A central theme in economics is that people who benefit the most from a good or service should pay more for it. If a government decides to build a highway connecting 2 cities, charging a toll to users of the highway is preferred to financing the road through general taxation.
I think of the highway toll example in considering the pharmaceutical industry. The federal government provides many services that disproportionately benefit pharmaceutical firms. Most of these services are paid for by the public at large, through income and other taxes. In effect, we charge everyone for benefits realized by a few. Far more efficient would be to follow the highway example and charge pharmaceutical companies for the services they disproportionately receive. In this piece, I outline and propose user fees for 3 specific public policies.
Precedent for the User Fee Approach
A precedent for the user-fee model is the Prescription Drug User Fee Act, or PDUFA. In the late 1980s, pharmaceutical firms and groups advocating on behalf of people with certain diseases (especially groups representing people with HIV/AIDS) were upset that review times for drug candidates at the US Food and Drug Administration (FDA) were so long—29 months on average. Such long review times meant lost sales for pharmaceutical companies and delayed access to potentially lifesaving medications for patients.
In response, the FDA and pharmaceutical companies agreed to create PDUFA. Under PDUFA, pharmaceutical companies pay money to the FDA, which allows the FDA to hire additional examiners. The FDA agreed to standards for review times, and the US Congress agreed that it would not reduce the federal contribution to the FDA. PDUFA is generally viewed as a success; review times have decreased to just more than 1 year, and pharmaceutical payments total nearly $1 billion annually.
The table below outlines 3 additional areas to which the principles of benefit-related payment could be applied. I provide rough estimates of the amounts that might be collected, although the proper amount for each would clearly be a matter for discussion.
Researcher Training Fee. The National Institutes of Health (NIH) contributes about $350 million annually in support of the 9000 students each year who graduate with doctoral degrees in the biomedical sciences. About 18% of biomedical PhD graduates are employed in industry, so this is a benefit of about $63 million annually.
Scientists are somewhat like FDA examiners. Because their training often benefits the pharmaceutical industry, it would be natural to charge the companies for it. This concern is particularly apparent when the NIH confronts funding difficulties. President Trump’s first budget proposed reducing NIH spending by 22%. Fortunately, Congress rejected these proposed cuts. Still, the NIH budget is never safe.
The actual fee would need to be higher than $63 million because of indirect costs of training the PhD-level researchers, such as faculty mentors, space, equipment, and the like. At the low end, one might double the proposed fee to account for these indirect costs. At the high end, the cost could be in the billions of dollars annually, if one wanted to fund entirely new laboratories. In the absence of a better calculation, I estimate costs of $125 million annually. This proposal could extend to medical device companies as well, though fewer PhD-level researchers are hired by medical device makers than by pharmaceutical companies.
Academic Detailing Fee. Pharmaceutical companies spend as much as $25 billion annually for detailing, visits from pharmaceutical representatives to physicians to encourage use of selected medications. But drugs that are off patent are not detailed, even if they are more effective than on-patent medications. In some cases, firms detail inappropriately, and a remedy of more honest detailing is called for.
Noncommercial or “academic” detailing has been proposed for several decades. The United States uses academic detailing, which involves trained educators (such as physicians, nurses, and pharmacists) providing clinicians with an accurate, unbiased synthesis of the best evidence for practice in a specific clinical area, only sporadically. But other countries, such as Australia and Canada, use it more. Clinicians value academic detailing, and it has been shown to be effective in clinical trials in reducing inappropriate prescribing. The major issue preventing greater use
A program for academic detailing might be small or large. Perhaps it is best to start small, so a modest proposal might involve a fee of 2% on all current detailing. That would mean that effectively, 1 in 50 detail visits would be noncommercial. With this assessment, the amount collected would be about $500 million annually.
Comparative Effectiveness Research Fee. Research into comparative effectiveness—comparing 2 or more different treatments, such as pharmaceutical management of a disease vs surgical intervention—has been around for decades, but funding for it has been haphazard. Organizations that conduct comparative effectiveness research have seen their budgets challenged when they produce results unfavorable to a particular constituency. In addition, some fear that comparative effectiveness will lead to rationing care.
To its credit, the pharmaceutical industry supports comparative effectiveness research and even funds some research. However, it is not ideal for an industry to fund research on its own effectiveness. The choice of projects may reflect those areas in which research is likely to benefit the industry, not necessarily areas of most benefit to the public. In addition, researchers who want future funding may tilt their findings to favor the funders.
The natural solution is for pharmaceutical firms to contribute to a general fund for comparative effectiveness research. To be fair to pharma, the research could mostly be directed at clinical settings where pharmaceuticals are one potential treatment option.
As with academic detailing, there is not a single amount for comparative effectiveness research. The federal government allocated $1 billion annually to comparative effectiveness research after the Great Recession. One could imagine that an amount in the range of $500 million to $1 billion annually would be a reasonable successor.
In total, I suggest increased user fees of $1.1 billion annually for pharmaceutical companies. This amount is of modest size. For example, total industry profits are about 90 times higher. That metric is not necessarily the right one, however. Even if profits were much smaller and the industry had to raise prices in response, it does not make sense to subsidize one industry at the expense of others. User fees are good economics, and that makes for good policy.
About the author: David M. Cutler, PhD, is the Otto Eckstein Professor of Applied Economics in the Department of Economics and Kennedy School of Government at Harvard University and a member of the Institute of Medicine. He served on the Council of Economic Advisers and the National Economic Council during the Clinton Administration and was senior health care advisor to Barack Obama’s presidential campaign. He is a commissioner on Massachusetts’ Health Policy Commission. He is the author of the The Quality Cure (2014) and Your Money or Your Life (2004). He tweets at @cutler_econ. (Image: Ted Grudzinski/AMA)
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