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FEDERAL HEALTH CARE FINANCING SYSTEM INCENTIVES FOR QUALITY-ENHANCING INNOVATIONS ARE NEEDED TO AVOID TECHNOLOGICAL DECLINE, DUKE PROF SAYS

Executive Summary

Incentives for quality innovations should be built into the federal health care financing system to assure that pharmaceutical firms continue to search for medical advances, Duke University economics professor Henry Grabowski, PhD, maintained in a speech at a Feb. 13 conference in Washington on drug research for the elderly. "An incentive structure for quality-enhancing medical innovation" is necessary, Grabowski said, in order to avoid "a suboptimal level of technological advance" by U.S. industry research. "No one wants this outcome, especially not the elderly," he added, "but it could very well happen if we continue on our current development path in the health sector." Grabowski was speaking at a conference hosted by the Pharmaceutical Mfrs. Assn. and the Hill & Knowlton public relations firm. More than 100 congressional aides were invited to the meeting, which ws held on Capitol Hill. Unless such incentives are established, Grabowski contended, diagnosis-related group (DRG) regulations under Medicare's prospective payment system will force drug mfrs. to develop cost-reducing products over products designed to enhance the quality of life. Under the prospective payment system, "there will be increased incentives to adopt those products that directly reduce hospital costs per patient admission," Grabowski maintained, and "products that can reduce hospital stays or decrease the resources utilized in the hospital will be in great demand." Consequently, he continued, "many firms are now conducting studies of cost effectiveness of their new products with an eye to developing the necessary evidence in this regard." Such companies "are now motivated to study cost effectiveness of hospital-oriented drugs at the same time they are doing safety and efficacy testing." However, Grabowski cautioned, "not all new medical therapies are cost reducing," and "there are clearly not the same incentives under DRGs for a hospital to adopt quality-enhancing innovations as cost-reducing ones." The reason, he noted, is that "increased costs generally associated with quality-enhancing innovations must be absorbed from a fixed DRG reimbursement amount." The evolving cost control measures taken by the public and private third-party payers "are sending powerful messages to the R&D laboratories of health care firms," Grabowski maintained: "Invent a drug or medical device which is cost reducing to the user, and it will be quickly embraced. Invent one which increases quality, and it will face a more uncertain future." Upjohn Vice Chairman Theodore Cooper, MD/PhD, asserted that federal health care financing policies are an "important determinant" of industry investments in R&D. "Financing policies are considered carefully in the overall financial planning process because we keep an eye on our R&D investment as a percentage of revenues," Cooper said, and "changes in health care financing change your revenue mix." Consequently, "as changes in health care financing change your revenue mix, you are forced to look at your R&D investment in the context of allocating corporate resources to meet profit goals," he continued. "As the new public policy initiatives to control health care costs mature, I think we'll see an influence on capital formation in the industry," Cooper predicted. "As capital formation changes, so will the formulas for investing capital in R&D." Cooper also stressed the importance to industry research of drug export legislation, tax credits, patent protection, and funding for the Natl. Institutes of Health (NIH). Tax credits provide a research program "the extra margin of corporate support it needs to evolve into a full-scale development program," and they are "an important and visible sign that the federal govt. is interested in encouraging industrial R&D," Cooper said. The federal govt.'s "attitude toward" the NIH, Cooper declared, "will affect "R&D investment decisions." The entire "research enterprise in this country depends on stability within the NIH because that is where most of the fuel for the system comes from." Noting that govt., academic, and industry scientists are "working closer together," he said that "each component of this research triad has a special niche, and the govt.'s handling of NIH is a clear indicator of how much or little the govt. and academic scientists will contribute from their own niches." Explaining Upjohn's decisionmaking process regarding R&D investments, Cooper said Upjohn considers the utility, practicality, and commercial potential in a particular research area before committing resources. The company asks "three fundamental questions," he said: Does the research meet or identify "an unmet medical need?" Does Upjohn have or can it develop the "technical competence" to pursue an investigation effectively? Does the investigation have "significant commercial potential?" Lack of commercial potential is not "an automatic determinant for exclusion," Cooper pointed out. The former chairman of PMA's Commission on Drugs for Rare Diseases said "a so-called orphan drug may meet the unmet-medical-need criterion so well that commercial potential is given much less weight in the decision." Furthermore, "a commitment to development of orphan drugs helps provide continuity to your scientific program. It says to your research staff that there is room in the corporate mix for drugs that result from excellent scientific work" regardless of the size of the patient population. In addition, he continued, "another consideration is that drugs often show unexpected utility in other areas once they are studied or used therapeutically in man." Cooper offered as an example the anesthetic lidocaine, which is used as anti-arrhythmic. Upjohn's discovery that minoxidil, a vasodilator, can be used as a hair growth promoter in bald people is a second example. Offering an example of a specific company decision, Cooper noted that the firm "recently" dropped basic research into fertility therapy after determining there was little commercial potential and an adverse regulatory climate for drug products in that therapeutic category. Upjohn "decided to end discovery and lead-finding research in our fertility research area because the return-on-investment criterion was getting worse and because we saw a regulatory climate in this country that was generally adverse to drugs involving human reproduction," Cooper said. Time is "another but not so basic component of the decisionmaking process," Cooper continued. "An area of potential investigation must exist in a reasonably long time frame because the development and approval process is so long; 10 years is a good average figure. If the market or the practice of medicine will change dramatically before those 10 years are up, you may decide not to invest resources in a project, even though it meets in theory the basic criteria in the short term," he noted. Time to marketing will be protracted for drugs developed through biomedical research, Cooper maintained. "As the pace of biomedical research quickens -- and it will quicken -- the length of development and approval times will become an increasingly important factor in R&D investment decisions." In addition, FDA's guidelines for clinical research in the elderly "undoubtedly will make research more expensive, and they will lengthen development times," he contended. Upjohn, which organizes its "research and marketing functions" into therapeutic categories, is currently focusing R&D in the following areas, Cooper said: "hypersensitivity, artherosclerotic, thrombotic, infectious, viral, gastrointestinal, and central nervous system diseases and on cancer and diabetes." The company's "biotechnology and basic research support operation bolsters the work done in these therapeutic areas," he added.

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