Lect 14: Market Failures: Patents & Supplier Induced Demand
Barriers to Entry and Exit
Barriers to Entry:
Gatekeeping: Limits choosing any service, especially subsidized ones.
Laws and Regulations: Restrict who can be registered health professionals, requiring qualifications and development.
Legal Restrictions: Laws limit what healthcare can be legally traded.
Barriers to Exit:
Addiction: Some healthcare is addictive, making it difficult for patients to stop.
Necessity for Life: Continuing treatment is necessary for survival in some cases.
Technology Dependence: Ongoing maintenance restricts changing technologies.
Provider Obligations: Providers can't leave without arranging care for existing patients.
Research and Development Costs
Creating new products poses a significant barrier to entry.
Estimates of new drug costs range widely.
Simoens and Huys (2021) identify estimates from US to US per new medicine.
These costs account for the many medicines that fail before reaching the market.
Reasons for failure include not working, lacking evidence, or being too expensive to fund.
The Problem with Perfect Markets and New Drugs
In a perfect market, new drugs can be copied freely.
Other firms enter the market to compete, driving down prices.
The price reflects the cost of producing the drug and its value to patients.
The profit from producing the drug may not be enough to recoup research and development costs.
Companies may never invest if they can't recoup costs.
Patents as a 'Loophole'
Patents provide the sole right to produce a technology for a period.
This prevents competitors from using the same production method.
Patents don't necessarily protect against:
Different drugs for the same disease using different mechanisms.
'Me-too' drugs that prevent the same types of medicine but in a slightly different way.
The appropriate patent duration is a crucial issue.
Pharmaceutical Issues in the US
The pharmaceutical issue has a substantial influence on policy in the US.
Pharmaceutical costs are much higher than elsewhere due to:
The impact of litigation
Lack of competition and issues with drug reimbursement.
I.MAK (2022) highlights patent abuse as the root of the drug pricing crisis.
The top 10 selling drugs in the US have a combined 740 patents.
On average, there are 140 patents filed for each of these drugs, with 66% filed post-FDA approval.
Four times as many patents are granted in the US as in Europe.
These patents prevent generics and biosimilars from entering the US market.
Co-founded by Priti Krishtel.
New Zealand will extend pharmaceutical patent terms as part of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership.
This extension will be for a maximum of 2 years (possibly shorter), to 22 years from the filing date.
Humira (adalimumab) by AbbVie
An anti-TNF agent that reduces inflammation and immune response in several conditions, including Crohn’s Disease.
Researched/developed by part of BASF, later purchased by Abbott Laboratories (now AbbVie).
Humira: Patents and Prices
In 1996, Humira cost a year per patient.
The patent was about to expire, but costs didn't fall.
AbbVie sued 10 competitors and then settled with them, delaying entry into the US market until 2023.
AbbVie made more patent claims (dosage, packaging, formulation differences) to extend protection to 2036 in the USA.
Price rises have continued.
In early 2023, Humira costs over US a year per patient.
AbbVie has made in revenue since 2016 from Humira.
Avastin and Lucentis by Genentech
Avastin (bevacizumab) and Lucentis (ranibizumab) are used to treat wet age-related macular degeneration (AMD).
Both are made by Genentech.
Both can be injected into the eye and are equivalent in preventing AMD.
Lucentis is newer and a fragment of Avastin.
Early comparison found slightly more adverse events with Avastin () than with Lucentis (), but the side effects weren't related to Avastin in cancer studies with higher doses.
Lucentis (around per dose) costs much more than Avastin (around per dose).
Genentech applied for FDA approval for Lucentis for AMD but not for Avastin, increasing profits with little benefit to patients.
Insulin
Discovered in the early 1920s by researchers at the University of Toronto.
The patents for insulin extraction were sold to the University for , on the basis that this “belongs to the world”.
Subsequent formulations have been patented at massive profit.
Eli Lilly charges US for a vial costing US to make.
In 2023, Eli Lilly limited out-of-pocket costs in the USA.
Patents: Necessity and Costs
Patents serve an important purpose; there is more market failure without patent protection.
However, a poorly functioning patent system carries a significant cost:
Changes to formulations, packaging, dosages, etc., are used to extend protection.
Off-label usage carries risks, but pharmaceutical companies seem to game the system.
One-fifth of drugs in development aren't developed by the marketing company but are researched and acquired.
Should the same patent protection be allowed when Pharma acquires technologies (especially from public sector research or via traditional medicines)?
Proposed Reforms for US Patents
To ‘fix’ patents in the USA, 5 reforms were suggested:
Raise the bar for patents – significant improvement for patients?
Change financial incentives for the patent office (currently paid per patent issued).
Increase public participation – communicate with the public about health and the value provided by patent applications.
Allow the public to have legal standing around patents – patients don’t have the right to sue for access where patents aren’t appropriate.
Expand oversight – create an independent unit to act as a public advocate.
Perfect Information
"Everybody knows the value of the good/service to buyers and sellers"
Do you have good information about:
The options available
The risks each option poses
The quality of treatments
What the treatment might lead to, etc.
Supplier-Induced Demand
"So doctor, what should I do?"
Demand is ‘derived’:
Based on expected contribution of healthcare to health.
Demand is ‘induced’ if:
Buyers rely on sellers to inform them about the good.
Buyers then act based on what sellers tell them.
Buyers demand more than they would have done if they’d had the information themselves.
Supplier-Induced Demand: Mechanism
The supplier increases quantity demanded:
Demand curve moves to the right.
Price charged and quantity used increases.
Primary Care and SID
Longden et al (2017). Australia.
Looked at urgent care primary care with the introduction of GP-substitute services.
Episodes labeled ‘urgent’ receive up to more than non-urgent ones.
Study found increases in urgent visits/decreases in other visits – more cases are labeled as urgent with higher costs to government.
Other issues:
Target income hypothesis?
Relationships between area-level deprivation and density of GPs.
Barlow et al (2021) – highest GP concentrations in the most and least deprived areas.
Diagnostic Imaging and SID
Zabrodina et al (2020). Switzerland.
For inpatients, payments introduced based on diagnosis-related groups in 2012, replacing fee-for-service payments.
For ambulatory patients, fee-for-service remained.
Found that hospitals encouraged unnecessary repeat images (CT, MRI) for patients still under fee for service, with this costing CHF 6.5 million.
Akbari et al (2020). Iran.
Looked at ultrasonography and breast cancer screening.
Found 56% of 334 cases examined had undergone an unnecessary diagnostic scan, with this number higher in people with less education or who had health insurance.
Secondary Care and SID
Harder to identify specifically in secondary care, as smaller numbers and casemix is more varied.
Even if not SID, physician’s advice changes choices …
Patients can be seen by the same specialist publicly (longer waiting list) or more quickly, privately. (Specialists receive hospital salary plus private work.)
NHS hospitals (UK) can now charge private patients to use beds (up to 49% over costs).
Private patient units now exist within NHS hospitals, against a background of falling bed numbers.
Private patients ‘queue jump’.
Defensive Medicine
Defensive Medicine is the provision of additional goods/services (beyond what might be ideal or selected by the patient) by health professionals based on a fear of litigation.
Reduces the chances of missing something?
To convince patients that they’re being listened to?
Document that standard protocols are being followed?
Make sure that you’re being seen to 'do everything'?
There’s a particular concern here in the space of diagnostic tests.
Probably less important in NZ than elsewhere (and especially the US) because of ACC reducing the scope for suing clinicians.