Publicly funded clinical drug trials

And other ideas from Rigged: How Globalization and the Rules of the Modern Economy Where structured to Make the Rich Richer

I’ve been reading the free ebook Rigged by Dean Baker and the main purpose of this post is to encourage people to read it, as it’s very insightful, particularly the section on patents. A common critique applied to the critics of the present patent system is that they want to remove the present system of IP protection without having demonstrated how a viable alternative could work to supply public goods that are by their nature underfunded by a free market. Based on reading Deans editorials I even had this impression myself. However after reading Rigged I now think this criticism is not at all fair. In fact what impressed me about Rigged was how practical it is in describing how the transition to a new IP system could occur and what the costs and benefits might be (at least from a policy perspective the political side is not really covered). I’m now quite convinced that publicly funding clinical drug trials would fairly quickly start to generate large social returns as well as making access to life changing medicines significantly more fair.

The development of new medical technology can be thought of to occur broadly in three stages. In the first stage basic research is predominantly funded by the American public through the National Institute of Health. In the second stage, based on basic research the potential for some kind of treatment is identified and further research is undertaken to create a new drug or medical device. The current IP laws encourage scientists or companies to act as entrepreneurs to facilitate the second stage by commercializing public research since the Bah Dole act 1980 allows individuals or companies working on government contracts to gain control of any patents which result. In the third stage clinical trials are conducted to verify the efficacy and safety of the new treatment, FDA approval is attained and the treatment is brought to market.

As has often been pointed out this process essentially turns publicly funded medical science into a private legal monopoly. All the costs associated with the patent system and implications for equity are exactly what you would expect from the enforcement of a private monopoly. The NIH has an annual budget of 52 Billion dollars while total Pharmaceutical R&D spending totaled 91 billion dollars in 2020, so this represents an enormous public subsidy for private financial gain. The government is also ultimately the main purchaser of all these medicines sold under this private monopoly system through Medicare, Medicaid and various subsidies for private insurance.

A striking fact about this system is that conducting clinical trials is essentially a highly standardized and formulaic process. Indeed what constitutes evidence for the effectiveness and safety of a drug is ultimately regulated by the government at the end of the day. Governments are usually competitive with the market at providing highly standardized services at a large scale. To conduct clinical trials the government would have to identify which drugs were worth investing in, but the government already allocates funding for basic research quite successfully, a task that would seemingly require far more discretionary decision making. Under a public funding system the government would contract out the work of undertaking the trials which is what large pharmaceutical companies do now anyway. There’s no reason why the government couldn’t fund clinical trials and by not doing so it essentially hands pharmaceutical companies a free lunch at huge financial cost to itself and huge social costs to the public.

If the US government started funding clinical trials now, it’s likely within a matter of years not decades, some newly developed treatments would be publicly owned. A very large chunk of the initial outlay would be recouped through lower prices but more importantly a fairer more socially optimal system of medicine supply would result. Utilization of many treatments would increase as they could be supplied at their marginal cost. On the other hand there might be less incentive for drug companies to encourage their products to be used for a wide range of conditions and off label uses. Once people saw the benefits of the new policy they would likely be highly popular just as expansions of healthcare coverage are invariably popular after the fact. It would also be possible to do this without dismantling the existing pipeline of medical innovation. It’s hard to think of a more sensible and pragmatic policy.

The recommendation for publicly funded clinical trials is just one part of the chapter on patents which also discusses copyright and industries outside of healthcare. The second stage of treatment development could also be funded publicly. Typically innovative pre clinical research is undertaken by small biotech companies, whose ultimate aim is to be acquired by a larger company. Under a system of public funding smaller biotech’s would not aim to be acquired but instead would continue to receive government contracts based on their track record of creating new innovations. The government could weed out less successful contractors over time. Like with public clinical trials public funding of pre clinical would allow more open sharing of results. Technological advance is based on incremental improvements and the sharing of information, the inhibition of which has always been the main criticism of the patent system. There are good reasons to believe a more open system would create faster progress considering the success of open source code in the software industry, the problem of patent thickets, the problem of secrecy and so on. The question of how great these advantages would prove is speculative. But the potential for faster innovation is big.

Showing how publicly funded trials can increase social welfare highlights the peculiarity of the present drug development system. The public dominates basic research and final purchases of drugs but because drug companies convinced everyone they are indispensable to a middle stage of the proccess they can insert themselves into the middle of this chain and create a dysfunctional system of private monopoly. It’s a very unequal relationship with Medicare barred from negotiating cheaper prices of drugs and even the data used to establish drug safety is considered proprietary so that it cannot be viewed by independent doctors or researchers (only the results of drug trails are published in peer reviewed journals the original data is not published creating an incentive for abuse). What keeps this system going is a combination of private profits and the political power of the Pharmaceutical industry. It’s not about good public policy or increasing the rate of medical innovation.