The Health Impact Fund and product monopolies

KEI will later issue a more detailed comment on the Health Impact Fund. One of the key issues that will be addressed is the way that Hollis and Pogge propose turning the prize fund proposals that are based upon open licensing of patents into something that reinforces the monopoly supply chain.

We understand that one motivation for doing this was to attract support from some large pharmaceutical companies, and the European governments that protect them.

This is an important issue because we are at a point where India is implementing the TRIPS agreement, and there are some important challenges for those who want to obtain compulsory licenses. In particular, who will be the suppliers of generic products, after pharmaceutical product patents become common in India, China and other WTO members?

The Hollis/Pogge approach would borrow the reward mechanisms from the prize fund proposals, but gut them of the open licenses. This effectively creates a deep subsidy for the monopoly product in the markets where compulsory licenses might be issued, creating an anti-competitive dumping type effect, reducing the potential market for generic suppliers.

Hollis and Pogge are not unaware of these issues. They know there are strong economies of scope and scale on the pharmaceutical and vaccine markets. These issues have been discussed extensively off list. Professor Hollis’ rationale for eliminating the open licenses from the prize funds is his assertion that prize controls are better than competition. Hollis and Pogge should be prepared to explain why it is a good idea to further marginalize the generics sector at this point in history.

As a further aside, it is frustrating to see the HIF marketed as something new in terms of the reward mechanism, since it is largely Pogge accepting Hollis’ 2005 approach to the prize fund valuation, which in turn was influenced by the earlier proposals that Hubbard and I developed with Aventis in 2002, and which were incorporated in the two Sanders bills (HR 417, 109th Congress, S.2210, 110th Congress) and a variety of other proposals, including those most recently advanced by Barbados and Bolivia in the WHO discussions. Pogge in particular could be more forthcoming about this. But this is a minor quibble compared to the assault on open licensing of patents.

The Hollis/Pogge proposal is being marketed in a big roll-out right at the time that UNITAID is trying to set up an open licensing patent pool, and when Johnson & Johnson and Gilead have endorsed the idea of connecting (1) the licensing of patents to the UNIAID patent pool, (2) to the opportunity to participate in a prize fund, at least for certain Type II or III diseases. Hollis and Pogge would give the prizes without asking for the licenses in return.

In WHA61.21, WHO member governments have now endorsed the development of proposals to de-link R&D incentives from product prices, and also to enhance the role of competition in providing quality generic products, including through downstream patent pools and open licensing.

The Hollis/Pogge proposal is an effort to fend off the threat of an open licensing approach, by dealing with some of the inefficiencies of the current system, specifically by using the prize fund approach of de-linking the rewards from consumer prices. But Hollis and Pogge propose to keep and strengthen the monopoly supply chain.

Since the HIF is voluntary, it will only be used when the expected profits from the HIF are higher than the expected profits from an unconstrained monopoly. The HIF will increase expected profits from unconstrained monopoly pricing, precisely because the HIF would make it harder to find an efficient generic supplier, in the event that a compulsory license be issued. Consider the consequences of this. If expected profits from unconstrained monopoly pricing are higher, the voluntary participation in a prize fund becomes more expensive. The HIF not only undermines generic competition, it undermines any incentive to voluntary give up unconstrained pricing, and it makes the prize fund more expensive and less cost effective.

One can understand why the HIF appeals to certain pharmaceutical companies. It is less obvious why anyone else should support it.

For those who have not looked at the data on the relationship between competition and prices, one place to start would be the June 20, 2008 cost benefit analysis of the proposed UNITAID patent pool: There are many other sources of data that tell a similar story.

One final note. Hollis has indicated in several conversations that he is skeptical of the benefits of generic competition, and he anticipates more benefits from negotiations with a sole source supplier. In making this argument, Hollis draws attention to some products for which competition among several suppliers is unlikely. However, even in a case where economics of scale are such that a single supplier is desired, there is no benefit to being legally locked-in to that supplier. If the patent barriers can be addressed, through licensing or otherwise, the parties involved in procurement can threaten or actually replace a bad supplier with a better supplier. From an economics perspective, ex ante competition can be quite important even when ex post competition is unrealistic. In layman terms, this means, if you can choose your supplier, you are always better off than when you have no choice at all.