We have a bottle of pills which will improve a particular patient's health by an amount we value at $10,000. The bottle of pills costs $100 to produce. One way or another the patient has $100 to pay for it. So he buys the pills, takes the pills, and the world is $9,900 better off.
But it doesn't work like that. It costs a lot of money to develop a new drug - $1bn is a round-number estimate. That cost is paid for through the price of the pills during the period of patent production. Patents in the USA and EU last for twenty years, but much of that period can be taken up with testing and licensing. (An extension of up to five years is available to compensate for the delay.) Let's assume that leaves ten years (another round number) for the drug company to make some money selling the drug. And let's suppose the drug could benefit 10,000 patients a year. That's 100,000 patients over the ten years; to get a billion dollars out of them you need to charge $10,100 for the bottle of pills. Unfortunately, for half the patients there's no chance at all of their paying that much. And you need to run a $1bn advertizing campaign to persuade the other patients and their doctors to use the drug. So now you need to charge $40,100 for the bottle. Which makes giving the drugs to the patient we started with a heavily losing proposition.
Sometimes we do unattractive, even inhumane things for sound economic reasons - devoting resources to where they can do most good. But this situation is economic madness. We have created a system where a transaction which would make the world $9,900 richer can't happen.
Let's clear our minds of any destructive obsession with the granting of patent monopolies, and think of a way to pay for the development of new drugs which will encourage the development of the new drugs we want without making it impossible to use them to best advantage.
First, we abolish all patent restrictions on drug manufacture - we allow any manufacturer to make and distribute any licensed drug, subject only to regulatory controls on quality. Instead, we will award patent holders a share of a global drugs fund, according to how much good their patented drug is doing.
What's should be the measure of the value of a drug? It should be how many people take it multiplied by how much they benefit. And we should assess that benefit relative to the previous best treatment. NICE in the UK uses the Quality Adjusted Life Year to measure as the basis for its decisions on what drugs to fund. Personally, I'm not comfortable with the assumption that one person's life is worth more than another's just because they're in better health, and I'd be content to use unadjusted life years. However, it's important that the measure we use should reflect the impact of side effects, so that a treatment which is as effective as another but with milder side effects can be properly rewarded.
In any case we assume that a year of healthy life is worth the same for everyone in the world, rich or poor.
There's one wrinkle, which is that the patent holder of the drug actually used gets only the marginal benefit value over the previous best treatment, and if that previous best treatment is still in patent its patent holder is assigned its marginal benefit over its previous best treatment, and so on. The point of this is that the developer of a slightly superior "me-too" drug gets paid only for the drug's slight superiority. (There's the complication that an alternative drug may be much better for a particular patient, perhaps because of idiosyncratic side effects: we would need a mechanism for the doctor to record this so that the benefits can be assigned appropriately.)
Now we need a big pot of money to feed all those billions of dollars to the patent holders. That's not an impossible problem: global drugs spending is currently about a trillion dollars, of which about three quarters is spent on branded drugs, almost all of it in the developed nations. The price of the branded drugs will fall precipitously once all drug manufacturing becomes generic, freeing up perhaps $700 billion a year of healthcare spending. We just have to collect that up and distribute it to the drug companies according to their logged QALY contributions.
Individual governments would be responsible for gathering the money by whatever mechanism works best for them. Initially, the amount would be assessed according to the savings in each country as prices fall. Over time we would transition to a specified share of GDP from each country.
For distribution, either the money could either be treated as a pool to be distributed proportional to QALY contributions, or a price per QALY could be set, and funding managed to fulfil it. The latter would be require more financial structuring, but be simpler for drug developers.
Who would gain and lose out of this scheme? Marketing spending on drugs would fall dramatically - there would be little gain in promoting a drug unless its life-year contribution had been established, and little need to do so once it had. So it would be bad for the marketing guys.
It would be very good for people in poor countries who are vulnerable to diseases not affecting the rich - sleeping sickness for example. Because their lives would become as valuable for drug development purposes as anyone else's.
That implies that relatively less effort would go into developing drugs for the rich. But that needn't be the case in absolute terms, because of all the marketing money being saved. And the drugs being developed would at least be the ones with the biggest life-year benefits. (I suppose it would be possible for opponents of this scheme to point to some useful drug which might not have been developed under it: it's inevitable that making the best decision a priori will occasionally result in an inferior decision a posteriori.)
Everyone everywhere would be able to get the drugs they need so long as they or their insurance or their national health service could cover the manufacturing cost of the drug. In the UK we would no longer be making hard decisions about whether to fund a drug costing tens of thousands of pounds to extend the life of cancer patients by a few months - if the drug worked, we'd use it.
The big weakness is that we would be creating a body of experts whose decisions would determine the destination of hundreds of billions of dollars. There could be a lot of money available to suborn them. To make that harder, its decision making process needs to be open - , all the quality-adjustments should be published, all the criteria for an acceptable drug trial should be published, and all the (anonymized) trials data should be published, so that every calculation is repeatable.
This body could use its power for good: one of the major weaknesses of drug research is that unfavourable results get buried. By requiring all trials it considers to have been registered with it in advance, and by requiring all registered trials to report results, it can end the cherry-picking which bedevils drug research.
One of the defects of the current licensing system is that a patent owner need not seek a licence for all uses of a drug, so long as it is licensed for one use, and so can suppress adverse findings for an 'off-label' use - notoriously GSK withheld results suggesting that Paroxetine should not be prescribed to adolescents. This scheme would end that - a drug's developer would not be rewarded for off-label uses, and would therefore be incentivized to seek to demonstrate the effectiveness of its drug for any widespread use.
For a change I've left links out of the main text: I'll gather them here instead.
The cost of a new drug
Marketing spending compared with development spending
Discussion of the EQ-5D QALY measure used by NICE
Global spending on drugs
US proposal for a Medical Innovation Prize Fund
Joseph Stiglitz on prizes instead of patents
GSK and Paroxetine
Bad Pharma by Ben Goldacre