University Study Notes: Economics of Health - Patents and Supplier Induced Demand

Assessment and Marking Updates

• Presentation Marking Delays: There is a current delay in returning marks for presentations. Approximately $45$ presentations still require marking, followed by a moderation process. If no remarking is necessary, updates should be available at the start of next week, potentially discussed during tutorials.
• Class Test Feedback: Due to the volume of assessments in a large class, the class test marks may not be returned within the standard three-week window. The marking process is currently at the $1.5$-week mark but was delayed by the completion of prior assessments.
• Scheduling Rationale: University-set dates for class tests aim to prevent student overload (e.g., consecutive test days). The first day back from break was the mandated date, despite preferences for a later schedule.

Introduction to Module 3: Economics of Health

• Recap of Market Competition: Previous discussions focused on the perfectly operating market and market power.
• Porter’s Five Forces: This model was used to illustrate how certain market conditions allow providers to generate higher profits than under perfect competition.
• Scope of Current Lecture: Investigation of cases where providers extract excess profits, specifically through the misuse of patents and the phenomenon of supplier-induced demand.

Market Entry and Exit Dynamics in Healthcare

• Condition for Perfect Markets: Free entry and exit are essential to maintain competitive pressure and prevent profiteering.
• Barriers to Entry in Health:     * Professional Regulation: Legislation such as the Health Care Practitioners Competency Assurance Act ensures providers are trained, competent, safe, and accountable.     * Legal Restrictions: Laws dictate what healthcare can be legally traded to prevent unregulated or low-quality pharmaceuticals (analogous to the production of drugs in the series Breaking Bad).     * Addictive Substances: Many pharmaceuticals are addictive, necessitating regulation rather than a completely free market.     * Gatekeeping: Specific pathways (referrals) limit demand and restrict free choice of services.
• Barriers to Exit in Health:     * Continuity of Care: Professional standards prevent practitioners from abandoning patients without ensuring alternative care is available.     * Clinical Safety: Protocols for tapering treatments (e.g., avoiding the "cold turkey" approach for addictive substances) prevent sudden market exit.     * Technological Commitments: Financial commitments to maintenance contracts for high-cost technology (e.g., a $1,000,000$ dollar surgical robot) act as an exit barrier.
• Insurance Constraints: In the U.S. system, "in-network" providers represent a barrier to entry. New providers who are "out-of-network" struggle to compete because patients cannot receive insurance reimbursements for their services.

The Economics of Pharmaceutical Patents

• Research and Development (R&D) Costs: Developing new medicines is exceptionally expensive. Estimates for bringing a single new drug to market range between $944,000,000$ and $2,800,000,000$ dollars.
• Rationale for Patents: Patents provide a temporary legal monopoly to produce a technology, allowing firms to recoup massive R&D investments.
• Patents vs. Alternatives:     * Trademarks and Copyright: Used for brand identity and creative works (e.g., Disney’s Steamboat Willie).     * Patent Loophole/Limitation: While patents protect specific processes or products, they do not prevent "me-too" drugs—pharmaceuticals that achieve a similar therapeutic endpoint via different processes.
• System Exploitation: In practice, patent protection often extends far beyond its original intent through legal and legislative manipulation.

Pharmaceutical Case Studies: Patent Misuse and Pricing

• The U.S. Market Context: High prices in the U.S. are driven by extensive litigation costs, lack of competition, and the pharmaceutical industry’s influence on political campaigns and legislation.
• Over-Patenting Statistics: According to an I-MAK report, the top $10$ selling drugs in the U.S. have an average of $74$ granted patents each (out of $140$ attempted per drug). Approximately $66\%$ of these were filed after the FDA already approved the drug.
• Humira (Adalimumab):     * Function: An anti-TNF agent used to reduce inflammation in autoimmune diseases.     * History: Developed in Germany; purchased by Abbott Laboratories (now AbbVie).     * Pricing: In 1996, the cost was $50,000$ dollars per year per patient. Prices rose to $80,000$ dollars by early 2023.     * Evergreening Tactics: AbbVie extended protection to 2036 (a $40$-year extension) by suing competitors and filing new patents for minor changes in dosage, packaging, and formulation.     * Revenue: Between 2016 and 2023, the drug generated $114,000,000,000$ dollars.
• Avastin and Lucentis:     * Comparison: Both treat wet age-related macular degeneration (AMD). Avastin was originally a cancer drug used "off-label" for AMD for approx. $100$ dollars per dose.     * Price Manipulation: The company developed Lucentis—a slightly modified molecule specifically for AMD—and charged $2,000$ dollars per dose (a $20$-fold increase).
• Insulin:     * Original Intent: The patent was sold to a university for $1$ dollar by its creators, who intended it to "belong to the world."     * Modern Exploitation: Eli Lilly has charged $275$ dollars for a product that costs approximately $10$ dollars to manufacture.     * The Twitter Incident: In 2022, a parody account with a purchased blue checkmark impersonated Eli Lilly and tweeted that insulin was now free. The resulting public shaming contributed to the company capping out-of-pocket costs in 2023.

Supplier Induced Demand (SID)

• Definition: A situation where a buyer (patient) relies on a seller (doctor) to inform them of the value and necessity of a service. This information asymmetry allows the seller to influence demand.
• Contrasting Examples: Unlike purchasing a loaf of bread or a Snickers bar (where the consumer knows the value and utility), healthcare decisions are heavily mediated by the provider’s expertise.
• Economic Impact of SID:     * Price and Quantity: Increases both the price and the quantity of healthcare exchanged.     * Negative Gain from Trade: Results in healthcare delivery where the value to the buyer is less than the cost of production, though the buyer may not realize this due to a lack of information.
• Direct-to-Patient (Consumer) Advertising (DTPA):     * Global Context: Only two high-income countries allow DTPA for prescription drugs: The United States and New Zealand.     * Criticisms: The Royal New Zealand College of General Practitioners and other medical bodies have argued for its abolition since 2017, citing concerns that it complicates the doctor-patient relationship and pressures physicians to prescribe inappropriate or costly medications.     * Legislative Failure: The proposed Therapeutic Products Act sought to replace the outdated Medicines Act and regulate medical claims/advertising more strictly, but the legislation was recently "canned."

Evidence and Observations of Induced Demand

• Payment Systems: Fee-for-service models (getting paid per action) tend to increase the volume of tasks performed compared to fixed-payment systems.
• Primary Care Examples: A study in London/Australia regarding urgent care showed that when "urgent" labels resulted in higher compensation, the frequency of those labels increased immediately.
• Diagnostic Imaging: Evidence suggests that providers respond to payment incentives by altering the volume of scans (e.g., MRI or CT).
• The Iranian Study: Research indicated that $56\%$ of diagnostic cases were unnecessary, occurring most frequently among patients with lower education levels and private health insurance.
• Summary of SID: While professional codes of practice mitigate some abuse, the potential for exploitation remains high, particularly in areas involving expensive nutritional supplements or diagnostic tests.