Abstract
On the thirty-fifth anniversary of the adoption of the Orphan Drug Act (ODA), we describe the enormous changes in the markets for therapies for rare diseases that have emerged over recent decades. The most prominent example is the fact that the profit-maximizing price of new orphan drugs appears to be greater today than it was in 1983. All else equal, this should reduce the threshold for research and development (R&D) investment in an economically viable product. Further, the small size of patient populations for orphan drugs, together with the increasing prevalence of biologics among orphan drugs, have created a set of natural monopoly-like markets in which firms face little competition, even after the end of formal periods of patent protection and market exclusivity. Additionally, the evolving technologies of drug development—in particular, the increasingly common use of auxiliary endpoints in clinical trials and the use of biomarkers for patient selection for treatment—now allow manufacturers to target smaller populations. Taken together, these changes raise doubts about whether the ODA encourages the development of products that otherwise would not have been brought to market—or whether, instead, it simply rewards the producers of inframarginal products. After presenting empirical support for our claims of an evolving marketplace, we discuss the trade-offs associated with reshaping the ODA for the twenty-first century.
| Original language | English (US) |
|---|---|
| Pages (from-to) | 97-137 |
| Number of pages | 41 |
| Journal | Innovation Policy and the Economy |
| Volume | 19 |
| Issue number | 1 |
| DOIs | |
| State | Published - 2019 |
Funding
The tax credit is funded from general tax revenue and therefore has a relatively broad base of financial support. Thus, inefficiency arises from the general deadweight loss of raising government funds and the op‑ portunity cost of how those funds could be otherwise spent. In contrast, the period of market exclusivity results in a protracted period of higher drug prices. In a world with no cost sharing, those prices would spur higher insurance premiums across the entire risk pool. Higher premi‑ ums would in turn distort the purchase decision for insurance; the re‑ sulting welfare losses would fall most acutely on the privately insured. Those cost burdens are compounded to the extent that insurers employ differential cost sharing for orphan and other specialty products. In that case, the benefits of orphan products would be financed, in part, through an effective tax on individuals with orphan conditions. That tax partly unwinds the insurance product for those individuals, result‑ ing in an inefficiently low consumption of drugs and an inadequate level of risk protection.
ASJC Scopus subject areas
- Economics and Econometrics
- Strategy and Management
- Management of Technology and Innovation