of 10 years following the introduction of its product. The share would be equal to its share of total QALYs generated by all participating products  QALY: Quality-Adjusted Life-Year  The share would be re-evaluated annually based on current data

11 How much would firms earn? The payment for a product would depend on  the health impact of the product, and  the health impacts of other products  the total rewards available As with the price system, earnings would depend on the relative quality and sales of a given product compared to others, but also on how well it is used. Firms would form expectations of earnings based on past rates of reward per QALY.

12 Additional points 1 Health impact would be assessed globally, without distinction among countries or medical conditions. Following the reward period, firms would be obliged to offer global zero-priced licenses on all intellectual property required for manufacture and sale. The 10-year period of reward payments mimics revenues under a patent. This system does not undermine patent rights – it is simply a different way of being paid.

13 Additional points 2 In the early years, the best opportunities for HIF-rewards are likely to be in the traditionally neglected area of tropical (rather than global) diseases, stimulating innovations that would not have existed without the HIF.

14 Determining the sale price One way to set the sale price would be to require the firm to seek tenders for production.  The tenders could be repeated every year or two as suited to the product.  The tenders could be geographically specific. The expectation is that the drug developer would obtain no profits from selling the drug: profits would obtain from health impact rewards.

15 The importance of opting in Firms would have a choice. Only those that expected to make more under the HIF would opt in. This means that the outside opportunity would regulate the rewards inside the HIF: if the payments from the HIF became too generous, more firms would opt in, reducing the payment per QALY (and vice versa). ◄

16 Which products would be in the HIF? Firms would choose the HIF for any product with potential health impact that is high relative to the product’s profitability with monopoly pricing.  e.g. drugs for neglected diseases  e.g. drugs for which patents did not provide effective protection from generics

17 HIF resolves critical problems in prize determination Which products should be rewarded, and how large should the prize be? The HIF is a market-based solution: payments are determined by competition between all registered products for the available rewards.  A drug for malaria can directly compete against a drug for HIV/AIDS.  This regulates relative rewards for registered products, rewarding each at the same rate per QALY, creating efficient incentives. ◄

18 Assessing health impact Health impact would be assessed compared to the outcomes that could have been expected to occur given the state of technology two years before, and excluding the firm’s own patented products.  This is tricky! It is especially difficult to assess QALYs in developing countries because of data problems, weaker healthcare infrastructure, and less compliance with therapeutic regimen.

19 QALY confusion There are different, conflicting approaches to QALY assessment. The HIF would have to choose an approach  It doesn’t have to choose a value per QALY – this arises endogenously The HIF process would be subject to strategic gamesmanship … just like other systems. The HIF’s reliance on health impact assessment makes explicit and transparent the emerging practice of insurers to make what they cover conditional on some measure of value, which has been subject to the same critiques. ◄

20 Assessment Health impact will be assessed annually based on available information and inference Assessment will rely on data from  Clinical trials  Pragmatic or practical trials  Audited data on sales  Stratified sampling of use of the product in different environments  Administrative databases  Global burden of disease data

21 QALYs vs. Prices If you don’t like the idea of rewarding based on an imperfect measure of QALYs, do you really think that prices are a better measure of a drug’s value? The key question: are prices, since they arise out of a “market” mechanism (however imperfect), intrinsically better than QALYs, which are estimated by an administrative body?

22 How about prices? Currently, firms receive a reward per pill equal to the price less the cost of manufacturing and distribution. Why is that not equal to “value”?  Lack of information on the part of consumers  Consumer typically does not pay the full cost  Nor does the prescribing physician bear the cost  Willingness to pay may not reflect value

23 Assessment cost This system would be expensive to run. Assessment costs would probably be at least 10% of the fund payout or $600m per year. But assessment of health impact is a priority in almost all countries already.  Clinical reasons  Budgetary reasons Assessment costs are therefore partly balanced by collateral benefits.

24 Financing Firms would require there to be a long- term commitment  Otherwise no innovation incentive effects Only governments, of affluent and developing countries, can commit large sums long-term.  We propose a small share of GNI for each member country. $6bn a year is less than 1% of global expenditures on pharmaceuticals.

25 Financing cost [1] Currently about 90% of expenditures on patented drugs are in developed countries; Most expenditures are funded by government and employment-based insurance plans.  Thus currently, most of the cost of developing pharmaceuticals is borne by rich countries, through taxes and insurance premia. ◄

26 Financing cost for non-induced products If registered products would have been developed in the absence of the HIF, the incremental cost of the HIF to taxpayers is small. Without the HIF, the product would be sold at a high price, paid by insurer/government, funded by insurance premium/taxes. With the HIF, the taxpayer must contribute to the HIF, but direct expenditure on drugs falls because of lower price. HIF eliminates the need to exclude potential buyers who can afford the product at variable cost but could not afford the much higher monopoly price. ◄

27 Financing cost for induced products If registered products would not have been developed anyhow, there is an additional cost to taxpayers. If the products are for global diseases, the incremental cost is for drugs which have a high impact on health globally.  Any products in the HIF must have a higher QALY/$ ratio than products not registered. If the products are for tropical diseases, the incremental cost to non-tropical countries is performance-based foreign aid.  The rich have prudential as well as altruistic reasons for addressing tropical diseases

28 Financing – which budget? Most other proposals which involve real money require that money to come from ODA budgets. The HIF requires a lot of funding because it is preventing firms from profiting from high prices in developed countries. Since it is saving health budgets large amounts of money, the savings should finance the HIF. Thus, there is no reason to make ODA budgets the source of HIF funding. ◄

29 Too much government involvement? One objection is that this would allow a multilateral quasi-governmental institution to intrude into the market. Mitigating factors:  Discretion is limited: impacts are assessed and rewards allocated on the basis of objective measures.  Governments are already in this market as big buyers and price-setters.

30 The “last mile” problem in drug delivery Proper prescribing and compliance are essential to drug effectiveness. The HIF pays on the basis of each medicine’s actual health impact,  as assessed not only through sales data, but sampling of actual use and population health data Firms therefore have incentives to promote appropriate use of their registered products, as well as to develop products which are effective in resource-poor settings. ◄

31 Everyone can win from better institutional design The HIF allows pharmaceutical innovators to concentrate on promoting public health while satisfying shareholders. Patients win through gains in innovation, lower prices for important new drugs, and additional efforts by patentees to achieve actual health impact. Taxpayers are assured of good value for money.

32 The HIF is a global insurance system Consumers contribute a co-pay based on the variable cost of the drug. Everybody pays a premium based on income. The “price” earned by the drug innovator is based on the therapeutic value.

33 Design Challenges Can health impact assessment be sufficiently consistent to be attractive to companies and funding partners? How will companies form initial expectations about the reward per QALY? How can the HIF ensure reliable funding? How should the HIF determine who is eligible for rewards?

34 Comparison with other prize systems There are other prize-type systems. How does the HIF fit in?  AMCs  Patent pool/DEFEND proposal Helpful first to consider what are the basic parameters which vary across the proposals

35 Basic parameters Product scope Geographic scope Determination of prize amount Method of ensuring low prices Source of funding

36 Product scope AMCs: limited to a vaccine Patent pool: unlimited HIF: unlimited Whatever products have the greatest ratio of health impact / patent profitability will be funded under the HIF Solves the problem of determining the reward amount

37 Geographic scope AMCs  Limited to developing countries Patent pool  Limited to developing countries HIF  Global Implication: the HIF is not just development aid. It can be paid for through reductions in drug prices in rich countries.

38 Determination of prize amount AMCs  Determined in advance on the basis of expected cost? Patent pool  ? Perhaps based on royalty from generics HIF  Share of assessed health impact i.e. pay for performance

39 Method of ensuring low prices AMCs  Price controls Patent pool  Open licensing HIF  Competitive tender

40 Source of funding AMCs: ODA Patent pool: generic royalties + ODA HIF: reduction in drug expenditures in developed countries ◄

41 How the HIF features fit together Allowing all products is necessary to generate competition so that reward payments based on health impact are appropriate Global geographic scope is important to (a) create incentives for high value products to register and (b) make cost savings into the funding source

42 Progress We are working on obtaining input from a variety of stakeholders, including pharmaceutical companies and governments We are testing consistency of health impact assessment on existing drugs We are running simulations We are exploring legal issues, including incorporation, patent issues, contracts…

43 Thank you! More information available at

44 Supplementary slides Mandatory licensing vs. price controls Risk Comparison to insurance

45 Why not require open licensing instead of tendering? Generic competition is often not robust  Especially initially, and in small markets and countries Even robust generic competition does not always lead to low retail prices  True in both developed and developing countries Those products which did not attract enough generic competition would be able to double up on rewards plus high prices, reducing payments for other drugs.  This would make the HIF very attractive for complex biologics where non-patent barriers enabled monopolies. The firm could register with the HIF without loss of sales revenues in developed countries.

46 Risk Firms appear to face extra risk since profits depend on sales volume, on the actual impact of drugs sold, and on the reward rate per QALY. The reward rate is outside their control. Risk is mitigated by  Optional nature  Other firms opting in or out will stabilize profitability  Experience from past years Hard to know how expectations would be formed in advance of the HIF being implemented. Might set minimum or maximum reward/QALY?

47 Why not just rely on insurance? Typically insurers make payment conditional on “cost-benefit” trade-off  HIF can always include any product; but if benefit is low, reward is low. HIF is different from standard insurance mechanisms, since it doesn’t require exclusion of some products. The HIF is explicitly designed for the pharmaceutical market.