The Orphan Drug Act at 35: Observations and an Outlook for the Twenty-First Century

Nicholas  Bagley; Benjamin  Berger; Amitabh  Chandra; Craig  Garthwaite; Ariel Dora Stern

Chapter | Innovation Policy and the Economy, Volume 19 | 2018

The Orphan Drug Act at 35: Observations and an Outlook for the Twenty-First Century

by Nicholas Bagley, Benjamin Berger, Amitabh Chandra, Craig Garthwaite and Ariel Dora Stern

Abstract

On the 35th 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 being 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 tradeoffs associated with reshaping the ODA for the 21st century.

Keywords: Health Care and Treatment; Laws and Statutes; Research and Development; Investment; Markets; Monopoly;

Format: Print

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Citation:

Bagley, Nicholas, Benjamin Berger, Amitabh Chandra, Craig Garthwaite, and Ariel Dora Stern. "The Orphan Drug Act at 35: Observations and an Outlook for the Twenty-First Century." Chap. 4 in Innovation Policy and the Economy, Volume 19, edited by Josh Lerner and Scott Stern, 97–137. University of Chicago Press, 2018.

Chapter | Handbook of Behavioral Economics | 2019

Behavioral Economics and Health-Care Markets

Amitabh Chandra, Benjamin Handel and Joshua Schwartzstein

This chapter summarizes research in behavioral health economics, focusing on insurance markets and product markets in health care. We argue that the prevalence of choice difficulties and biases leading to mistakes in these markets establish a special place for them in economic analysis. In addition, we argue that while the behavioral health-economics literature has done a better job documenting consumer-choice mistakes in insurance and treatment choices than explaining why those mistakes occur, it is clear that we should not ignore these mistakes in our analyses. We document evidence showing that consumers leave lots of money on the table in their insurance-plan choices, sometimes thousands of dollars. This is true both when consumers make active choices (e.g., they do not have a default plan) and when they make passive choices (e.g., they have a default plan). We discuss the implications of this body of work for the design and regulation of insurance markets, including the interaction between consumer choice difficulties or biases and adverse selection. We then document evidence on consumer mistakes in health-care utilization and treatment choices, especially in response to changes in prices such as copayments and deductibles. We show how choice difficulties or biases may lead patients to respond to such increases in patient cost-sharing by reducing demand for high-value care, muddying the traditional argument that the price elasticity of demand for medical care meaningfully captures the degree of moral hazard. We conclude with directions for future research.

Keywords: Behavioral economics; Consumer Behavior; Economics; Health Care and Treatment; Insurance; Markets;

Citation:

Chandra, Amitabh, Benjamin Handel, and Joshua Schwartzstein. "Behavioral Economics and Health-Care Markets." In Handbook of Behavioral Economics: Foundations and Applications 2, edited by B. Douglas Bernheim, Stefano DellaVigna, and David Laibson. Amsterdam: Elsevier/North-Holland, 2019. View Details

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There is considerable controversy about the causes of regional variations in health care expenditures. Using vignettes from patient and physician surveys linked to fee-for-service Medicare expenditures, this study asks whether patient demand-side factors or physician supply-side factors explain these variations. The results indicate that patient demand is relatively unimportant in explaining variations. Physician organizational factors matter, but the most important factor is physician beliefs about treatment. In Medicare, we estimate that 35% of spending for end-of-life care and 12% of spending for heart attack patients (and for all enrollees) is associated with physician beliefs unsupported by clinical evidence.

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The Orphan Drug Act at 35: Observations and an Outlook for the Twenty-First Century

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