Skip to main content
SpringerLink
Log in

Should Financial Incentives be Used to Differentially Reward ‘Me-Too’ and Innovative Drugs?

  • Current Opinion
  • Published:
PharmacoEconomics Aims and scope Submit manuscript

Abstract

Strategies to change the existing mix of innovative and ‘me-too’ drugs are intended to increase societal value of a given investment in R&D by providing an incentive for firms to invest in drugs that are more likely to be clinically innovative. How can financial incentives be used to change this mix? Will a strategy have its intended consequence or will it have the unintended outcome of reducing the rate at which the population burden of disease is reduced? The perspective of this review is a country such as Australia, Canada or the UK that has universal health insurance and a drug reimbursement process that is informed by economic evidence.

A review of the literature was performed and the views of both the proponents and the opponents of such strategies and the mechanisms by which they could be implemented were summarized. The debate is based largely on hypothesized responses by firms to changes in incentives rather than empirical evidence. The main point of contention is whether a changed mix of new molecular entities (NMEs) increases or decreases the total amount of clinical innovation launched each year.

The argument presented in this article is that, despite the limited empirical evidence, it is possible to improve our assessment of the likely costs and consequences of a proposed strategy by appealing to economic theory and observations about the reimbursement process. First, the empirical evidence supporting the view that changing a mix of drugs will improve clinical innovation is based on the average launched drug, not the marginal innovative drug otherwise not developed, and therefore could be misleading. Second, the dynamic and complex nature of evidence of clinical innovation will reduce the feasibility of using contractually based mechanisms to implement such a strategy. Also, a single country is unlikely to have an impact on R&D decisions, and variation in the per capita economic value of new drugs would make multi-jurisdiction contracts with one firm difficult to implement. Third, the quality of evidence of the clinical innovation of the lead drug could be reduced if there are fewer or no follow-on drugs. Finally, the existing inefficiencies in the process of displacement to finance new technologies from a capped budget reduces the efficiency with which any additional potential clinical innovation from NMEs will be translated to reduced population burden of disease.

The article concludes that it is possible that such a strategy could be costly to implement, and the impact on global burden of disease uncertain in both direction and magnitude. This is likely to be the case even if the average clinical innovation content of innovative NMEs is higher than for me-too NMEs and the mechanisms designed to change the mix of NMEs are effective. Other options to improve the effectiveness with which pharmaceutical clinical innovation reduces burden of disease should be explored, including improved efficiency of both firm R&D and the process of disinvestment to finance new technologies.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Similar content being viewed by others

Notes

  1. Under the chairmanship of Estes Kefauver, the US Senate Subcommittee on Antitrust and Monopoly investigated the degree of monopoly power and “so-called administered prices (those over which a selling industry has some degree of control, as opposed to market-driven prices)” in particular in the US pharmaceutical industry.[2] This investigation lead to the Kefauver-Harris Drug Amendments, which were “passed to ensure drug efficacy and greater drug safety. For the first time, drug manufacturers (were) required to prove to FDA the effectiveness of their products before marketing them.”[3]

  2. For example, Australia, Canada, the Netherlands and the UK.

  3. In this article, the term net benefit (NB) is used to describe the summary metric that forms the nexus between health technology assessment and reimbursement decisions. The literature and regulators use either the incremental cost-effectiveness ratio (ICER) or the NB, despite the demonstrated advantages of the NB over an ICER. The conclusions in this article are the same regardless of whether an ICER or an NB is used by the regulator.

  4. Specifically, if a budget holder is required to select from two alternative uses of $1 million, and is provided with information about the nature of any health benefits and the patients to whom they accrue, any information about whether the main inputs into the programme are state-of-the-art or old-school technologies will not change that selection.

  5. The analysis by Hollis[6] of financial incentives for and social objectives of pharmaceutical innovation is an example of a formal application of this type of model.

  6. This definition was derived from the WHO definition: “the creation of something new, normally through study and experimentation. In the context of public health, innovation normally results from research and may include new medicines, medical devices, diagnostic methods, clinical practices or means of delivering healthcare.”[10]

  7. Another issue is whether factors outside the clinical trial context should be considered. For example, a clinical trial might indicate a new and existing drug are equi-effective in terms of the primary clinical endpoint; however, if the new drug has a different adverse-event profile from the existing drug, which in turn increases the coverage of target patients, should the new drug be seen as clinically innovative for those patients who would otherwise not have used the existing drug? And should the estimates of the innovative value of the first drug be revised if they included benefits to this group of non-compliant patients?

  8. I am assuming that, early in the R&D process, the firm makes choices using molecule type as proxies for expected financial gain and probability of approval because the results of phase II and III trials, which would provide an indicator of expected innovative gain, are not available. Therefore, because this article is concerned with incentives for R&D, molecule type is a more useful classification. This issue is discussed further in Section 2.1.

  9. For example, by the US FDA.

  10. Hollis[6] describes the chief strength of an HIF as creating “an incentive to develop new medicines with large measurable health impacts, where the incentive is independent of the wealth of the consumer, while enabling access at low prices.”

  11. Currently, in reimbursement schemes such as the Pharmaceutical Benefits Scheme (PBS) in Australia, a new drug that is clinically equivalent to an existing patented drug will be priced the same as that existing drug. This approach is equivalent to paying each me-too drug the same as the innovative drug for each unit of additional health gain compared with the benchmark drug outside the new therapeutic subclass. However, a new innovative drug that has no clinical advantage over existing drugs will not receive a premium over the prevailing benchmark drug. This situation — a premium for a me-too but none for an innovative NME — could be argued to generate incentives to invest more in the development of me-too drugs.

  12. While Ekelund and Persson[19] do not use the terminology of innovative and me-too drugs, the conclusions of their study are relevant to the issue of price competition. Ekelund and Persson[19] replicated a US study by Lu and Comanor[30] but use Swedish in addition to US data. In both studies, the price of the new chemical entity (NCE; analogous to NME) is defined relative to a branded substitute. The NCE is also classified as having either a major, minor or no improvement compared with the branded substitute. Under this approach, some NCEs are me-too drugs, but they are not identified as such. Some branded substitutes are innovative drugs, but not identified as such. However, the conclusions the authors draw would appear to be relevant to the case for price competition and me-too drugs: (i) the degree of price competition resulting from additional NCEs (or me-too drugs) is dependent upon whether the market is regulated; and (ii) NCEs with a therapeutic improvement are priced at a premium above the branded substitute in both a regulated and an unregulated market.

  13. In 2005, the Australian PBS introduced a scheme whereby “the listing of new generic versions of existing PBS medicines will be subject to an automatic reduction of at least 12.5 per cent in the government benchmark price.”[32] It is likely that cost cutting was the impetus for this scheme; however, this is an example of how reference pricing could be used within an NB context to create a differential reward for me-too and innovative drugs by reducing the on-patent rewards to me-too drugs relative to the innovative drug.

  14. The perspective of this article is that of the evidence required by regulators in order to justify a strategy to change a mix of NMEs. A different perspective on the question of firm decision making and me-too and innovative drugs is presented in DiMasi.[14]

  15. An example of the latter is the need for longer, more expensive trials that reduce the reliance on surrogate endpoints.

  16. For example, consider the role of me-too drugs in developing the evidence base for the therapeutic subclass of the SSRIs and the lead drug fluoxetine; in particular, adverse-event profiles and effectiveness across patient subgroups.

  17. In practice, this constraining parameter, c, takes one of a number of qualitative values, for example the (unconstrained) social willingness to pay for a QALY (k), the shadow price of an additional QALY (λ) or the expected cost per effect of the services displaced (d) to finance the additional cost, ΔC, of the new drug. A number of recent papers have addressed the political and economic controversy regarding the qualitative choice of c in the context of UK National Institute for Health and Clinical Excellence (NICE) decision making and the implications of this choice for the total health gains produced from a health budget.[37–43] These issues are relevant to reimbursement processes in many countries and further discussion is outside the scope of this article.

  18. The case of Herceptin®, which was recommended by NICE at a significant additional financial cost to the UK NHS, illustrates the consequences of displacing services to finance a new drug, even if the health gains from the new drug are priced at or below the accepted maximum price.[44,45]

  19. Consider the example of an innovative NME (drug B) that demonstrates a reduction in adverse event rates compared with the best available current treatment (drug A) in a clinical trial of 6 months’ duration. The firm that owns the patent for drug B enters into an agreement in the form of an HIF and is paid an amount of economic rent consistent with the value of the loss in health gains that it prevents. A firm that sponsors a me-too drug (drug C) designs a 12-month trial against drug A. The trial of drug C versus drug A demonstrates that the gains in adverse event rates in the first 6 months are almost completely offset by an increased adverse event rate in the second 6 months that a patient receives the drug. Should the additional payments to drug B continue on the basis of this indirect evidence? Should the manufacturer of drug B be required to complete a 12-month trial of drug A versus drug B? Or should it be required to trial drug B versus C? Will prescribers encourage their patients to enrol in a trial of drug A versus drug B versus drug C? Would the costs of the inevitable incompleteness of any contractual processes be borne by the health budget?

  20. An $I is used by the WHO and has the same purchasing power as the $US has in the US. This estimate is based on 2005 exchange rates.[47]

References

  1. Angell M. The truth about the drug companies: how they deceive us and what to do about it. New York: Random House, 2004

    Google Scholar 

  2. Records of the Committee on the Judiciary and Related Committees, 1816–1988. In: Guide to Federal Records in the National Archives of the United States [online]. Available from URL: http://www.archives.gov/legislative/guide/senate/chapter-13-judiciary-1947-1968.html#SAM [Accessed 2009 Sep 22]

    Google Scholar 

  3. Significant dates in US food and drug law history [online]. Available from URL: http://www.fda.gov/AboutFDA/WhatWeDo/History/Milestones/ucm128305.htm [Accessed 2009 Sep 22]

  4. Comanor WS. The political economy of the pharmaceutical industry. J Econ Lit 1986; XXIV (Sep): 1178–217

    Google Scholar 

  5. Kanavos P, Reinhardt U. Reference pricing for drugs: is it compatible with US Health care? Health Aff 2003; 22 (3): 16–30

    Article  Google Scholar 

  6. Hollis A. The health impact fund: a useful supplement to the patent system? Public Health Ethics 2008; 1 (2): 124–33

    Article  Google Scholar 

  7. Wertheimer AI, Santella TM. The advantages of incremental innovation. IPN working papers on intellectual property, innovation and health, 2005. International Policy Network [online]. Available from URL: http://www.who.int/intellectualproperty/submissions/Pharmacoevolution.pdf. [Accessed 2009 Jul 27]

  8. Mooney G. QALYs: are they enough? A health economist’s perspective. J Med Ethics 1989; 15: 148–52

    Article  PubMed  PubMed Central  CAS  Google Scholar 

  9. Mooney G, Coast J, Jan S, et al. Searching for a threshold not so NICE. J Health Serv Res Policy 2007; 12 (3): 190–1

    Article  PubMed  Google Scholar 

  10. World Health Organization. Innovation [online]. Available from URL: http://www.who.int/topics/innovation/en/ [Accessed 2008 Dec 20]

  11. PBAC guidelines. Part II: guidelines for preparing the main body of a major submission [online]. Available from URL: http://www.pbs.gov.au/html/industry/static/how_to_list_on_the_pbs/elements_of_the_listing_process/pbac_guidelines/b_part_2 [Accessed 2009 Jun 20]

  12. Cohen J, Stolk E, Niezen M. The increasingly complex fourth hurdle for pharmaceuticals. Pharmacoeconomics 2007; 25 (9): 727–34

    Article  PubMed  Google Scholar 

  13. Corley ST. Electronic prescribing: a review of the costs and benefits. Top Health Inf Manage 2003; 24 (1): 29–38

    PubMed  Google Scholar 

  14. DiMasi JA. Comment on “Me-too drugs: is there a problem?” WHO Intellectual Property Forum 2005 [online]. Available from URL: http://www.who.int/intellectualproperty/forum/HollisResponse.pdf [Accessed 2008 Dec 20]

    Google Scholar 

  15. Discoverers award 2006: Zetia® [online]. Available from URL: http://www.phrma.org/files/Discoverers_award_2006.pdf [Accessed 2008 Dec 20]

  16. Huskamp HA. Prices, profits and innovation: examining criticisms of the value of new psychotropic drugs. Health Aff 2006; 25: 635–46

    Article  Google Scholar 

  17. Woods K. In response to Q843 from John Austin, UK Select Committee of Health, Minutes of Evidence. January 2005 [online]. Available from URL: http://www.publications.parliament.uk/pa/cm200405/cmselect/cmhealth/42/5012006.htm [Accessed 2009 Apr 20]

    Google Scholar 

  18. Trouiller P, Olliaro P, Torreele E, et al. Drug development for neglected diseases: a deficient market and a publichealth policy failure. Lancet 2002; 359 (9324): 2188–94

    Article  PubMed  Google Scholar 

  19. Ekelund M, Persson B. Pharmaceutical pricing in a regulated market. Rev Econ Stat 2003 05; 85 (2): 298–306

    Article  Google Scholar 

  20. Ridley DB, Grabowski HG, Moe JL. Developing drugs for developing countries. Health Aff 2006 Mar-Apr; 25 (2): 313–24

    Article  Google Scholar 

  21. Grabowski H. Encouraging the development of new vaccines. Health Aff 2005 May-Jun; 24 (3): 697–700

    Article  Google Scholar 

  22. Ravvin M. Incentivizing access and innovation for essential medicines: a survey of the problem and proposed solutions. Public Health Ethics 2008; 1 (2): 110–23

    Article  Google Scholar 

  23. Sherer FM. The pharmaceuticals industry. In: Newhouse J, Culyer A, editors. The handbook of health economics. Amsterdam: Elsevier, 2000

    Google Scholar 

  24. Scherer FM. The pharmaceutical industry: prices and progress. N Engl J Med 2004; 351 (9): 927–32

    Article  PubMed  CAS  Google Scholar 

  25. Claxton K, Briggs A, Buxton MJ, et al. Value based pricing for NHS drugs: an opportunity not to be missed? BMJ 2008 Feb 2; 336 (7638): 251–4

    Article  PubMed  PubMed Central  Google Scholar 

  26. Jena AB, Philipson TJ. Cost-effectiveness analysis and innovation. J Health Econ 2008; 27 (5): 1224–6

    Article  PubMed  Google Scholar 

  27. Hollis A. Me-too drugs: is there a problem? [online]. Available from URL: http://www.who.int/intellectualproperty/topics/ip/Me-tooDrugs_Hollis1.pdf [Accessed 2008 Dec 20]

  28. Hollis A. Incentive mechanisms for innovation [IAPR technical paper # 07005]. Calgary: University of Calgary, 2007

    Google Scholar 

  29. Lichtenberg FR, Philipson TJ. The dual effects of intellectual property regulations: within- and between-patent competition in the US pharmaceuticals industry. J Law Econ 2002; 45 (2): 643–72

    Article  Google Scholar 

  30. Lu ZJ, Comanor WS. Strategic pricing of new pharmaceuticals. Rev Econ Stat 1998; 80 (1): 108–18

    Article  Google Scholar 

  31. Pharmaceutical price controls in OECD countries: implications for U.S. consumers, pricing, research and development, and innovation. Washington, DC, International Trade Administration, US Department of Commerce, December 2004 [online]. Available from URL: http://www.ita.doc.gov/drugpricingstudy [Accessed 2008 Dec 20]

  32. Department of Health and Ageing, Commonwealth of Australia. 12.5 per cent price cut for generic drugs [online]. Available from URL: http://www.health.gov.au/internet/ministers/publishing.nsf/Content/health-mediarel-yr2005-ta-abb028.htm?OpenDocument&yr=2005&mth=3 [Accessed 2009 Jun 15]

  33. Barton JH, Emanuel EJ. The patents-based pharmaceutical development process: rationale, problems, and potential reforms. JAMA 2005 Oct 26; 294 (16): 2075–82

    Article  PubMed  CAS  Google Scholar 

  34. Berndt ER, Glennerster R, Kremer MR, et al. Advance market commitments for vaccines against neglected diseases: estimating costs and effectiveness. Health Econ 2007 May; 16 (5): 491–511

    Article  PubMed  Google Scholar 

  35. Hollis A, Pogge T. The Health Impact Fund: making new medicines accessible for all. Incentives for Global Health, 2008 [online]. Available from URL: http://www.yale.edu/macmillan/igh/e-library.html [Accessed 2009 Sep 22]

    Google Scholar 

  36. Eckermann S, Willan AR. Globally optimal trial design for local decision making. Health Econ 2009; 18 (2): 203–16

    Article  PubMed  Google Scholar 

  37. McCabe C, Claxton K, O’Hagan A. Why licensing authorities need to consider the net value of new drugs in assigning review priorities: addressing the tension between licensing and reimbursement. Int J Tech Assess Health Care 2008 Spr; 24 (2): 140–5

    Article  Google Scholar 

  38. Towse A. If it ain’t broke, dont price fix it: the OFT and the PPRS. Health Econ 2007; 16 (7): 653–65

    Article  PubMed  Google Scholar 

  39. McCabe C, Claxton K, Culyer AJ. The NICE cost-effectiveness threshold: what it is and what that means. Pharmacoeconomics 2008; 26 (9): 733–44

    Article  PubMed  Google Scholar 

  40. Sculpher M, Claxton K, Akehurst R. It’s just evaluation for decision-making: recent developments in, and challenges for, cost-effectiveness research. In: Smith P, Ginnelly L, Sculpher M, editors. Health policy and economics: opportunities and challenges. Maidenhead: Open University Press, 2005: 8–41

    Google Scholar 

  41. Birch S, Gafni A. Economists’ dream or nightmare? Maximizing health gains from available resources using the NICE guidelines. Health Econ Policy Law 2007; 2 (Pt 2): 193–202

    Article  PubMed  Google Scholar 

  42. Gafni A, Birch S. Incremental cost-effectiveness ratios (ICERs): the silence of the lambda. Soc Sci Med 2006; 62 (9): 2091–100

    Article  PubMed  Google Scholar 

  43. Culyer A, McCabe C, Briggs A, et al. Searching for a threshold not setting one: the role of the National Institute for Health and Clinical Excellence. J Health Serv Res Policy 2007; 12 (1): 56–8

    Article  PubMed  Google Scholar 

  44. Barrett A, Roques T, Small M, et al. Rationing: howmuch will herceptin really cost? BMJ 2006 Nov; 333 (7578): 1118–20A

    Article  PubMed  PubMed Central  Google Scholar 

  45. Berenson A. A cancer drug shows promise, at a price that many can’t pay. New York Times 2006 Feb 15 [online]. Available from URL: http://www.nytimes.com/2006/02/15/business/15drug.html?_r=1. [Accessed 2008 Dec 20]

    Google Scholar 

  46. Pearson S, Littlejohns P. Reallocating resources: how should the National Institute for Health and Clinical Excellence guide disinvestment efforts in the National Health Service? J Health Serv Res Policy 2007 Jul; 12 (3): 160–5

    Article  PubMed  Google Scholar 

  47. CHOosing Interventions that are Cost Effective (WHOCHOICE), 2005 [online]. Available from URL: http://www.who.int/choice/results/mnh_afrod/en/index.html [Accessed 2009 Sep 22]

  48. Pfizer 2005 annual review [online]. Available from URL: http://media.pfizer.com/files/annualreport/2005/annual/review2005.pdf. [Accessed 2009 Jun 15]

  49. DiMasi J. The value of improving the productivity of the drug development process: faster times and better decisions. Pharmacoeconomics 2002 Suppl. 3; 20 (15): 1–10

    Article  PubMed  Google Scholar 

Download references

Acknowledgements

This article was prepared while the author was in receipt of a University of Adelaide Divisional PhD Scholarship. The article benefited from comments on an earlier draft from Jon Karnon and Nikki McCaffery and the comments of anonymous reviewers. The author has been a member of the Economic Sub-Committee of the Pharmaceutical Benefits Advisory Committee (Australia) since 1997.

Author information

Authors and Affiliations

  1. Discipline of Public Health, The University of Adelaide, Mail Drop DX650 545, Adelaide, South Australia, 5005, Australia

    Brita Pekarsky

Authors
  1. Brita Pekarsky
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Brita Pekarsky.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Pekarsky, B. Should Financial Incentives be Used to Differentially Reward ‘Me-Too’ and Innovative Drugs?. Pharmacoeconomics 28, 1–17 (2010). https://doi.org/10.2165/11318770-000000000-00000

Download citation

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.2165/11318770-000000000-00000

Keywords

Search

Navigation