Equitable Division of International Joint Costs in Pharmaceutical Research and Development

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Equitable Division of International Joint Costs in Pharmaceutical Research and Development

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Title: Equitable Division of International Joint Costs in Pharmaceutical Research and Development
Author: Shah, Tarak
Citation: Equitable Division of International Joint Costs in Pharmaceutical Research and Development (2004 Third Year Paper)
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Abstract: Significant increases in pharmaceutical spending over the past two decades have lead to public outrage over the cost of prescription drugs. Pharmaceutical research and development is an expensive process – in 2000 it was estimated that drug companies spent more than $800 million in R&D for each new chemical entity that was brought to market. These R&D costs should be divided across all users of the new drugs. However, due to the widespread use of cost controls in other countries, on average Americans pay 40% to 125% more for a prescription drug than foreign citizens. Foreign governments are pushing a disproportionate amount of drug research costs onto American citizens – Americans believe they are subsidizing health care for the rest of the world. The outrage over high U.S. prescription drug prices has lead to a growing movement in the United States to allow reimportation of drugs from other countries. Unfortunately, while reimportation may reduce price disparities between the U.S. and other nations, it will do so by importing the inefficient cost control regulations present in other countries. Economic theory suggests that cost controls are necessary in pharmaceutical markets due to the threat of moral hazard. Cost controls eliminate market distortions and can be economically beneficial for both drug firms and pharmaceutical consumers. However, imposing cost regulations can be dangerous if the cost cuts are too deep. Regulatory systems charged with cutting drug prices are motivated to ignore the large sunk costs of R&D and set drug prices at the marginal cost of serving their population – which can often be as little as 25% of the cost of a drug. Further, the global benefits of pharmaceuticals create a free-rider problem where governments can achieve the benefits of new drug developments without having to pay the associated costs of researching that drug. This paper outlinines an international approach that will allow drug manufacturers to equitably recoup global joint research costs, while recognizing the international need for constraints on prescription drug spending. Due to the prisoner’s dilemma associated with government pricing of prescription drugs, the only way to ensure an equitable distribution of R&D expenditures is with a comprehensive treaty that limits the forms of cost controls each member nation can impose. The treaty, which is based on the British system of regulating pharmaceutical company profit margins, ensures that each country contributes a minimum share of the joint costs associated with the development of a pharmaceutical. Global R&D costs are allocated between member nations based on a formula that accounts for the level of prescription usage in each country and that accounts for the financial ability of a country to fund global drug development. However, the treaty allows member nations significant discretion to curtail drug prices by regulating advertising, manufacturing, regulatory, liability, and other drug costs.
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