Innovation Imperiled

US healthcare needs radical revision, but we can't wipe out innovation in the process.

Richard Gallagher
Dec 31, 2008

Healthcare spending in the United States is unsustainable. It topped $2.3 trillion in 2007—that's $7,600 for every man, woman and child. That wouldn't be quite so hard to swallow if the service was excellent, but it's spotty, especially for the 47 million uninsured. Reform is essential to reduce the financial burden and to make the system more accessible and equitable. The Office of Health Reform, led by Jeanne Lambrew, reporting to Health and Human Services Secretary Tom Daschle, is a welcome start.

But, while everyone would be delighted to return to 1970's healthcare costs, who among us wants to return to 1970's healthcare outcomes? Improvement in diagnostics, prevention, treatment, and professional training has been dramatic. Even though a radical overall is needed, we must support research and invention.

There's a chain of innovation in healthcare—it links basic science to start-up biotechs that develop promising leads to the multinational companies that commercialize the results. For the chain to function, each link must be in good working order. And right now, all of them are showing signs of fatigue.

Biotech is the weakest link, a victim of the economic recession. Industry leaders are begging for government support to prevent collapse. In early December, British biotech bosses called for the creation of a £1 billion government venture capital fund to shore up the sector. A week later their US counterparts petitioned Congress for hundreds of millions of dollars in tax credits to help sustain companies through a capital drought: One third of biotechs are operating on six month's (or less) supply of operating cash.

At press time, neither country had decided to "bail out" the biotech sector. How many effective drugs, diagnostics and devices won't see the light of day for lack of bridging funding? How many jobs will disappear, imaginative small companies destroyed, and genuine healthcare advances lost before action is taken? Biotechnology must have immediate and substantial support from government.

Of course some of the best biotech innovations will be saved through acquisition by the pharma companies. There is an ongoing firesale of biotech gems as a way to salvage something from a desperate situation. Acquisition on the cheap is one of the ways in which big pharma is currently papering over the cracks. As industries go it's as close to recession-proof as you'll find—demand isn't going to go away. The impact of the economic slowdown on pharma stocks has been only half as bad as that on the market as a whole and the global market for pharmaceuticals is predicted to grow 4.5-5.5% in 2009.

But the problems remain—blockbusters going off-patent, disappointing R&D performance, voraciously expensive corporate machines, a major public image crisis, and governments that are increasingly reluctant to pay top price for medicines.

US healthcare reform is likely to hit pharma companies hard, and rightly so. But it has to be done in such a way that doesn't destroy their appetite for genuine innovation. The danger is that a wounded pharma sector will retrench and rehash existing therapies—going after lucrative and easy rather than medically-important targets. So while US President-elect Barack Obama is right to state that a major health care initiative "has to be intimately woven into our overall economic recovery plan," special measures are needed to encourage innovation.

What might be done? One interesting development in the United Kingdom is the new Pharmaceutical Price Regulation Scheme which is in force in January. The arrangement will cut 5% off the price of drugs currently available, and encourage further use of generics. But it also sets price according to the effectiveness of treatments, encouraging companies to launch new products at a low price (to get approval from the governing authority) and increase their margins on the basis of their usefulness. This is one way of encouraging companies to be innovative.

If you have other suggestions to encourage innovation in pharma, I and the Office of Health Reform would be glad to hear them. In the meantime, that office should focus on the major culprits in the healthcare rip-off, including unnecessary treatments, excessive bureaucracy and profiteering by insurers.