Introduction

This final chapter summarizes key findings and conclusions of the previous chapters and explores their policy implications. More specifically, we discuss eight policy issues that arise as governments seek to promote pharmaceutical innovation in their countries as well as to cope with the consequences of such innovation on public and private budgets, distinguishing between new innovations that are worth the extra cost from those that are not. The issues, which have implications for public decision making ranging from industrial to health policy, are (1) whether or not a country without a well-developed pharmaceutical sector can successfully promote developing such a sector with an industrial policy, (2) strategies for promoting pharmaceutical innovation, (3) incentives for development and production of vaccines, (4) public provision of information on pharmaceutical cost and effectiveness, (5) policies to promote competition in markets for pharmaceutical products, (6) differentials in prices of pharmaceutical products among countries, (7) health benefits of pharmaceuticals, and (8) how governments cope with pharmaceutical innovation.

Is an Industrial Policy Aimed at Promoting Development of a Pharmaceutical Industry Likely to Succeed?

Government policy makers wear two hats vis-à-vis the pharmaceutical sector: (1) seeking to promote economic growth by increasing national employment and income, key objectives of industrial policy, and (2) promoting personal health and life expectancy and averting the spread of pandemics, key objectives of health policy, the latter being more likely to succeed as a consequence of the widespread availability and use of innovative pharmaceutical products (Sloan and Hsieh, Chapter 1).

Introduction

Each year new pharmaceutical products are introduced as a consequence of technological advances. For example, in the United States, between 1990 and 2004, the U.S. Food and Drug Administration approved 431 new drugs with new molecular entities (NMEs). On average, nearly 29 NMEs are introduced in the U.S. pharmaceutical market annually. These new drugs extend the capability of medicine to treat diseases. New drugs developed in the United States and other high-income countries are often soon introduced in other countries, particularly if the new drug is a life-saving innovation or represents a substantial improvement over existing drugs. Improving the public's health of population is a universal goal around the world, albeit limited by many countries' ability to afford the most recently developed pharmaceuticals.

Adopting new and more effective drugs is costly. In recent years the growth rate of spending on pharmaceuticals in many countries has far exceeded the growth rate of overall health spending. Taking the median of OECD (Organization for Economic Cooperation and Development) countries as an example, during 1990–2000 the average annual growth rate of spending per capita on pharmaceuticals was 4.5%, while the average annual growth rate of health care expenditure per capita was only 3.1% (Anderson et al. 2003). As a result, increased spending on pharmaceuticals has become a major driving force of rising personal health care expenditures in many countries.

Context

The pharmaceutical industry serves a dual role in modern society. On one hand, it is a growing industry, and its output makes a direct contribution to gross domestic product (GDP). On the other, prescription drugs, this industry's major output, are an input in the production of good health. These products make an important contribution to the improvement of population health.

The purpose of this book is to investigate public policy issues in pharmaceutical innovation. In Section II we first describe the important characteristics of prescription drugs. We emphasize that these characteristics deviate from the standard conditions in a competitive market. In Section III we discuss the current performance of the pharmaceutical market. In Section IV we investigate market failures that persist in allocating research and development (R&D) resources and in the utilization of prescription drugs. In Section V we analyze the policy conflict between the economic and health sectors arising from pharmaceutical innovation. The final section discusses the structure of the book and the major content of the chapters.

Characteristics of Prescription Drugs

Prescription drugs have many complex characteristics, which, when taken together, have led to major controversies in public policy arenas, including pricing, patents, and incentives for research and development, as well as excess industry profits. Each characteristic is not unique to pharmaceuticals, but rather it is the characteristics, taken in combination, that make the industry unique.

Probabilistic Nature of Demand and Effectiveness

Prescription drugs are inputs in the production of good health.