[Ip-health] The Health Impact Fund and open licensing vs. price controls

[Aidan Hollis]

We thank James Love for drawing attention to the Health Impact Fund we have
been working on with a small team. This proposed Health Impact Fund (HIF) i=
s
an optional mechanism that will offer to reward pharmaceutical innovators
based on the health impact of their products, if they agree to sell those
products at designated low prices. The proposed Fund is to be financed
mainly by governments. More information on the proposal is available at
www.incentivesforglobalhealth.org.


There are many proposals envisioning a prize mechanism for stimulating
pharmaceutical innovation, including the two Sanders Bills. The HIF is
another such proposal, and we are currently working on specifying its
operations in some detail. We hope to be in a position to present a workabl=
e
version within a few months.



Jamie has made a number of points in his recent email to ip-health , which
we would like to address. First, he asked about the proposed mechanism. As
with the Sanders Bill, it is intended that rewards be paid to innovators in
proportion to the health impact of their pharmaceutical products. However,
instead of requiring open licensing of the relevant IP and know-how, the HI=
F=E2=80=99s
design requires that the owner of the relevant IP must sell the drug at an
administratively fixed low price, no higher than the HIF=E2=80=99s estimate=
 of the
cost of manufacturing. This would not be a negotiated price.



Why are we proposing price controls, rather than open licensing? If
competition is not effective in reducing the price to near cost, innovators
would benefit from high prices and still receive reward payments from the
HIF. Competition may fail to be effective for a variety of reasons. First,
competition can take a long time to push prices down. Generic firms need to
ramp up their manufacturing capacity and obtain the approval of regulatory
authorities, which can take years. Second, in many countries, generic
competition does not lead to low prices because of other distortions
(including insurance) in pharmaceutical markets. Third, in the case of many
products (such as complex biologics and some vaccines), generics simply don=
=E2=80=99t
exist, or there are very few generics, even when patents do not obstruct
entry. Fourth, even if generic competitors have access to patented
technologies, they may be significantly disadvantaged if they lack access t=
o
unpatented trade secrets or supplies of an essential ingredient. Thus, we
are not convinced that generic competition will always lead to low prices.



To really ensure low prices, we think it is reasonable simply to mandate
them as a condition for a firm to receive health impact-based payments from
the HIF. However, we appreciate that there are disadvantages inherent in
such a strategy, and in particular we recognize that generic producers may
sometimes have lower costs which are simply not revealed unless competition
occurs. Thus, in our view, there are costs and benefits to either strategy,
but we think that there are good reasons for combining rewards with price
controls rather than with open licensing. These reasons are especially
strong in the case of an optional fund like the HIF. If the HIF mandated
open licensing rather than price controls, every product for which no
generic competition was anticipated would register for HIF rewards. Then
much of the money paid out by the HIF would be wasted on high-priced
products, leaving little for rewarding products accessible to the poor.



Jamie has suggested that following the implementation of TRIPS, there may b=
e
fewer and fewer independent sources of active pharmaceutical ingredients
(APIs). We agree that this is a concern. This concern reinforces our view
that generic competition will not always reduce prices to near cost.



Jamie also suggested that perhaps the HIF is =E2=80=9Cdeliberately being ma=
rketed to
undermine support for =E2=80=98prizes=E2=80=99 which Pogge says are a bad i=
dea, as if the
Hollis/Pogge reward system is anything more than a copy of the early prize
fund reward systems.=E2=80=9D The HIF is evidently a prize mechanism in the=
 same
sense as the Sanders Bill is, and we are surely not seeking to undermine th=
e
idea of such a mechanism! As previously explained (in an e-mail exchange
with Jamie, partly cc'd to the i+a keionline listserv), Pogge's points abou=
t
prizes were only meant to highlight some important advantages of a general
reward mechanism over specific prizes tied to meeting some pre-announced
technical specifications. Both the HIF and the Sanders Bill realize these
advantages.




In conclusion, we would like to point out that the core purpose of the
proposed Health Impact Fund is to develop an effective way for governments
and other donors to support pharmaceutical innovation while ensuring wide
access globally. If the mechanism works well, the Fund can be expanded, so
that our current system of monopolies, fixated on products for which
innovators can charge high prices, would increasingly be complemented by a
system in which they would be focused on developing products that, sold at
low prices, will have the largest global health impacts.



We have received no funding from drug companies nor are we soliciting any.
Our only four research sponsors -- the Australian Research Council, the
Social Science and Humanities Research Council of Canada, the BUPA
Foundation, and the European Commission -- have never made the slightest
attempt to influence in any way the direction of our work.




Aidan Hollis and Thomas Pogge


----- Original Message -----
From: "James Love" <james.love@keionline.org>
To: "ip-health" <ip-health@lists.essential.org>
Sent: Sunday, April 27, 2008 12:07 PM
Subject: [Ip-health] Open licensing vs Monopoly Controlled Supply



http://www.keionline.org/index.php?option=3Dcom_jd-wp&Itemid=3D39&p=3D112

Open licensing vs Monopoly Controlled Supply

April 27th, 2008 by James Love

One of the most important battles being waged both inside and outside of
the IGWG concerns the nature of competition for the supply of
inexpensive medicines and vaccines.

...

Recently the academic researchers Aidan Hollis and Thomas Pogge have
proposed a Health Impact Fund (HIF). Although technical details remain
elusive on key points, and are not forthcoming from Pogge yet (despite
numerous KEI requests for clarifications), the HIF reward system seems
to increasingly be modeled after the approaches set out in the first
medical innovation prize fund proposals* =E2=80=94 some type of reward for =
the
impact of the products on health outcomes. Pogge make a lot of effort to
say his fund is different from a prize fund, but it is hard to see why
from the reward mechanism. What is different about the Hollis/Pogge HIF
is the sole source (monopoly) supply feature. This is new, however, as
both Hollis and Pogge recently advocated open licensing and competition
for supply. Now they are firmly in the Gates/EU/IFPMA camp of sole
source suppliers, at negotiated prices. Why the switch? Does it matter?

Under the HIF, companies "opt-in" for the prizes, in return for lower
product prices. But they keep the monopoly, even if they take the
prizes. Companies that "opt-out" of the prize/low price system can do
whatever they like, including charging prices developing countries
cannot afford. Developing countries could threaten compulsory licenses
for high priced "opt-out" products. But who can supply the generic
alternatives, unless there is a market, somewhere, for generic products?
This is one of the problems with the HIF approach. Another is that it is
deliberately being marketed to undermine support for "prizes" which
Pogge says are a bad idea, as if the Hollis/Pogge reward system is
anything more than a copy of the early prize fund reward systems.*

All of this matters a lot. Both China and India are now implementing the
TRIPS, and it is becoming increasingly more difficult to find generic
suppliers of APIs who are truly independent. Many of the leading Indian
companies, like Ranbaxy, have been co-opted by the big pharmaceutical
companies. If the "new" incentive mechanisms are wedded to monopolies,
it will be harder, not easier, to get affordable prices, for both the
ones receiving the prizes, and the one=E2=80=99s outside of the prize syste=
ms.
...