Innovation International Health Care Systems Pharmaceuticals Public Policy

Innovation in small markets

The introduction of new treatment technologies typically occurs where there is a large market.  A lot of innovations are developed to treat disease that affect a large number of people in the developed world because the financial returns are large.  It is less likely to observe innovation in the treatment of rare diseases or diseases that affect individuals in developing countries.  This issue is particularly relevant as the technology to produce new precision medicines comes online.

One of the most widely known regulations to incentivize the development of treatments for rare diseases is the United States Orphan Drug Act (ODA) of 1983.  Other countries, however, have also enacted legislation to incentivize investment in rare diseases. For instance, a paper by Iizuka and Uchida (2017) looks at legislation enacted in Japan.  Japan provides research grants for rare and intractable diseases.  However, Japan also incentivizes innovation through patient demand incentives.

In 1973, the [Japanese] government started implementing a policy that reduces patient cost sharing for a subset of intractable diseases.  Japan implements universal health coverage, and patients below age 70 pay coinsurance of 30% for any medical treatment covered by public health insurance. The demand-side policy reduces patients’ out-of-pocket spending by setting a stop-loss, a maximum amount of monthly out-of-pocket expenditure, for the treatment of qualified intractable diseases, which ranges between 0 to 23,100 JPY per month based on their family income.

Japan also has an ODA-type policy that promotes R&D for conditions that affect <50,000 Japanese patients and are serious diseases with high medical needs.

The authors of the study use a difference-in-difference methodology because in 2009, Japan added 17 intractable diseases to the list of conditions eligible for reduced cost sharing.

Using clinical trials data taken from public registries, we identified the effect of the policy using the DID approach, exploiting the institutional detail that the diseases covered by the policy increased in an arbitrary fashion during our data period. We found that the demand-side policy increased firms’ incentive to innovate. Specifically, firm-sponsored new clinical trials increased as much as 181% when covered by the policy.



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