[Senate Hearing 112-570]
[From the U.S. Government Publishing Office]








                                                        S. Hrg. 112-570

  THE HIGH COST OF HIGH PRICES FOR HIV/AIDS DRUGS AND THE PRIZE FUND 
                              ALTERNATIVE

=======================================================================

                                HEARING

                               BEFORE THE

                SUBCOMMITTEE ON PRIMARY HEALTH AND AGING

                                 OF THE

                    COMMITTEE ON HEALTH, EDUCATION,
                          LABOR, AND PENSIONS

                          UNITED STATES SENATE

                      ONE HUNDRED TWELFTH CONGRESS

                             SECOND SESSION

                                   ON

 EXAMINING THE COST OF HIV/AIDS DRUGS AND THE PRIZE FUND ALTERNATIVE, 
INCLUDING S. 1137, TO PROVIDE INCENTIVES FOR INVESTMENT IN RESEARCH AND 
DEVELOPMENT FOR NEW MEDICINES, TO ENHANCE ACCESS TO NEW MEDICINES, AND 
   S. 1138, TO DE-LINK RESEARCH AND DEVELOPMENT INCENTIVES FROM DRUG 
  PRICES FOR NEW MEDICINES TO TREAT HIV/AIDS AND TO STIMULATE GREATER 
                    SHARING OF SCIENTIFIC KNOWLEDGE

                               __________

                              MAY 15, 2012

                               __________

 Printed for the use of the Committee on Health, Education, Labor, and 
                                Pensions




[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]



      Available via the World Wide Web: http://www.gpo.gov/fdsys/

                                _____

                  U.S. GOVERNMENT PRINTING OFFICE

74-310 PDF                WASHINGTON : 2012
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001







          COMMITTEE ON HEALTH, EDUCATION, LABOR, AND PENSIONS

                       TOM HARKIN, Iowa, Chairman

BARBARA A. MIKULSKI, Maryland       MICHAEL B. ENZI, Wyoming
JEFF BINGAMAN, New Mexico           LAMAR ALEXANDER, Tennessee
PATTY MURRAY, Washington            RICHARD BURR, North Carolina
BERNARD SANDERS (I), Vermont        JOHNNY ISAKSON, Georgia
ROBERT P. CASEY, JR., Pennsylvania  RAND PAUL, Kentucky
KAY R. HAGAN, North Carolina        ORRIN G. HATCH, Utah
JEFF MERKLEY, Oregon                JOHN McCAIN, Arizona
AL FRANKEN, Minnesota               PAT ROBERTS, Kansas
MICHAEL F. BENNET, Colorado         LISA MURKOWSKI, Alaska
SHELDON WHITEHOUSE, Rhode Island    TOM COBURN, M.D., Oklahoma
RICHARD BLUMENTHAL, Connecticut     MARK KIRK, Illinois
                                    

             Pamela J. Smith, Staff Director, Chief Counsel
                 Lauren McFerran, Deputy Staff Director
              Frank Macchiarola, Republican Staff Director

                                 ______

                Subcommittee on Primary Health and Aging

                   BERNARD SANDERS, Vermont, Chairman

BARBARA A. MILKULSKI, Maryland       RAND PAUL, Kentucky
JEFF BINGAMAN, New Mexico            RICHARD BURR, North Carolina
ROBERT P. CASEY, JR., Pennsylvania   JOHNNY ISAKSON, Georgia
KAY R. HAGAN, North Carolina         ORRIN G., HATCH, Utah
JEFF MERKLEY, Oregon                 LISA MURKOWSKI, Alaska
SHELDON WHITEHOUSE, Rhode Island     MICHAEL B. ENZI, Wyoming (ex 
TOM HARKIN, Iowa (ex officio)        officio)

                Ashley Carson Cottingham, Staff Director

               Peter J. Fotos, Republican Staff Director

                                  (ii)








                            C O N T E N T S

                               __________

                               STATEMENTS

                         TUESDAY, MAY 15, 2012

                                                                   Page
Sanders, Hon. Bernard, Chairman, Subcommittee on Primary Health 
  and Aging, Committee on Health, Education, Labor, and Pensions, 
  opening statement..............................................     1
Akhter, Mohammed N., M.D., MPH, Director, DC Department of 
  Health; Executive Director of the American Public Health 
  Association from 1997-2002, Washington, DC.....................     5
    Prepared statement...........................................     7
Oldham, Frank, Jr., President and CEO, National Association of 
  People With AIDS, Washington, DC...............................    10
    Prepared statement...........................................    11
Moon, Suerie, MPA, Ph.D., Research Director and Co-Chair of the 
  Forum on Global Governance for Health, Harvard Global Health 
  Institute and Harvard School of Public Health, Cambridge, MA...    13
    Prepared statement...........................................    15
Stiglitz, Joseph E., Professor at Columbia University; Winner of 
  the Nobel Prize in Economics; former Chairman of the Council of 
  Economic Advisers and a Chief Economist for the World Bank, New 
  York, NY.......................................................    19
    Prepared statement...........................................    22
Lessig, Lawrence, Professor at Harvard Law School; founder of 
  Creative Commons and the Stanford Center for Internet and 
  Society, Cambridge, MA.........................................    24
    Prepared statement...........................................    26
Love, James Packard, Director of Knowledge Ecology International; 
  Co-Chair of Trans Atlantic Consumer Dialogue Intellectual 
  Property Policy Committee, Washington, DC......................    29
    Prepared statement...........................................    31

                                 (iii)

  

 
  THE HIGH COST OF HIGH PRICES FOR HIV/AIDS DRUGS AND THE PRIZE FUND 
                              ALTERNATIVE

                              ----------                              


                         TUESDAY, MAY 15, 2012

                                       U.S. Senate,
                  Subcommittee on Primary Health and Aging,
       Committee on Health, Education, Labor, and Pensions,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
Room SD-430, Dirksen Senate Office Building, Hon. Bernard 
Sanders, chairman of the subcommittee, presiding.
    Present: Senator Sanders.

                  Opening Statement of Senator Sanders

    Senator Sanders. We're going to begin the hearing, and I 
want to thank all of you very, very much for being here. In my 
view, the issue that we are discussing today is of monumental 
importance. And while it may be controversial within the halls 
of the U.S. Congress, I have the feeling that the more the 
American people understand this concept, the more support that 
there will be.
    And I think it's fair for me to tell you that I do not 
expect the legislation that we'll be discussing today to be 
passed tomorrow or in the next few months. For the U.S. 
Congress, this is a fairly radical piece of legislation. We 
have many billions of dollars of opposition that will be out 
there from drug companies and other sources.
    But I believe from the bottom of my heart that this issue 
is so important that discussion has got to begin as soon as 
possible, and that's what we're doing today. So the ideas that 
people may be hearing on C-SPAN today may sound fairly radical. 
In a few years, they're not, because I think what we're talking 
about is absolutely commonsensical, and it's absolutely in the 
best interest of the people of our country and people 
throughout the world. So I want to thank all of you for being 
here, not just for being here today, but for the work that many 
of you have done for many, many years on this subject.
    I start my approach to healthcare from a very basic 
premise--and it's something that I have believed throughout my 
entire life--that health care is a right, not a privilege, and 
that poverty--the inability to pay for medicine or healthcare 
in general--should not be a death sentence, neither in the 
United States of America or anyplace else. And yet, to a 
significant degree, that is the case. Today, some 45,000 
Americans die each year because they don't get to a doctor when 
they should, and many, many others are suffering.
    Now, to me, one of the great moral issues of our day is 
that there are people in our country suffering and in some 
cases dying because they are not able to afford a medicine that 
can be purchased for pennies per treatment. In other words, it 
is one thing--and I think we can all understand this--if 
somebody has an illness that is unable to be treated--we don't 
know how to treat it--that death is a tragedy, but it is a 
different type of tragedy.
    It is a needless tragedy when somebody dies because they 
can't pay a few pennies for a drug that is out there that can 
cure them and ease their suffering. And that's what we're 
talking about today. The analogy would be if somebody were in 
the middle of a swimming pool and drowning, and somebody turned 
their back and said, ``I'm not going to jump in that pool and 
save that child.''
    The United States has today, as I think most Americans know 
or should know, the highest prices in the world for 
prescription drugs. According to the Canadian Patented 
Medicines Prices Review Board's annual survey, average prices 
for patented medicines in the United States in 2009 were 85 
percent higher in the United States than in Canada, and 
approximately 150 percent higher than in France, Italy, Sweden, 
and Switzerland.
    Price differences on certain drugs are far greater, some of 
which I'll be talking about in a minute. The simple fact is 
that the prices of patented medicines are a significant barrier 
to access to health for millions of uninsured and underinsured 
Americans, let alone people in the developing world, and people 
die because of that.
    Now, this is an enormously important issue, and it's an 
issue that says that our healthcare system is a system which 
allows significant numbers of people to die and suffer because 
they can't afford medicine. According to the Kaiser Family 
Foundation and the Harvard School of Public Health, 40 percent, 
40 percent of Americans reported experiencing, quote,

          ``at least one of three cost-related concerns in 
        their family: 16 percent say it is a serious problem to 
        pay for prescription drugs; 29 percent say they have 
        not filled a prescription in the past 2 years because 
        of the cost; and 23 percent say they have cut pills in 
        half or skipped doses in order to make a medication 
        last longer.''

    I remember talking to a physician in northern Vermont, a 
primary care physician in a working class town in my State, and 
she said, ``Yeah, I write out the prescriptions, but 40 percent 
of the people don't bother to fill them.'' Now, what sense does 
that make? What sense does that make, when people are unable to 
fill and pay for a prescription? It makes no sense. People then 
get sicker. They end up in the hospital, a great cost to the 
entire system, not to mention all of the suffering that is 
involved.
    Stop and think for a moment what these numbers really mean. 
While we now take it for granted, one of the great advances of 
the 20th Century was the advent of modern medicines capable of 
treating a wide range of debilitating and fatal illnesses. But 
all of that research and all of that development doesn't mean a 
thing if somebody cannot afford to purchase that drug.
    Now, the concept we are discussing today is relevant, of 
course, to all kinds of diseases, and we have introduced 
legislation based on the Prize Model for all kinds of diseases. 
But today, the legislation that we are discussing deals 
strictly with HIV/AIDS medicine.
    Now, let me tell you why I have introduced separate 
legislation just to deal with HIV/AIDS. And the reason is that 
it simply blew me away--and I think would blow anyone's mind 
away--to understand that one drug, Atripla, costs over $25,000 
per person, per year, for a course of treatment, but that a 
generic, FDA-approved version of the very same drug is being 
purchased from a competitive supplier by a U.S. Government 
program--and that program is, of course, the President's 
Emergency Plan for AIDS Relief, PEPFAR, for under $200 per 
patient for distribution in developing countries.
    So let me repeat that again in case somebody in the C-SPAN 
world didn't get it. And that is that the same exact drug, 
which in a local pharmacy here in Washington, DC, will cost a 
patient $25,000, is being purchased by the U.S. Government for 
distribution in the developing world for $200--$25,000--$200.
    Now, according to the CDC, approximately 1.2 million people 
are living with HIV in the United States. Each year, 
approximately 50,000 Americans are infected with HIV, and 
approximately 17,000 people with AIDS died in the United States 
in 2009. Globally, of course, the numbers are staggering.
    According to the World Health Organization, there are more 
than 34 million persons living with HIV/AIDS worldwide, and 2.7 
million more are infected each year. Ninety percent of the 34 
million HIV-positive persons live in developing countries--over 
30 million persons--yet only approximately 7 million of them 
are receiving treatment. So in the developing world, the vast 
majority of people who are struggling with HIV are not getting 
the therapy that they need.
    Although medicines can slow or even halt the advance of 
HIV, many Americans--now we're back in the United States of 
America--diagnosed as HIV-positive are not taking the medicines 
they need because they simply cannot afford to buy them. The 
increased demand has overwhelmed Federal financial support for 
the AIDS Drug Assistance Program, ADAP, administered by the 
States. In fiscal year 20l0, ADAP served a record 229,000 
people, reflecting an increase of 24,000 people over fiscal 
year 2009, and a 40 percent increase since fiscal year 2007. 
However, during that same period, Federal funding only grew by 
9 percent.
    So here's where we are in the United States of America. I'm 
not talking about South Africa. We're not talking about the 
developing world. Funding shortages caused ADAP waiting lists 
that had been whittled down to 361 people nationwide in 2010 to 
grow to a high of 9,217 people in 12 States as of August 2011. 
And they are still at 2,700 people as of May 10, 2012. That's 
2,759 Americans last week who need to be on treatment who are 
not.
    And that, frankly, is only part of the story, because many 
more are simply being kept off or thrown off the waiting lists 
due to stiffer eligibility requirements. For example, if your 
income is just a little too high, or your State has a cap on 
the number of people who can enroll, you may not even get on a 
waiting list.
    So, to summarize, all over the world, millions of people 
are suffering from HIV, not getting the treatment they need. In 
the United States of America, people are suffering with HIV, 
not getting the treatment they need, although the treatment is 
extremely inexpensive.
    That's the challenge that we are going to address today. 
How do we deal with that? And the approach that we are offering 
today--and I'm so happy that our very distinguished panel is 
here to discuss it with us--is that in the case of AIDS, people 
can get the drugs that they need--should be able to get the 
drugs that they need at prices that they can afford.
    That's the radical concept that we have. People should not 
be dying because they can't afford a rather small cost for 
drugs. And the solution that we are offering is a Prize Fund 
proposal targeted to HIV/AIDS medicine, S. 1138, and that's the 
legislation we're discussing today.
    Now, under this bill, innovation would be rewarded annually 
from a $3 billion Prize Fund for HIV/AIDS. The Prize Fund would 
make awards to developers of medicines, based primarily on the 
added therapeutic value a new treatment offers and the number 
of people it benefits.
    Products would have generic competition immediately after 
FDA approval, that is--and here is the key point--the bill 
would eliminate today's high-priced marketing monopolies, where 
a company says, ``We own the patent. Nobody else can have it. 
We can charge as much as we want for the medicine''--in the 
case of Atripla, $25,000 a year for a patient.
    As some of our witnesses will discuss, companies receive a 
prize today for bringing a new drug to market. They do receive 
a prize. But it's called a monopoly. That's the prize that they 
receive.
    Under the legislation we are discussing today, instead of 
making their money by charging their patients outrageously high 
prices--in the case of Atripla, $25,000 per year--innovative 
companies would be making their money by receiving Prize Fund 
payments for producing important medicines that ease suffering 
and save lives. Once that medicine is approved for sale, that 
company can receive prize payments, but the medicine goes to 
the market at an affordable price because of generic 
competition. Again, in the case of Atripla, instead of $25,000, 
generic companies are making it for $200.
    There are many other aspects that we will discuss today. 
But, in essence, the concept is designed to accelerate 
innovation and expedite access to lifesaving medicines at the 
same time--more new ideas to tackle the serious health problems 
facing humanity, getting that product out to the market as 
inexpensively as we possibly can.
    This legislation would reward true innovation, eliminate 
the market incentive for copy-cat drugs, and get all HIV/AIDS 
treatments to the people who need them at generic prices, which 
some have estimated to be under 1 percent, on average, compared 
to brand name prices for HIV/AIDS medicines.
    I believe that by breaking the link between drug prices and 
the rewards for medical research and development, we can 
provide virtually universal access to medicines as soon as they 
are available on the market. We can end rationing and 
restrictive formularies, and we can manage overall research and 
development incentives through a sanely administered fund that 
provides significant rewards, but only for new medicines that 
actually offer new value. The bottom line would be better 
products sooner and generic prices for all pharmaceutical 
products right away, not after 10 years of astronomical prices.
    How do we pay for it? It pays for itself, and then some. 
While a $3 billion per year fund for this may sound like a lot 
of money, when you compare it to the savings we would realize 
by paying generic prices for the approximately $9.7 billion IMS 
Health estimates was spent in 2011 on the top 15 brand-name 
HIV/AIDS drugs last year, before rebates or discounts, it is a 
bargain.
    So, in other words, the initial investment does cost money, 
but we save money long-term. That is why this bill would 
require all private health reimbursement and insurance programs 
to contribute to the Prize Fund in an amount proportionate to 
the number of HIV/AIDS patients covered by private plans.
    To conclude, the bottom line is that the goal of our laws 
and policies for medicines must be to develop drugs as quickly 
as possible, drugs that are the most effective we can find for 
the diseases people are facing, and to get them out to every 
person who needs them as soon as possible. That is what I have 
tried to do with S. 1138 for HIV/AIDS treatments. We should 
reward innovators for developing these new medicines in a way 
that does not force any of those who need the drug to wait, 
suffer, and in some cases die.
    I want to thank the panel that we have with us today. This 
is not only a distinguished panel, but it is a panel of folks 
who have been working, in some cases, on this issue and are 
very familiar with this issue. And I want to thank them again, 
not only for being here today, but for the work that they have 
done for so many years.
    Let me begin with Dr. Mohammed Akhter. Dr. Akhter is the 
director of the DC Department of Health. Dr. Akhter has served 
as the executive director of the National Medical Association, 
the executive director of the American Public Health 
Association, and commissioner of Public Health for the District 
of Columbia. He has also been a professor at Howard University 
College of Medicine and the senior associate dean for Public 
and International Health at Howard. One of Dr. Akhter's stated 
goals for the DC Department of Health is expanding HIV 
services, including making them available on demand.
    Dr. Akhter, thank you so much for being with us.

   STATEMENT OF MOHAMMED N. AKHTER, M.D., MPH, DIRECTOR, DC 
DEPARTMENT OF HEALTH; EXECUTIVE DIRECTOR OF THE AMERICAN PUBLIC 
       HEALTH ASSOCIATION FROM 1997-2002; WASHINGTON, DC

    Dr. Akhter. Good morning, Chairman Sanders. I appreciate 
the opportunity to be here. I want to thank you for holding 
these hearings, and I'm honored to be here to testify in 
support of your bill, S. 1138. We thank you for all the work 
that you have done in the past.
    I know for many years that you have been always a tireless 
advocate for the American people's health and want to make sure 
that people have the services available, accessible, and 
affordable to them. And I think this bill is a continuation of 
your lifelong effort in making sure that the people have the 
access to the medication that people so desperately need in 
order to live and live healthier lives.
    I want to share with you this morning and the members of 
the committee the successes that we have in our Nation's 
capital, Washington, DC, in dealing with the HIV/AIDS epidemic. 
The District of Columbia has emerged as a leader in prevention. 
We've been doing the HIV testing and educational programs in 
the schools. We are testing in the clinics and the emergency 
rooms. But we are also testing for HIV in the DMVs, where 
people come to get their driver's license, or in social 
services centers, where people come to get social services, so 
that it's widely made available and accessible.
    Last year, we tested 122,000 people, which means one out of 
five citizens in the District of Columbia had the chance to 
come and get tested and know their status. But that's not all. 
We've also been very active in connecting people once they've 
been tested to the treatment. Seventy-five percent of the 
people that tested positive were connected to the treatment 
within 3 months.
    Our mayor, Mayor Gray, and the city council have been very 
actively in support of HIV/AIDS treatment, because treatment 
and prevention are now linked together. You can't do one 
without the other. And so we have made the treatment on demand 
available to all who test positive, so nobody in the District 
of Columbia is turned away.
    In fact, we know in other States that the waiting lists--
and sometimes people come to the District and register 
themselves so that they can get the free medication. And that's 
a shame, because everybody ought to be able to get the 
medication where they live and where they work.
    Mr. Chairman, also, I want to say because of our work in 
prevention, in treatment, we've been very successful because we 
had a very close collaboration with the Federal Government, 
particularly with the Centers for Disease Control, Kevin 
Fenton, and also with the National Institutes of Health, where 
Tony Fauci has taken a personal interest in the District to 
make sure that we have the best research available to be able 
to act upon it.
    So because of our work in the District, along with our 
community-based partners, since 2009 there has not been a baby 
born with HIV in the District of Columbia--since 2009. The 
number of cases of people dying from HIV has been reduced by 
more than 50 percent in the last 5 years. The number of 
persons--and also because of our good preventive work, the new 
cases have for the first time started to decline--the number of 
cases.
    This is a tremendous success story. HIV/AIDS funding 
through HRSA played a big role in terms of providing us the 
ADAP drugs that we were able to provide to our residents. But 
despite all of this success that we talk about in the District 
of Columbia, it comes at a very high cost.
    First, there are a lot more people living with HIV/AIDS 
today, and every day the number continues to increase. Second, 
more than half of our people living in the District of Columbia 
are now in their mid-40s, so they are in need of additional 
medical care, which is very expensive. We've been very 
fortunate to move some of these patients over to Medicaid so 
they could get the other services that are available.
    The cost in the District of Columbia for one patient per 
year is, right now, $9,400 per person. And that cost is going 
to go up. This is the minimum cost, because we are now starting 
treatment earlier and earlier upon diagnosis. And I believe 
it's going to be a lot higher when everybody who needs the 
medication needs to be on the treatment.
    In 2009, there were 755 cases in the District of Columbia, 
new cases, and they added $228 million to the cost. And after 
all, at the end of the day, the taxpayers end up paying for 
these costs, and we all end up paying for these very exorbitant 
costs. So we are very encouraged with the bill that you have 
introduced, and we are looking forward to having a good 
discussion on the bill and hoping that it will eventually pass 
so that we can not only take care of the situation at home but 
also abroad.
    Thank you very much, Mr. Chairman, for the opportunity.
    [The prepared statement of Dr. Akhter follows:]
          Prepared Statement of Mohammad N. Akhter, M.D., MPH
    Chairman Sanders, Ranking Member Paul and distinguished 
subcommittee members, I am honored to testify before you today on the 
Costs of HIV/AIDS Treatment in the United States, and the Medical 
Innovation Prize Fund Act: S. 1137, also referred to as the ``prize 
bill'' and the Prize Fund for HIV/AIDS Act: S. 1138, the ``prize 
fund.''
    Thank you, Chairman Sanders, for convening this hearing and for 
your tireless work on behalf of the American people to make health care 
more accessible and more affordable. You have upheld for many years the 
belief that every American should be guaranteed comprehensive medical 
care as a right of citizenship so that they can live healthy lives. I 
believe that the prize fund concept will support and encourage 
innovations that will lead to better health outcomes.
    I am very proud to share with this committee a success story for a 
Federal and local partnership that is truly making a difference in the 
lives of people living in our Nation's capital and in the fight against 
the HIV epidemic. Today, 30 years into the fight against the epidemic, 
we have the tools and experience to make a difference. Death rates in 
the District of Columbia due to AIDS have precipitously fallen, in part 
due to the generosity of Congress in the provision of medication and 
medical care. The number of deaths among persons with HIV/AIDS 
decreased by more than 50 percent from 326 in 2005 to 153 in 2009. 
Treatment is now also understood as prevention--an HIV-positive person 
successfully treated with antiretroviral is very unlikely to spread HIV 
to others. Along with our other highly successful prevention programs, 
we are beginning to see a slowing of new cases in the District of 
Columbia. This Federal-local partnership is paying off.
    I am proud to report that DC is a national leader in HIV testing 
and set a new record for publicly funded HIV testing last year. Testing 
is done routinely in emergency rooms and in major clinics throughout 
the city. HIV testing is also administered in our Department of Motor 
Vehicles and in one of our Economic Security Offices, where city 
residents apply for TANF and other services. In 2011, we set a new 
record of 122,000 publicly supported HIV tests, up from 110,000 in 2010 
and triple the total of 43,000 tests in 2007.
    We are also very proud of our efforts to link people early into 
treatment to ensure healthy outcomes for people living with HIV. Over 
75 percent of those who are diagnosed with HIV were connected to care 
within 3 months, which is also a new record for the District of 
Columbia.
    We have also promoted successful large-scale prevention strategies. 
We distributed an unprecedented 5 million free condoms last year and 
made national news on a very successful female condom program. We are 
also proud of our award winning social marketing program that promotes 
condom use and protection against the spread of HIV.
    The synergy of our efforts has led to a decline in infant mortality 
in the District. While many factors have led to the decline in infant 
mortality, the contribution of the condom and safe sex program is 
clear. Access to condoms decreased our teen pregnancy rate by 10 
percent, which further decreased our infant mortality rate, a double 
win for the District.
    Through our efforts, no baby has been born HIV-positive in the 
District of Columbia since 2009. Likewise, through the leadership of 
our Mayor and city council, we have been able to ensure treatment on 
demand for HIV care and for drug treatment. The city has been an early 
adopter of the Affordable Care Act and as a result, now has the second 
highest insurance coverage level in the Nation, with 93 percent of 
adults insured. In addition, 96 percent of District of Columbia 
children are insured, which represents the highest level of children's 
health insurance coverage in the Nation.
    In the District, like the rest of the Nation, we have focused on 
reducing disparities as part of our implementation of the National HIV/
AIDS Strategy. As part of that effort, DC provided free Sexually 
Transmitted Disease (STD) testing for 4,300 youth, ages 15 to 19, 
through the school-based STD screening and community screening 
programs, up from 3,000 in 2010.
    Under the National Strategy, we have also improved coordination and 
integration of services. I sent a letter to more than 4,000 doctors in 
DC, highlighting the District's policy of offering routine HIV tests to 
all adults and adolescents. The Department of Health is also 
collaborating with the Department of Insurance, Securities and Banking 
to enforce District law on insurance reimbursement of HIV testing in 
emergency rooms. The Mayor's Host Committee for the International AIDS 
Conference coordinates District government support for the AIDS2012 
conference, which takes place in July 2012.
    The District of Columbia government works in partnership with many 
fine community-based organizations such as Whitman Walker Health, La 
Clinica del Pueblo, Unity Health Care, and others. These groups have 
gained invaluable experience with our very diverse population in DC and 
more importantly, have gained their trust. Our many accomplishments are 
the result of strong partnerships and shared goals.
    We also extend gratitude to our partners at the Centers for Disease 
Control and Prevention (CDC), particularly Dr. Kevin Fenton, for his 
leadership. Of note, our city has developed a significant research 
capacity to contribute to the fight against HIV and AIDS. We could not 
have done this without the leadership of Dr. Tony Fauci at the National 
Institutes of Health (NIH), who has taken a personal interest in our 
city.
    I have emphasized our progress in prevention and care of HIV, but 
our work in health information, monitoring and evaluation has also 
improved. DC is one of three jurisdictions in the United States that 
has viral suppression data on a population basis. In partnership with 
the George Washington University School of Public Health and Health 
Services, the District has become a national leader in the epidemiology 
of HIV.
    Despite our many successes, the District still has a serious HIV 
epidemic; in fact, all of urban America has a serious epidemic. 
Metropolitan DC is very much like other metropolitan areas in the 
United States in its high levels of the virus infecting the population. 
The composition of our epidemic is, however, a bit more complex than 
some cities. We actually have three epidemics: one among men who have 
sex with men, another among IV drug users and a third among African-
American heterosexuals, making our challenge more complex even though 
DC rates, as a metropolitan area, are not as high as some.
    In the District of Columbia, we had 755 new cases of HIV in 2009. 
Two or three persons are newly diagnosed in the District every day. The 
route of transmission has remained somewhat stable over the past years. 
In 2009, men who have sex with men (MSM) account for the greatest 
number of HIV/AIDS cases diagnosed each year. However, the number of 
MSM cases decreased by approximately 27 percent since 2005. 
Heterosexual contact was the second most common mode of transmission 
for HIV/AIDS cases diagnosed during the last 5 years. HIV/AIDS cases 
attributed to heterosexual contact declined from 335 cases in 2005 to 
234 cases in 2009, a decrease of 30 percent. The number of newly 
diagnosed cases attributable to injection drug use decreased by 60 
percent from 153 in 2007 to 62 in 2009. We credit the locally funded DC 
Needle Exchange Program, which started in 2008, for this significant 
decline.
    We are very proud of the work we have done with our HRSA Ryan White 
program, where residents in our eligibility area have excellent access 
to life saving services. An important trend has been the transfer of 
clients from ADAP (AIDS Drug Assistance Program/HRSA) onto Medicaid, 
made possible by the expanded eligibility of Medicaid. We are now able 
to offer full health insurance to residents, expanding coverage beyond 
HIV services. This is very important in the District, given the fact 
that our population of HIV-positive individuals is increasingly older. 
Well over half of the persons infected with HIV in the District are 
over 45 years of age, and that trend will continue. People with HIV are 
increasingly living with other chronic disease--diabetes and 
hypertension--like the rest of our population. The Affordable Care Act 
has made it possible for the District to move more than 1,000 persons 
from Ryan White CARE Act services to Medicaid, thereby decreasing some 
of the pressure on the Ryan White Program.
    While there is much good news, it all comes at a huge cost. Medical 
care, specifically lifesaving antiretrovirals, is very expensive. 
Currently, our average cost per ADAP patient is about $9,400 per year. 
(It is estimated that discounted drug costs for antiretrovirals are 
approximately $303,100 per person \1\ over the course of a lifetime for 
drugs alone). That estimate is low because new recommendations are for 
people to start on medication as soon as they are diagnosed, and not 
wait for their CD4 count to drop. This both preserves the health of the 
patient (protecting the immune system) and decreases the likelihood 
that a person will spread the virus, because the treatment suppresses 
HIV, making it undetectable in body fluids when taken properly. If 
there are two to three new diagnoses a day in the District, that means 
we are adding just under $1 million to the long-term health expenditure 
in our city every day. A large part of that cost is taxpayer dollars. 
Though ultimately, we all pay into some insurance program or another. 
The increase in the number of people who were District residents at the 
time of their HIV diagnosis increased from 16,513 reported in 2008 to 
16,721 in 2009. That increase adds over $228 million to the long-term 
health care costs in the District of Columbia.
---------------------------------------------------------------------------
    \1\ Medical Care: November 2006, Volume 44, Issue 11, PP. 990-997 
doi: 10.1097/01.mlr.0000
228021.89490.2a
---------------------------------------------------------------------------
    We need a cure and we need a vaccine. While we await those 
discoveries, the need for new treatments is clear. Our current 
medication, even if it was less expensive, creates a daunting 
challenge. To preserve life and to stop the transmission of the virus, 
patients need to take medication accurately every day for the rest of 
their lives. This is a major challenge for many of our residents, even 
if free drugs are available. So, we need new research into practical, 
patient-centered treatment approaches to fight the epidemic. We need to 
consider the affordability of new treatments, new drugs, and new 
approaches. To halt the HIV epidemic in the United States and around 
the world, we need a far more efficient approach. For generations, 
tuberculosis ravaged our country. Through combined effective 
medications and treatment protocols, the Nation eliminated the 
tuberculosis epidemic. We need to do the same for HIV.
    We welcome discussion on the ``prize bill'' because it provides a 
fresh way to think about incentivizing innovations. New drugs and new 
treatments that are inexpensive from the outset are highly preferable. 
The inequitable situation we have faced for decades, in which new, 
high-priced medication and treatment are only available to those who 
can pay, makes our battle very difficult. We encourage any new 
incentives that will promote new treatment for HIV and other illnesses 
in the District of Columbia.

    Senator Sanders. Thank you very much for your presentation 
and for all of the extraordinary work you are doing.
    Our next panelist is Frank Oldham, Jr. He is the executive 
director of the National Association of People with AIDS. He 
also serves on the board of directors for the National Minority 
AIDS Council. Mr. Oldham was the citywide coordinator for AIDS 
policy under Mayor Bloomberg, the assistant commissioner of the 
Chicago Department of Public Health Division on STD/HIV/AIDS 
Public Policy and Programs, and the deputy assistant 
commissioner of the Bureau of HIV Program Services for the New 
York City Department of Health.
    He launched the ``Faces of AIDS Project'' in 1999, which 
spawned two books and a touring photo exhibit showcasing the 
stories of people living with AIDS. Mr. Oldham advises several 
planning and policy bodies for New York City, the Centers for 
Disease Control, LAMBDA Legal, and Washington, DC.
    Mr. Oldham, thanks very much for being with us.

  STATEMENT OF FRANK OLDHAM, JR., PRESIDENT AND CEO, NATIONAL 
        ASSOCIATION OF PEOPLE WITH AIDS, WASHINGTON, DC

    Mr. Oldham. Senator Sanders and distinguished members of 
the committee, thank you for providing us with the opportunity 
to share our thoughts with you on this subject that is so 
important to 1.2 million people living with HIV/AIDS in 
America. The National Association of People with AIDS, known as 
NAPWA, is the largest and oldest patient advocacy group for 
people living with HIV/AIDS. We're also seen as the most 
trusted voice of our community because of our longstanding 
independence.
    Next year, NAPWA has a bittersweet milestone. We turn 30 
years old. I say bittersweet because we'd like nothing better 
than to see an end to this epidemic which has already taken the 
lives of 620,000 Americans. On the other hand, we are thrilled 
to be alive to do the good work our organization needs to do to 
educate and inform about the needs of people living with HIV/
AIDS. These are 30 years that dear friends of mine, lost in the 
early years of the AIDS epidemic back in the 1980s and 1990s, 
never had a chance to live.
    So with this in mind, we thank the pharmaceutical industry, 
the FDA, and brilliant researchers for creating 
antiretrovirals. I'm living proof that they work. I've been 
positive for over 23 years. We are at a brilliant beginning in 
saving the lives of people living with AIDS.
    However, according to recent studies from CDC, less than 25 
percent of people prescribed antiretrovirals stay on the 
treatment. Some say it is because they get nauseous, especially 
when they first start them; others because of the barriers in 
access to the medication; and they have a potential to increase 
risk for long-term organ damage.
    And while premature death at the age of 70 because of ART 
is preferable to premature death because of AIDS at age 30, 
NAPWA does believe we can work to support research that will 
find better treatments that will give those of us living with 
HIV/AIDS the same quality of life and expectancy as those who 
don't have HIV. One of my friends and colleagues who has been 
taking antiretrovirals for over 20 years is thrilled to be 
alive because of them. But he takes an additional 10 pills to 
manage the side effects of this class of medication. Please 
keep that in mind when factoring the cost burden of the status 
quo. Please keep this in mind.
    So our 30th anniversary is not only bittersweet because the 
epidemic is still here. It's bittersweet because we are 
fortunate to have treatments that dramatically extend survival, 
but they are not an acceptable end-game. We can and must do 
better.
    For the last 2 years at our major international 
conferences, NAPWA has hosted symposiums on functional cure 
research. This area of research involves creating triggers for 
the immune system to allow a patient's own natural self-defense 
to kick in and work against HIV. This involves creating 
therapeutic vaccines that could be given to people living with 
HIV after they are already infected.
    To explain, very quickly, many children get chicken pox. 
Despite being treated for it, the virus lingers slowly in the 
background for the rest of the person's life. In most cases, it 
remains in check. But in some people, as adults, it emerges as 
shingles. Researchers are working on a shingles vaccine given, 
despite the presence of the virus in a person's body. The 
vaccine is designed to prevent further outbreaks within the 
person who is already infected.
    So, too, would be the case for HIV therapeutic vaccines. 
Impressive results have been emerging recently. One company 
based in Gaithersburg, VIRxSYS, has shown that its therapeutic 
vaccine, when used in monkeys that were intentionally highly 
infected with the monkey version of HIV, was able to achieve a 
functional cure in some of the monkeys. At 2 years, no 
detectable--again, no detectable--viral load was recorded, even 
in the most hard to reach reservoirs of these animals. This 
represents significant progress.
    Another company based in Norway, Bionor Pharma, has shown 
that its therapeutic vaccine reduced the viral set or baseline 
in patients significantly better than placebo. This could offer 
an insurance policy to all people living with HIV who either 
have no access, as you mentioned, to ART, can't afford the 
treatments, no longer respond to them, or who simply stop 
taking them. You can't stop taking a vaccine. Once it's in you, 
it's in you.
    I want to make two other last points. Both of these cures, 
these beginning new cures, may fail because these companies do 
not have the money to really produce them. They do not have the 
money to produce them. The one in Norway is actually working in 
human beings, but they do not have the money to produce them. 
We need to rethink, as you said, as this bill says, how we 
actually get pharmaceutical companies to invest, and 
incentivize companies to find new treatments.
    The National Association of People with AIDS will be here 
as long as there are people living with HIV/AIDS. We want to be 
partners with Senators, Members of Congress, and industry 
representatives who are prepared to roll up their sleeves and 
take an honest assessment of what does and what does not work 
when it comes to incentivizing drug development in HIV.
    We applaud you, Senator Sanders, for thinking creatively to 
figure out new incentives that could result in faster results. 
We do not want to come back here 30 years from now without a 
cure. All possible incentive options should be put on the table 
for discussion if we are ever going to incentivize the type of 
breakthrough that can provide a bridge to a complete cure.
    Thank you so much, Senator Sanders.
    [The prepared statement of Mr. Oldham follows:]
                Prepared Statement of Frank Oldham, Jr.
    The National Association of People with AIDS, known as NAPWA, is 
the largest and oldest patient advocacy group for people living with 
HIV/AIDS. We're also seen as the most trusted voice by the community 
because of our long standing independence.
    Next year, NAPWA has a bittersweet milestone. We turn 30 years old. 
I say bittersweet because we'd like nothing better than to see an end 
to this epidemic, which has taken such a toll on the least fortunate of 
our society. On the other hand, we're thrilled to be alive to do the 
good work our organization needs to do to educate and inform about the 
needs of people living with HIV/AIDS. These are 30 years that dear 
friends of mine, lost in the early days of the AIDS epidemic, never had 
a chance to live.
    So with them in mind, we thank the pharmaceutical industry, the 
FDA, and brilliant researchers for creating antiretrovirals. I'm living 
proof that they work.
    But these are far from perfect drugs. According to recent CDC 
studies, less than 25 percent of people prescribed antiretrovirals stay 
on the treatment.
    Some say this is because they can make you nauseous, especially 
when one first starts taking them. Others stop because access to them 
has stopped. They do increase the risk of long-term organ damage. And 
while premature death at age 70 because of ART is preferable to 
premature death because of AIDS at age 30, NAPWA does believe we can 
work to support research that will find even better treatments that 
will give those of us living with HIV/AIDS the same quality of life and 
expectancy as those who don't have HIV.
    One of my friends and colleagues who has been taking 
antiretrovirals for nearly 20 years is thrilled to be alive because of 
them. But he takes an additional 10 pills a day to manage the side 
effects of this class of medication. Keep that in mind when factoring 
the cost burden of the status quo.
    So our 30th anniversary is not only bittersweet because the 
epidemic is still here. It's bittersweet because while we are fortunate 
to have treatments that dramatically extend survival, they are not an 
acceptable end-game. We can and must do better.
    For the last 2 years at major international HIV/AIDS research 
conferences, NAPWA has hosted symposiums on functional cure research. 
This area of research involves creating triggers for the immune system 
to allow patient's own nature self defense shield kick-in and work 
against HIV. This involves creating therapeutic vaccines that could be 
given to people living with HIV after they are already infected.
    To explain, many children get chicken pox. Despite being treated 
for it, the virus lingers slowly in the background for the rest of that 
person's life. In most cases it remains in check. But in some people, 
as adults, it emerges as Shingles. Researchers are working on a 
shingles vaccine--given despite the organism's presence already in the 
body. So too would be the case for therapeutic vaccines for HIV.
    Impressive results have been emerging recently. One company based 
in Gaithersburg, VIRxSYS, has shown that its therapeutic vaccine, when 
used in monkeys that were intentionally highly infected with the monkey 
version of HIV, was able to achieve a functional cure in some of the 
monkeys. At 2 years, no detectable viral load was recorded, even in the 
most hard to reach reservoirs of these animals.
    Another company based in Norway, Bionor Pharma, has shown that its 
therapeutic vaccine reduced the viral set point--or baseline--in 
patients significantly better than placebo. This could offer an 
insurance policy treatment for all of those people who either have no 
access to ART, can't afford the treatments, no longer respond to them, 
or who simply stop taking them. You can't stop taking a vaccine. Once 
it's in you, it's in you.
    Our symposium featured many other vaccine candidates, but these two 
tell an interesting story. The Norwegian vaccine development will not 
move into phase 3, the final human test before presentation to FDA for 
approval, unless a pharmaceutical company steps forward. Costs of these 
trials are enormous, and the small biotech companies cannot do them 
alone. But the story of the first company, based here in Gaithersburg, 
is all too familiar to us. No funding was made available, and the 
technology now sits idle. We will never know if it is a breakthrough in 
humans unless something changes fast.
    Many speculate why these--or any HIV therapeutic HIV vaccine 
candidate--have not been licensed by pharmaceutical companies. We don't 
know the answers and should be careful not to project. However, one 
prevailing thought is that eliminating a highly profitable daily 
treatment--one taken for years if not decades of a patient's life--is 
preferred to the sale of a significantly less expensive immune-based 
therapy.
    Regardless of the reason, with over 30 HIV treatments on the 
market, but over 20 of these are antiretrovirals--a single class of 
therapy--we must do something to stimulate new innovation. Industry is 
not bringing us new breakthroughs--only mildly improved versions of the 
same class of treatment we first saw in 1987 when AZT was approved as 
the first antiretroviral.
    Therapeutic vaccines are only one category of immune-based 
strategies that are underfunded and appear not to be the blockbuster-
sized drug that industry embraces. There are others. We are eager to 
see these products reach the market--and for companies to make a fair 
profit for their brilliant research and investments--but under the 
current system, we're not seeing the advances despite good science.
    The National Association of People with AIDS will be here as long 
as there are people living with HIV/AIDS. We want to be partners with 
Senators, members of Congress, and industry representatives who are 
prepared to roll up our sleeves and take an honest assessment of what 
does and does not work when it comes to incentivizing drug development 
in HIV.
    We applaud Senator Sanders for thinking creatively to figure out 
new incentives that could result in faster results. We do not want to 
be coming back to the Senate 30 years from now. We want a cure, and I'm 
here to tell you that the HIV community will not rest until we have 
one. All possible incentive options should be put on the table for 
discussion if we are ever going to incentivize the type of breakthrough 
that can provide a bridge to a complete cure.

    Senator Sanders. Thank you very much, Mr. Oldham.
    Our next panelist is Dr. Suerie Moon, who is research 
director and co-chair of the Forum on Global Governance for 
Health, Harvard Global Health Initiative and Harvard School of 
Public Health. She is also the co-director of the Project on 
Innovation and Access to Technologies for Sustainable 
Development, Sustainability Science Program, Harvard Kennedy 
School of Government.
    She previously worked for Medecins Sans Frontieres/Doctors 
Without Borders and consulted on access to medicines policies 
for MSF, Oxfam, the Medicines Patent Pool, UNAIDS, UNITAID, and 
the World Health Organization. Dr. Moon is a member of the 
board of directors of MSF-USA, Drugs for Neglected Diseases 
Initiative-North America, the Proposal Review Committee of 
UNITAID, and the Global Advisory Committee of the World Health 
Organization project on local production for access to medical 
products.
    Dr. Moon, thanks very much for being with us.

STATEMENT OF SUERIE MOON, MPA, Ph.D., RESEARCH DIRECTOR AND CO-
  CHAIR OF THE FORUM ON GLOBAL GOVERNANCE FOR HEALTH, HARVARD 
 GLOBAL HEALTH INSTITUTE AND HARVARD SCHOOL OF PUBLIC HEALTH; 
                         CAMBRIDGE, MA

    Ms. Moon. Thank you very much, Senator Sanders. It's a real 
honor to be here. And thank you for holding this hearing on 
this really crucial topic.
    I'm going to focus my comments today on the link between 
drug prices here in the United States and the challenge of 
access to global access to medicines, two topics that are often 
discussed separately but are actually quite closely 
interlinked, as you pointed out this morning.
    First, I'd like to provide a quick update on where we are 
today and how we got here. As you mentioned, global access to 
HIV medicines has increased dramatically over the last decade 
to reach a total of 7.4 million people as of 2010, about 90 
percent of whom live in developing countries. I think this is 
an achievement that was unimaginable 10 years ago.
    Two of the enabling factors that were key for increasing 
access in developing countries, in particular, was, first, the 
dramatic reductions in the price of antiretroviral medicines, 
and, second, the availability of international funding. In 
developing countries, the annual price of ARVs has dropped from 
$10,000-$15,000 per patient per year in the year 2000 down to 
as low as $100 or less today, in other words, less than 1 
percent of the patented U.S. price. These price reductions came 
about due to robust competition amongst generic producers that 
were enabled through a number of measures.
    Americans can be proud of these accomplishments, because 
the U.S. Government has played a key role in at least three 
elements of this story. First were major investments by the NIH 
into HIV starting in the 1980s which enabled the major advances 
in antiretroviral treatment today.
    Second is the fact that the United States is the largest 
single global founder of HIV treatment through PEPFAR as well 
as through the Global Fund, and these contributions have truly 
strengthened the public image of the United States overseas. 
Unfortunately, for the first time in 5 years, it seems that the 
United States will be decreasing its contributions, and I urge 
you to do everything that you can to prevent this reversal.
    Third, most recently, as was alluded to earlier, the NIH-
funded research last year demonstrated that ARV therapy can, in 
fact, reduce the risk of transmission of HIV by 96 percent. 
This research finding is the closest thing that we have to an 
HIV vaccine. We're still, unfortunately, far from a vaccine, as 
my colleagues have pointed out. But this is an amazing finding, 
and it could potentially bring benefits to millions more people 
and could potentially halt the epidemic.
    Ironically--and it's a painful irony--just as the science 
shows that we need to find ways to reach more people with ART, 
both domestically as well as internationally, international 
funding for HIV is in crisis, and prices in the United States, 
as you pointed out yourself, are putting the drugs out of 
reach. Too many Americans living with HIV in our own backyard 
are unable to access treatment. And the same drugs that cost 
about $220 overseas cost $25,000 here.
    The question is: What explains this difference? In my view, 
the availability of low-cost generic ARVs in developing 
countries is part of an unwritten global political bargain, and 
that bargain goes as follows. People living in the United 
States and in Europe will continue to pay higher prices for 
medicines in order to reward companies for their investments in 
R&D, while people living in the poorest countries, or the 
donors that support them, will essentially pay for generic 
drugs sold near the cost of production.
    But that bargain is based on an assumption, and that 
assumption is that people living in rich countries will, in 
fact, be able to get access to care through government programs 
such as the ADAPs or private insurance. If this is no longer 
true and the prices are too high to ensure access, even in the 
wealthiest country in the world, then that bargain is not 
sustainable, and that is a problem for people everywhere, both 
in the United States as well as abroad.
    As others have rightly pointed out, this crisis stems from 
the very way in which research and development for new 
medicines takes place and the fact that we recuperate R&D 
investments through high drug prices. Of course, this pricing 
system has terrible consequences, especially when we know that 
the drugs can be manufactured for less than 1 percent of the 
patented price.
    But we also know that if everybody in the world paid that 1 
percent generic price, then the incentives for R&D would 
evaporate. So is there a better system? What I find so 
promising about the HIV/AIDS Prize Fund bill that you've put on 
the table is that, in fact, it would try to achieve both. It 
would achieve both improved innovation as well as ensuring the 
broadest possible access to the fruits of scientific research. 
And it's through a powerful concept called de-linkage which was 
recently endorsed by an independent international expert group 
of the WHO looking at new R&D mechanisms.
    I'm going to leave it to other panelists to go into detail 
on how the Prize Fund would work. But I wanted to just 
highlight one key feature of de-linkage, which is that it would 
dramatically decrease the marginal costs of extending access to 
more people. And this is the critical principle that we need to 
keep in mind when we're thinking about how to give access to 
ART for millions more people so that we can actually use 
treatment both as prevention as well as to save lives.
    Let me make one final comment regarding how this could 
function at the international level. At the end of your bill, 
you mention the possibility of a donor Prize Fund. And the way 
that the donor Prize Fund could function is to incentivize 
companies to share their patents with a new international 
initiative called the Medicines Patent Pool. The Patent Pool, 
in turn, out-licenses these patents to generic firms to 
encourage generic production to ensure the lowest sustainable 
prices for medicines everywhere.
    The Patent Pool has been having difficulty getting all 
developing countries included in the scope of the Pool. And 
incentives such as those provided through your bill could make 
it easier to expand access to people living in all developing 
countries, not just in some of them.
    So let me conclude my remarks there. And thank you very 
much for hosting this panel. I look forward to the other 
testimonies and to your questions.
    [The prepared statement of Dr. Moon follows:]
             Prepared Statement of Suerie Moon, MPA, Ph.D.
                              introduction
    My name is Suerie Moon and I am the co-chair and research director 
of the Forum on Global Governance for Health at the Harvard Global 
Health Institute and the Harvard School of Public Health. I also co-
lead the Project on Innovation and Access to Technologies for 
Sustainable Development at the Harvard Kennedy School of Government. 
The topic that brings us here today is the important issue of how to 
ensure equitable access to HIV treatment, an issue I have worked on for 
13 years primarily at the international level but also at the national 
level in developing countries such as the Democratic Republic of the 
Congo and China. I have advised a number of intergovernmental and non-
governmental organizations, published a number of articles, and am 
working on two books on this topic.
   access to hiv medicines at home and abroad: progress and setbacks
    Global access to medicines for HIV/AIDS has increased dramatically 
over the past decade, increasing by sixteenfold over 7 years to reach 
6.65 million people in the developing world by 2010; another 
approximately 750,000 people are on treatment in high-income countries 
(1). A key enabling factor for increasing access to treatment in 
developing countries was the combination of two things: first, the 
dramatic reductions in the price of antiretroviral (ARV) medicines and 
second, the availability of international funding. The price of a 
triple combination of ARVs has dropped from $10,000-$15,000 per 
patient/year in 2000, to as low as $100 today (2)--in other words, less 
than 1 percent of the patented U.S. price. These price reductions were 
enabled by robust generic competition, as reflected in the chart below. 
What we have seen with ARVs is that the greater the number of 
competitors in the market, the lower the price (See Figure 1).
    Americans can be proud of these accomplishments, as the U.S. 
Government has played an essential role in several elements of this 
story:

      First, major investment into HIV research by the National 
Institutes of Health (NIH) beginning in the 1980s enabled the 
scientific breakthroughs of antiretroviral therapy;
      Second, the United States is the single largest global 
funder of HIV treatment and care through the President's Emergency Plan 
for AIDS Relief (PEPFAR) and contributions to the Global Fund for HIV/
AIDS, Tuberculosis and Malaria (3). These contributions have 
strengthened the public image of the United States overseas especially 
in the countries hardest hit by the epidemic. Unfortunately, for the 
first time in 5 years it appears that U.S. contributions will be 
decreasing.
      Third, most recently, NIH-funded research demonstrated 
that HIV transmission can be prevented by taking a ``treatment as 
prevention'' approach--that is, antiretroviral therapy (ART) can reduce 
the risk that an HIV-positive person will transmit the virus to their 
partner by 96 percent (4). This research finding is the closest we have 
come to an HIV vaccine, which remains elusive. It also means that 
potentially millions more people could benefit from getting access to 
ARVs, and that this could potentially end the epidemic.




Source: Moon et al. 2011 (5).

    But it is a painful irony that just as the science shows us that we 
need to find ways to reach more people with ART, international funding 
for HIV is in crisis and prices in the United States are putting the 
drugs out of reach. As we have heard from the other panelists, too many 
Americans living with HIV in our own backyard are unable to access the 
treatment they need, in part because of these high prices. The same 
drugs that cost about $220 from a quality-assured generic producer in 
India cost over $25,000 in the United States. Why?
    The availability of low-cost generic medicines for HIV treatment in 
developing countries is part of an unwritten global political bargain. 
That bargain is that people living in high-income countries like the 
United States and Europe would continue to pay higher prices for 
medicines in order to reward companies for their investments in R&D, 
while people living in the poorest countries (or the donors that 
support treatment there) would essentially pay for generic drugs sold 
near the cost of production. But the political bargain was implicitly 
based on the assumption that people living in rich countries would have 
access through social protection mechanisms, such as government 
programs like the ADAPs or private insurance. If this is no longer 
true, and prices are too high to ensure access even in the wealthiest 
country in the world, then that political bargain is not sustainable.
    Some may reply that the answer is to charge higher prices elsewhere 
in the world, and that this would lead to lower prices in the United 
States. But clearly this is unacceptable from an ethical and public 
health point of view--what we need to do to save lives and stop the 
epidemic is to expand the reach of ART to more people, not less, and we 
have fewer dollars with which to do it. It is also unlikely that 
increasing prices elsewhere would actually lower prices here--that's 
not the way the pharmaceutical market works. So, what we have on our 
hands is the risk that the global political bargain will not hold--
which is a problem that touches people everywhere, both in the United 
States and abroad.
    This crisis reminds us of the drawbacks of the existing system for 
the research & development of new medicines (R&D)--that is, that we 
rely on high prices to recuperate private sector investments into R&D. 
These high prices mean that it costs society a significant amount of 
money (whether from government, insurance companies, or households' 
out-of-pocket expenditure) for each additional person who needs a 
medicine. In other words, if it costs $25,000 a year for ARV drugs, 
each additional person to be treated requires at least $25,000 for the 
drugs alone. This seems quite simple and straightforward, but this 
pricing system can have terrible consequences, especially when we know 
that these drugs can be manufactured for less than 1 percent of that 
price. Yet, if everyone in the world only paid the generic price, the 
incentive for R&D would evaporate. So, is there a better system?
    The promise of S. 1138 is that in establishing a prize fund, it 
would create a system that would separate the rewards for R&D from the 
price of the product--a powerful principle known as ``de-linkage.'' De-
linkage was the central principle endorsed in a recent report by an 
independent expert group convened by the World Health Organization to 
examine new mechanisms for R&D (the Consultative Expert Working Group 
on Research & Development: Financing and Coordination [CEWG]) (6).
          a simple illustration of the potential of de-linkage
    Here is a simplified hypothetical example to illustrate the basic 
idea:
    Imagine you have a budget of $100. In the current system, let's 
assume that the drugs are priced at $10 per patient. Your budget allows 
you to cover 10 patients total. About 1 percent of the price covers the 
cost of producing the drug (about 10 cents), and the remainder goes to 
the drug company as a reward for innovation. That is, $9.90 from each 
patient, or $99 altogether. On average, out of this $99 the industry 
will invest about 17 percent back into R&D, according to the industry 
association (7). So as a society we have now paid $100 to get about $17 
worth of R&D in the future. The system is pretty inefficient both for 
generating R&D funding and for meeting priority public health needs, 
but that is a topic that I believe others on this panel will address.
    Now imagine a system of de-linkage. In this system you create a 
prize fund to reward innovators, and in exchange for prize payments, 
the innovators allow competitive generic production of the drug from 
day 1. So, say you start with the same budget of $100. You can begin by 
setting aside $99 as a reward for the innovator. With the remaining $1, 
you can cover treatment for the same 10 people by purchasing a generic 
version of the drug. The key difference is that you have separated the 
market for R&D from the market for drug production. So far, the results 
are the same between the current model and the de-linked model in terms 
of patient coverage and R&D incentives, for the same cost to society.
    But then, what if more than 10 people need the drug? What if 
tomorrow the infectious disease has spread and 100 people need it? Or 
what if it turns out that more people need the drug than originally 
estimated? Or, what if the science shows the drugs can be used to 
prevent the transmission of a deadly disease? In the current system, to 
cover the additional 90 people would cost $900. In the de-linked 
system, it would only cost $9. The key difference here is that the 
marginal cost to get one more person access to the medicine under the 
de-linked system is $0.10 not $10.
    This feature of the prize-fund system is particularly relevant when 
we consider the latest science on HIV. As I mentioned earlier, we know 
now that ARV treatment can function as prevention. WHO issued new 
guidelines just last month recommending that in couples where one 
partner is HIV-positive and the other HIV-negative, treatment begin 
immediately to reduce the risk of transmission (8). Here at home, 
cities like New York are piloting this approach as well. The 
implications of the principle of treatment as prevention are that 
millions more people could potentially benefit from having access to 
ART. But achieving that requires big-picture thinking on how to get the 
drugs at the lowest possible cost while maintaining incentives for 
innovation.
    Finally, let me offer a few thoughts on how this bill could operate 
to address access issues internationally. The U.S. Government is the 
largest funder, and therefore indirect purchaser of ARVs for use in 
developing countries. But sometimes, we pay more than we have to for 
these drugs. For example, darunavir costs donors to the Global Fund 
over $6,500 per person/year in El Salvador, and this is just one drug 
required in a multi-drug combination.\1\ There is an internationally 
supported initiative to help make HIV treatment more affordable, and 
therefore available and sustainable--its called the Medicines Patent 
Pool. It works by asking companies to make their patents available to 
the Pool in exchange for the payment of a royalty. The Pool then 
licenses those patents out to generic manufacturers, who compete to 
offer the lowest prices for quality-assured drugs for use in developing 
countries. Again, Americans have reason to be proud, as the NIH was the 
first to contribute patents to the Pool. One of the challenges facing 
the Pool is that a number of developing countries are unable to benefit 
from it, due to restrictions from patent-holders on geographic scope. 
In addition, a few outlier companies are not yet in negotiations with 
the Pool, including the American firms Abbott, Johnson & Johnson and 
Merck. The HIV Prize Fund could incentivize companies to collaborate 
with this international initiative and include all developing countries 
within its scope, by providing a prize payment to the developers of 
innovative medicines well-suited for use in resource-poor settings. In 
exchange, companies would make their patents available to generic firms 
so that medicines could be produced and sold at the lowest sustainable 
prices produced by robust competition in the market.
---------------------------------------------------------------------------
    \1\ Price data from the WHO Global Price Reporting Mechanism, 
available: http://apps.who.int/hiv/amds/price/hdd/index.aspx.
---------------------------------------------------------------------------
                              conclusions
    While progress has been impressive, we are far from defeating the 
HIV epidemic. Over 7 million people are still in immediate need of 
treatment worldwide, and unfortunately, here in the United States the 
sight of people waiting on long lists for access to lifesaving 
medicines is not foreign. In addition, in some developing countries, 
the prices of HIV medicines remain very high--in the thousands of 
dollars--particularly for the newer medicines needed to treat the virus 
once it mutates and becomes resistant to first-line drugs. Despite 
great progress, we are still far from resolving the access problem.
    The United States has the opportunity to address a great moral 
challenge both at home and abroad by finding new ways to ensure that 
everyone gets access to the medicines they need, while providing 
improved incentives for R&D. In putting forward the Prize Fund for HIV/
AIDS bill, Senator Bernie Sanders has reminded us that innovation in 
medicine will require innovation in public policy. Prizes are a 
promising new incentive mechanism for addressing the pressing public 
problem of high drug costs and declining rates of innovation. This bill 
merits serious consideration by anyone concerned about the 
affordability of healthcare, equitable access to medicines, or 
harnessing the potential of technological innovation to address our 
most important health challenges, both here in the United States and 
globally. Thank you for this opportunity and for your attention. I look 
forward to your questions.
                               references
    1. World Health Organization, Joint United Nations Programme on 
HIV/AIDS (UNAIDS), United Nations Children's Fund. Progress Report 
2011: Global HIV/AIDS Response. Geneva: WHO; 2011. http://www.who.int/
hiv/pub/progress_
report2011/en/index.html.
    2. Medecins Sans Frontieres/Doctors Without Border (MSF). 
Untangling the Web of Antiretroviral Price Reductions (Online Edition). 
2012. Available from: http://utw.msfaccess.org/.
    3. Kaiser Family Foundation. U.S. Federal Funding for HIV/AIDS: The 
President's FY 2013 Budget Request (February 2012). Washington, DC: 
Kaiser Family Foundation; 2012. http://www.kff.org/hivaids/upload/7029-
08.pdf.
    4. Cohen MS, Chen YQ, McCauley M, Gamble T, Hosseinipour MC, 
Kumarasamy N, et al. Prevention of HIV-1 Infection with Early 
Antiretroviral Therapy. N Engl J Med. 2011 08/11; 2012/05;365(6):493-
505. Available from: http://dx.doi.org/10.1056/NEJMoa1105243.
    5. Moon S, Jambert E, Childs M, von Schoen-Angerer T. A Win-Win 
Solution?: A Critical Analysis of Tiered Pricing to Improve Access to 
Medicines in Developing Countries. Globalization and Health. 
2011;7(1):39. Available from: http://www.globalizationandhealth.com/
content/7/1/39.
    6. WHO Consultative Expert Working Group on Research and 
Development (CEWG): Financing and Coordination. Research and 
Development to Meet Health Needs in Developing Countries: Strengthening 
Global Financing and Coordination. Report of the Consultative Expert 
Working Group on Research and Development: Financing and Coordination. 
Geneva: World Health Organization; 2012. http://www.who.int/phi/
CEWG_Report_5_April _2012.pdf.
    7. Pharmaceutical Research and Manufacturers of America (PhRMA). 
Pharmaceutical Industry Profile 2011. Washington, DC: PhRMA; 2011. 
http://www.phrma.org/sites/default/files/159/
phrma_profile_2011_final.pdf.
    8. World Health Organization (WHO). Guidance on HIV Couples Testing 
and Counselling: Including Antiretroviral Therapy for Treatment and 
Prevention in Serodiscordant Couples. Recommendations for a Public 
Health Approach. Geneva: WHO; 2012. http://whqlibdoc.who.int/
publications/2012/9789241501972 eng.pdf.

    Senator Sanders. Dr. Moon, thanks very much for your 
testimony.
    Our next panelist is Dr. Joseph Stiglitz. He is a 
university professor at Columbia University and the winner of 
the 2001 Nobel Prize in Economics, as well as the 1979 John 
Bates Clark Medal. Dr. Stiglitz served in the Clinton 
administration as the chair of the President's Council of 
Economic Advisers, followed by an appointment as senior vice 
president and chief economist of the World Bank.
    He is a co-founder of the Initiative for Policy Dialogue, 
current president of the International Economic Association, 
chair of the U.N. Commission studying ways to reform the 
financial system, and a member of the CFTC-SEC Advisory 
Committee on Emerging Regulatory Issues. Last year, Foreign 
Policy magazine named him one of the Top 100 Global Thinkers.
    Dr. Stiglitz, thanks very much for being with us.

    STATEMENT OF JOSEPH E. STIGLITZ, PROFESSOR AT COLUMBIA 
  UNIVERSITY; WINNER OF THE NOBEL PRIZE IN ECONOMICS; FORMER 
   CHAIRMAN OF THE COUNCIL OF ECONOMIC ADVISERS; AND A CHIEF 
           ECONOMIST FOR THE WORLD BANK; NEW YORK, NY

    Mr. Stiglitz. Thank you very much for holding these 
hearings. I welcome this opportunity to share with you my 
thoughts on Senate bill 1138 and on the broader subject of how 
we can best finance research on HIV/AIDS and for health more 
generally.
    I should begin by saying that the approach taken by the 
bill is exactly right. It reflects an approach that I have been 
arguing for for years, including in my book, ``Making 
Globalization Work,'' in my academic writings, and in the 
various policy roles that I have been fortunate enough to play 
over the last two decades.
    The timing of this hearing could not be better, coming soon 
after the release of the report of the Consultative Expert 
Working Group on Research and Development: Financing and 
Coordination at the World Health Organization. I was able to 
present a keynote address at the launch of the report in Geneva 
just over a week ago. Interestingly, but not surprisingly, its 
core recommendations concerning the organization and finance of 
research and development coincide closely with this bill. The 
working group arrived at those conclusions after reviewing a 
wide range of alternative proposals.
    I will not spend time reiterating the seriousness of the 
HIV/AIDS problem both in America and around the world. 
Medicines have made enormous progress in prolonging lives and 
alleviating some of the costs and suffering, and further 
research promises even bigger dividends.
    The problem is that the medicines are very costly. Or, more 
accurately, the price charged for them is very high, but the 
cost of production is but a fraction of the price charged--the 
point that the Senator made earlier that the cost of production 
is less than 1 percent of the price charged.
    This is the inherent consequence of our current innovation 
system. The curious aspect of our current system is that the 
government, directly or indirectly, finances most health R&D, 
directly through public support and indirectly through public 
purchases of medicine, both in the Medicare and Medicaid 
programs. Given that government is financing most of the 
research, it is especially important that it be done in a way 
that is efficient. There are many dimensions to efficiency, two 
of which I want to talk about today.
    The first is that once knowledge is acquired, it should be 
used efficiently. Thomas Jefferson described knowledge as being 
like a candle. When one candle lights another, it doesn't 
diminish the light of the first. Once produced, knowledge 
should be disseminated and used as widely as possible.
    The desire to have knowledge used as widely as possible can 
run counter, however, to another concern. We have to have 
incentives to do research. Our patent system attempts to 
balance these concerns by providing a temporary monopoly power 
to innovators, the result of which is that there is restricted 
use of the knowledge for a limited period of time. This is a 
large inefficiency.
    But, increasingly, we have become aware of some other 
limits of the patent system. While it provides incentives, it 
does not necessarily provide incentives that correspond to 
social returns. In the healthcare sector, it may be more 
profitable to devote research to ``me-too'' drugs than to the 
development of a drug that really makes a difference. The 
patent system may even have adverse effects on innovation, 
because the most important input into any research is prior 
ideas, and the patent system encourages secrecy, just the 
opposite of the openness that is the hallmark of successful 
universities and academia more generally.
    There's ample ways to square the circle, which entail de-
linking research and development incentives from drug prices, 
and that is precisely what S. 1138 proposes to do in the 
context of new medicines to treat HIV/AIDS. It does this 
through a simple mechanism, prizes. The patent system is, of 
course, a prize. It awards to the first discoverer a temporary 
monopoly power, and that monopoly power results in the 
distortions I described above.
    With the prize system, we use the power of competitive 
markets to ensure that once a drug is discovered, it is made 
available at the lowest possible price. Competition ensures 
that the knowledge is used as widely as possible. In contrast, 
with monopolies, prices are raised to restrict the benefits 
that accrue from the knowledge. Moreover, with the prize 
system, rewards can better reflect the social contribution of 
the innovation, the true marginal contribution, as opposed to 
the current system, where research efforts are directed at 
maximizing rents, often achieved by taking rents away from 
others.
    What is particularly innovative about this bill is section 
9 on the Open Source Dividend Prizes. It recognizes that there 
is an alternative, more open and collaborative approach to 
innovation that has proven itself enormously successful in a 
number of areas of research, and not just IT. Research builds 
on previous research, and by providing incentives to ensure 
that more knowledge is in the public domain, the bill will 
contribute to the advancement of knowledge in this vital area.
    Finally, this bill has an important provision for a Donor 
Innovation Prize Fund. The United States has recognized that 
AIDS is a global problem and must be addressed globally. Our 
aid for AIDS is a humanitarian action, but it is also an action 
which is in our self-interest. The United States can play a 
leadership role in reforming the global system of financing and 
coordinating research and development to meet health needs, 
including and especially in the developing countries. With this 
bill, the United States does this.
    I should emphasize, in closing, that especially in a time 
of budget stringency, the need to increase the efficiency of 
America's innovation system is compelling. The difference 
between what the drug companies charge the government and the 
cost of production is in the tens of billions of dollars a 
year. Dean Baker estimates the gap at $270 billion a year.
    Money that goes to ``me-too'' drugs could be far better 
spent. We need more of our health research budget to be spent 
on diseases that matter. Much of the difference between the 
cost of production and what is charged does not go into 
research, but into advertising and marketing, and much of that 
is not spent to transmit information that would lead to better 
health, but to decrease the elasticity of demand across 
products, thereby increasing monopoly power and profits. Moving 
from a patent system to an effective prize system, using the 
power of the competitive market place to ensure the efficient 
dissemination of medicines is a critical step in creating this 
more efficient innovation system.
    America is the most innovative country in the world. It has 
the best universities, attracting the best minds from around 
the world. But America also has the least efficient healthcare 
system in the world, in the advanced industrial countries, 
spending more money per capita and a larger fraction of GDP on 
the healthcare sector than any other country, and getting far 
poorer outcomes than countries that spend much less.
    We need to harness our innovation system to work to drive 
down the costs and to improve performance. It is not just a 
matter of economics. It is, in many cases, a matter of life and 
death. We can do it. An essential step in doing this is de-
linking research and development incentives from drug prices 
and promoting greater sharing of scientific knowledge. This 
bill does this in an area that is of critical importance. It 
will provide a model for further reforms in our health 
innovation system.
    Thank you.
    [The prepared statement of Dr. Stiglitz follows:]
                Prepared Statement of Joseph E. Stiglitz
    I welcome this opportunity to share with you my thoughts on Senate 
bill 1138, and on the broader subject of how we can best finance 
research on HIV/AIDS, and for health more generally.
    I should begin by saying that the approach taken by the bill is 
exactly right. It reflects an approach that I have been arguing for for 
years, including in my book ``Making Globalization Work,'' \1\ in my 
academic writings,\2\ and in the various policy roles that I have been 
fortunate enough to play over the last two decades.
---------------------------------------------------------------------------
    \1\ Joseph E. Stiglitz, 2006, ``Making Globalization Work,'' New 
York: W.W. Norton. See chapter 4 for a discussion of intellectual 
property rights, including alternatives to the current system.
    \2\ Including ``The Economic Foundations of Intellectual 
Property,'' sixth annual Frey Lecture in Intellectual Property, Duke 
University, February 16, 2007, Duke Law Journal, 57(6), April 2008, PP. 
1693-1724; ``Intellectual Property, Dissemination of Innovation, and 
Sustainable Development,'' with Claude Henry, Global Policy 1(1), 
October, 2010, PP. 237-251; ``Two Ideas to Increase Innovation and 
Reduce Pharmaceutical Costs and Prices,'' with Arjun Jayadev, Health 
Affairs, 28(1), January/February 2009, PP. 165-168; and ``Medicine for 
Tomorrow: Some Alternative Proposals to Promote Socially Beneficial 
Research and Development in Pharmaceuticals,'' with Arjun Jayadev, 
Journal of Generic Medicine, 2010, 7(3), PP. 217-226.
---------------------------------------------------------------------------
    The timing of this hearing could not be better, coming soon after 
the release of the report of the Consultative Expert Working Group on 
Research and Development: Financing and Coordination at the World 
Health Organization, ``Research and Development to Meet Health Needs in 
Developing Countries: Strengthening Global Financing and 
Coordination.'' \3\ I was able to present a keynote address at the 
launch of the report in Geneva just over a week ago. Interestingly, but 
not surprisingly, its core recommendations concerning the organization 
and finance of research and development coincide closely with this 
bill. The working group arrived at those conclusions after reviewing a 
wide range of alternative proposals.
---------------------------------------------------------------------------
    \3\ Published April, 2012, and available at http://www.who.int/phi/
CEWG_Report_5_
April_2012.pdf (accessed May 10, 2012).
---------------------------------------------------------------------------
    I will not spend time here reiterating the seriousness of the HIV/
AIDS problem, both in America and around the world, the suffering of 
those afflicted by the disease, the economic cost to them, their 
families, and our economy. Medicines have made enormous progress in 
prolonging lives and alleviating some of these costs and suffering, and 
further research promises even bigger dividends. The problem is that 
the medicines are very costly; or more accurately, the price charged 
for them is very high, though the cost of production is but a fraction 
of the price charged.
    This is the inherent consequence of our current ``innovation'' 
system. The curious aspect of our current system is that the 
government, directly or indirectly, finances most health R&D--directly, 
through public support (National Institutes of Health, National Science 
Foundation), and indirectly, through public purchases of medicine, both 
in the Medicare and Medicaid programs. And even the part that is not so 
financed is not a ``market'' as we normally conceive of it; most 
individuals' purchases of prescription medicines are covered by 
insurance. Further, their decision to use a particular medicine is 
largely determined by physicians, and not by patients themselves.
    Given that government is financing most of the research, it is 
especially important that it be done in a way that is efficient. There 
are many dimensions to efficiency, two of which I want to talk about 
today. The first is that, once knowledge is acquired, it should be used 
efficiently. Thomas Jefferson described knowledge as being like a 
candle: When one candle lights another, it doesn't diminish the light 
of the first. Once produced, knowledge should be disseminated and used 
as widely as possible.
    The desire to have knowledge used as widely as possible can run 
counter, however, to another concern: we have to have incentives to do 
research.
    Our patent system attempts to balance these concerns by providing a 
temporary monopoly power to innovators, the result of which is that 
there is restricted use of the knowledge for a limited period of time. 
This is a large inefficiency.
    But increasingly, we have become aware of some other limits of the 
patent system. While it provides incentives, it does not necessarily 
provide incentives that correspond to social returns. In the health 
care sector, it may be more profitable to devote research to a ``me-too 
drug'' than to the development of a drug that really makes a 
difference. The patent system may even have adverse effects on 
innovation, because the most important input into any research is prior 
ideas; and the patent system encourages secrecy, just the opposite of 
the openness that is the hallmark of successful universities and 
academia more generally. (There are other adverse effects on 
innovation, related to the patent thicket and hold-up problems.)
    There is a simple way to ``square the circle,'' which entails de-
linking research and development incentives from drug prices, and that 
is precisely what S. 1138 proposed to do in the context of new 
medicines to treat HIV/AIDS. It does this through a simple mechanism--
prizes.
    The patent system is, of course, a prize. It awards to the first 
discover a temporary monopoly power, and that monopoly power results in 
the distortions I described above. In the case of HIV/AIDS, what is at 
stake is more than a distortion: it can become a matter of life and 
death. The high prices mean that those without insurance may not be 
able to afford medicines that could save their lives.
    With the prize system, we use the power of competitive markets to 
ensure that, once a drug is discovered, it is made available at the 
lowest possible price. Competition ensures that the knowledge is used 
as widely as possible (in contrast, with monopolies, prices are raised 
to restrict the benefits that accrue from the knowledge.)
    Moreover, with the prize system, rewards can better reflect the 
social contribution of the innovation--the true marginal contribution 
(as opposed to the current system, where research efforts are directed 
at maximizing rents, often achieved by taking rents away from others).
    What is particularly innovative about this bill is section 9, on 
Open Source Dividend Prizes. It recognizes that there is an 
alternative, more open and collaborative approach to innovation that 
has proven itself enormously successful in a number of areas of 
research, and not just IT.\4\ Research builds on previous research, and 
by providing incentives to ensure that more knowledge is in the public 
domain, the bill will contribute to the advancement of knowledge in 
this vital area. The bill is correct in asserting that the prizes 
``would create a powerful economic incentive to open source knowledge, 
data, materials and technology, which should directly benefit product 
developers.''
---------------------------------------------------------------------------
    \4\ Henry and Stiglitz, op. cit.
---------------------------------------------------------------------------
    Finally, this bill has an important provision for a Donor 
Innovation Prize Fund. The United States has recognized that AIDS is a 
global problem, and must be addressed globally. Our aid for AIDS is a 
humanitarian action, but it is also an action which is in self-
interest. Global Health and Knowledge are both among the set of goods 
that have come to be called Global Public Goods, goods from which 
everyone can benefit. These goods have taken on increasing importance 
with globalization; as the world has become more interconnected, it has 
become increasingly imperative that there be cooperative actions to 
advance common interests.
    The United States can play a leadership role in reforming the 
global system of financing and coordinating research and development to 
meet health needs, including and especially in the developing 
countries. As I noted before, the WHO Consultative Expert Working Group 
proposed the use of a prize fund to facilitate global innovation in 
this area.
    In the critical area of HIV/AIDS research, the need to de-link 
research development incentives from drug prices for new medicines and 
to stimulate greater sharing of scientific knowledge is apparent and 
imperative. The economic costs of not doing so are huge, but so too may 
be the human costs, in terms of lives unnecessarily compromised or 
lost.
    I should emphasize, in closing, that especially in a time of budget 
stringency, the need to increase the efficiency of America's innovation 
system is compelling. The difference between what the drug companies 
charge the government and the cost of production is in the tens of 
billions of dollars a year. (Dean Baker estimates the gap at $270 
billion a year.) Money that goes to developing me-too drugs could be 
far better spent. We need more of our health research budget to be 
spent on diseases that matter. Moreover, much of the difference between 
the cost of production and what is charged does not go into research, 
but into advertising and marketing, and much of that is not spent to 
transmit information that would lead to better health, but to decrease 
the elasticity of demand across products, thereby increasing monopoly 
power and profits.
    Moving from a patent system to an effective prize system, using the 
power of the competitive marketplace to ensure the efficient 
dissemination of medicines, is a critical step in creating this more 
efficient innovation system. We should think too about changing the 
balance between government-sponsored research (e.g., through the NIH, 
which has an impressive track record) and the patent system. The patent 
system encourages secrecy (and to some extent, so does the prize 
system, with the important exception of the open source prizes), and 
the hoarding of knowledge, rather than its efficient and full 
dissemination. (The patent, and to a less extent, the prize system has 
the further disadvantage of introducing high levels of uncertainty, 
which is reduced, if not resolved, in government-funded research 
programs. In the patent there is often duplicative research. These 
costs of duplication and of risk are inevitably passed on to consumers, 
or in the case of medicines, largely to taxpayers.)
    We should think too about reducing research and development costs 
and conflicts of interest in drug development by promoting public 
funding of clinical trials.\5\
---------------------------------------------------------------------------
    \5\ See, e.g. Stiglitz and Jayadev, 2010, op. cit.
---------------------------------------------------------------------------
    We could also improve the efficiency of our research system by 
encouraging real innovations, those that make a difference for health, 
through value-based pricing for drugs (and since the government is such 
a large buyer of drugs, its use of such a system would help shape the 
entire marketplace.) \6\ The bill, in outlining the criteria for the 
award of the prizes, simultaneously outlines some of the principles 
that could guide a system of value-based pricing.\7\
---------------------------------------------------------------------------
    \6\ See, e.g. Stiglitz and Jayadev, 2010, op. cit.
    \7\ One of the key principles is to focus on ``incremental 
therapeutic benefit . . . as compared to existing drugs.''
---------------------------------------------------------------------------
    America is the most innovative country in the world. It has the 
best universities, attracting the best minds from around the world. But 
America also has the least efficient health care system in the world, 
spending more money per capita, and a larger fraction of GDP, on the 
health care sector than any other country--and getting far poorer 
outcomes than countries that spend much less.
    We need to harness our innovation system to work to drive down the 
costs and to improve performance. As I have said, it is not just a 
matter of economics. It is, in many cases, a matter of life and death. 
We can do it. An essential step in doing this is de-linking research 
and development incentives from drug prices and promoting greater 
sharing of scientific knowledge. This bill does this in an area that is 
of critical importance. It will provide a model for further reforms in 
our health innovation system.

    Senator Sanders. Thank you very much, Dr. Stiglitz.
    Our next panelist is Lawrence Lessig, who is the Roy L. 
Furman Professor of Law at Harvard Law School, and director of 
the Edmond J. Safra Center for Ethics at Harvard University. 
Professor Lessig founded Creative Commons and The Center for 
Internet and Society at Stanford Law School and was previously 
on the faculty at the University of Chicago Law School.
    Professor Lessig serves on the boards of Creative Commons, 
MAPLight, Brave New Film Foundation, The American Academy, 
Berlin, AXA Research Fund and iCommons.org, and is on the 
advisory board of the Sunlight Foundation. He is a member of 
the American Academy of Arts and Sciences and the American 
Philosophical Association, and has received numerous awards, 
including the Free Software Foundation's Freedom Award, 
Fastcase 50 Award, and being named one of Scientific American's 
Top 50 Visionaries.
    Dr. Lessig, thanks very much for being with us.

STATEMENT OF LAWRENCE LESSIG, PROFESSOR AT HARVARD LAW SCHOOL; 
    FOUNDER OF CREATIVE COMMONS AND THE STANFORD CENTER FOR 
              INTERNET AND SOCIETY, CAMBRIDGE, MA

    Mr. Lessig. Mr. Chairman, thank you very much for the 
opportunity to testify.
    As you know, since the beginning of this Republic, there 
has been a fierce debate about how best to create incentives 
for scientists and innovators to discover and to bring to 
market advances in science that address important public needs. 
On one side of that debate have been the supporters of 
exclusive rights, secured by the government. The Constitution 
gives Congress the power to secure such rights. And since the 
earliest days of the Republic, Congress has, by law, 
established mechanisms which secure exclusive rights to 
inventors.
    On the other side of this debate have been skeptics about 
exclusive rights, at least within some domains of innovation. 
These skeptics have not doubted the need for incentives. They 
have instead worried that the costs of the system of incentives 
secured through government-granted monopolies sometimes 
outweigh the benefits. Such monopolies are, of course, just 
property rights.
    But as another Nobel Prize winning economist, Ronald Coase, 
wrote in 1959,

          ``All property rights interfere with the ability of 
        people to use resources. What has to be ensured is that 
        the gain from interference more than off-sets the harm 
        it produces.''

    Now, these costs are many and, in my view, too often just 
simply ignored. They include not only the costs of 
administering any patent or copyright system, but also the 
costs imposed upon the environment of discovery itself.
    Many have worried, for example, that one unintended cost of 
the Bayh-Dole Act has been to inhibit the sharing of scientific 
knowledge among academics, as technology transfer offices at 
universities have instructed researchers that secrecy is 
necessary to protect the patentability of inventions. Now, we 
have no way to be certain about the cost of such a change in 
incentives. But we need to worry about whether such costs 
outweigh the benefits of the system.
    Now, my view is that the patent system, in general, has 
provided important support for innovation. But it is important 
that Congress innovate with alternatives and test alternatives 
to see whether it is the best system in all areas of innovation 
and whether there aren't better systems for particular areas of 
innovation.
    Now, I've been asked to address one particularly important 
part of this bill, what's called the Open Source Fund in 
section 9. And this, of course, builds upon the insight that 
we've seen since the beginning of the Internet where scientists 
have been experimenting with alternative ways to share 
scientific knowledge. The traditional scientific journal 
provided an important service. But the process and constraints 
of journal publication were grounded in the technology of 
physical printing.
    The significant investment in producing published work 
justified the strict control on distribution. And vigorous 
enforcement of copyright and access restrictions were essential 
tools to provide the revenue necessary to support even 
nonprofit journal production. Free access was simply not 
feasible.
    But as the traditional mode of scientific publication has 
moved to the Internet, the temptation of at least some has been 
to exploit market power to radically increase the cost of 
access. In one study, for example, the Association of Research 
Libraries calculated that between 1986 and 2004, while the CPI 
increased just 73 percent, the unit cost for serial 
publications increased by close to 190 percent.
    Likewise, in a study published in 2004, Theodore Bergstrom 
and R. Preston McAfee found that the average cost per page of a 
for-profit journal was 4.5 times the average cost of a not-for-
profit journal, and the cost per citation was 9.2 times the 
cost of a not-for-profit journal. Now, these differences don't 
reflect the relative inefficiency of for-profit journals. They 
reflect instead a business model that seeks to exploit the 
inelastic demand that at least some have for scientific 
journals. Whatever the price, Harvard University will pay it. 
And for many publications, the benefit from the increase in 
that price to elite universities more than outweighs the loss 
from institutions that can no longer afford access.
    The Internet changes this dynamic dramatically by offering 
a free digital platform for distribution of creative work--and 
not just publications, data as well. But this work, too, needs 
revenue to support its provision. And so journals such as the 
Public Library of Science Medicine make published work 
available for free, but the authors must pay publication fees 
in order make that work available initially. And while these 
fees are often subsumed within research budgets, these research 
budgets could benefit from the support that the Open Source 
Dividend Prize offers to make it so that more scientists can 
make their work available in this particular way.
    Finally, let me just make one final comment about this 
hearing and your bill. I've spent the last 5 years of my career 
working on the cynical story of Congress. And the cynical story 
of Congress would predict that such a bill and such a hearing 
would never occur. And, indeed, it's not surprising that we 
have a bill with one Senator sponsoring it and a hearing with 
no Senator except the sponsor present.
    So when Jamie asked me to come, my initial reaction was: 
Why waste my time? But I think it's extremely important--and I 
commend you, Senator--to give America a conception of how 
legislation could occur where it was sense and not campaign 
dollars that drove the bottom line of what Congress did. So I 
thank you for the opportunity to fling myself down here for 
this purpose, at least, and I strongly support the innovation 
you're trying to add to this field.
    Thank you.
    [The prepared statement of Dr. Lessig follows:]
                 Prepared Statement of Lawrence Lessig
                              introduction
    Mr. Chairman, and members of the committee, my name is Lawrence 
Lessig, and I am a professor of law at Harvard Law School. I also 
direct the University's Edmond J. Safra Center for Ethics. I am honored 
to testify in support of Senator Sanders' important legislation.
    I have been asked to address section 9 of Senator Sanders' bill, 
concerning ``open source dividend prizes.'' My work studying innovation 
and creativity on the Internet, especially as it relates to ``open 
source'' and ``free software'' licensing, provides the background that 
informs my view of this provision. In light of that work, I am strongly 
supportive of the effort to experiment in alternatives to create the 
necessary incentives for scientists and researchers to produce the 
knowledge that progress in science requires.
                         incentives to discover
    Since the beginning of the Republic, there has been a fierce debate 
about how best to create incentives for scientists and innovators to 
discover and bring to market advances in science that would address 
important public needs.
    On one side of that debate has been supporters of exclusive rights, 
secured by the government, in the form of patents and copyrights. The 
Constitution, for example, expressly gives Congress the power to secure 
to ``Inventors'' and ``Authors'' such exclusive rights. Since the 
earliest days of the Republic, Congress has by law established 
mechanisms by which such exclusive rights can be secured.
    On the other side of this debate have been skeptics about exclusive 
rights, at least within some domains of innovation. These skeptics have 
not doubted the need for incentives. They have instead worried that the 
costs of the system of incentives secured through government-granted 
monopolies would outweigh the benefits. Such monopolies are, of course, 
just property rights. But as Nobel Prize winning economist Ronald Coase 
wrote in 1959,

          All property rights interfere with the ability of people to 
        use resources. What has to be ensured is that the gain from 
        interference more than off-sets the harm it produces.

    These costs are many, and too often simply ignored. They include 
not only the costs of administering any patent or copyright system, but 
also the costs imposed upon the environment of discovery itself. Many 
have worried, for example, that one unintended consequence of the Bayh-
Dole Act has been to inhibit the sharing of scientific knowledge, as 
technology transfer offices at universities have instructed researchers 
that secrecy is necessary to protect the patentability of inventions. 
We have no certain way to measure the significance of this effect, or 
its prevalence. But skeptics of an exclusive rights strategy for 
creative incentives worry that we systematically ignore these important 
costs, and thereby interfere with crucial discoveries.
    It is my own view that the patent system has provided essential and 
critical support to drug development in particular, and innovation more 
generally. But it is also my view that Congress should experiment with 
alternatives to the traditional patent system, and evaluate more 
carefully the conditions under which those alternatives might create 
more incentives at less overall cost.
    The idea of a ``prize fund'' as an alternative to an exclusive 
reliance on patents has a long historical pedigree. From the birth of 
the Republic, both private and public institutions have experimented 
with prizes as a less costly way to induce important innovation. In the 
18th Century, both in Britain and in the United States, private 
societies ``for the Encouragement of Arts, Manufacturers, and 
Commerce'' were established to offer prizes for named innovations. 
Sometimes these prizes were given in lieu of patents. Sometimes they 
complemented patents. But the urge to experiment was driven by the 
recognition that no single, simple system of incentives would produce 
the optimal amount of innovation. And that innovation about the system 
of incentives is just as important as the innovation those incentives 
create.
    The innovation contemplated by this bill would, at a minimum, teach 
us a great deal about the utility of the prize fund alternative to 
patents in the context of medical research. More importantly, it would 
incentivize discoveries that then would be available cheaply to 
patients in desperate need. I strongly support this limited 
experimentation, both because of this important benefit to patients, 
and because it might well promote the progress of understanding about 
how best to induce this class of medical innovation more generally.
                          the open source fund
    Senator Sanders' bill also includes a critical innovation to create 
incentives to support ``open sourced'' knowledge. This too is an 
important change which I strongly agree with.
    Since the birth of the Internet, scientists have been experimenting 
with alternative ways to create and share scientific knowledge. The 
traditional scientific journal has no doubt served science well. But 
the process and constraints of traditional journal publication were 
grounded in the technology of physical printing. The significant 
investment in producing published work justified the strict control on 
its distribution. Vigorous enforcement of copyright and access 
restrictions were thus essential tools to create the revenue necessary 
to support even non-profit journal production. ``Free access'' was 
simply not feasible.
    But as this traditional mode of scientific publication has moved to 
the Internet, the temptation of at least some has been to exploit 
market power to radically increase the cost of access. In one study, 
for example, the Association of Research Libraries calculated that 
between 1986 and 2004, while the CPI increased just 73 percent, the 
unit cost for serial publications increased by close to 190 percent. 
Likewise, in a study published in 2004, Theodore Bergstrom and R. 
Preston McAfee found that the average cost per page of a for-profit 
journal was 4.5 times the cost of a not-for-profit journal, and that 
the cost per citation in a for-profit journal was 9.2 times the cost in 
a not-for-profit journal. These differences do not reflect the relative 
inefficiency of for-profit journals. They reflect instead a business 
model that seeks to exploit the inelastic demand that at least some 
have for scientific journals. Whatever the cost, Harvard University 
will pay it. And for many publications, the benefit from increasing the 
price to elite institutions more than outweighs the loss from 
institutions that can no longer afford access.
    The Internet could change this dynamic dramatically. By offering a 
free digital platform for distributing creative work of any kind, the 
Internet enables ``open source'' models of scientific publication. 
Journals such as those supported by the Public Library of Science 
produce high quality publications, licensed freely on the Internet, 
with the same rigorous peer-review that marks traditional scientific 
publications.
    Because this work is licensed freely, it is accessible to any 
researcher around the world. And because it is licensed freely, 
innovative technologies for ``machine processing'' the work and 
extracting data for further scientific analysis can occur without any 
cloud of illegality. While the business model of many artists is 
restricted access to their work--so as to secure, rightly and properly, 
the necessary revenue to support their creativity--the business model 
of scientists is free access to their work. Open source models of 
publication support this business model of scientists, and advance the 
spread of knowledge and innovation generally.
    It is important to emphasize that such open source methods do not 
reject the idea of intellectual property in general, or copyright in 
particular. Indeed, to the contrary: ``open source'' publication 
properly understood depends upon intellectual property. When PLOS 
licenses its articles under a Creative Commons Attribution license, it 
is relying upon the copyright that the law automatically gives to 
authors of creative work, but it is deploying those rights in a way 
that fits with the business model of the creator--here, the scientist 
who wants her work distributed freely. This desire is not inconsistent 
with copyright. It is instead a perfect manifestation of the objectives 
of copyright: to secure to authors a benefit that helps them achieve 
their creative objective, and thereby helps the public too. It is for 
this reason that the late Jack Valenti, former president of the Motion 
Picture Association of America, endorsed the Creative Commons project 
upon its launch in 2002. As he said then, the licenses simply secure to 
the author more easily the freedom the law of copyright intends the 
author to have. They do not deny the freedom of other authors to 
restrict access to their work. Neither does the existence of ``open 
source'' models of publication deny the freedom of others to license 
their work in a more restricted way.
    But open source publication does not eliminate the need for 
revenue. It simply shifts the source of revenue, so as to secure free 
and open access to research results. Journals such as PLOS Medicine 
make the published work available for free. But authors are asked to 
support the publication of the work by paying a publication fee. And 
while these fees are often subsumed within the research budget of the 
scientists whose work is being published, they point to a more general 
need to secure alternative sources of revenue to support this more 
freely accessible mode of publication.
    The ``Open Source Dividend Prize'' described in section 9 of 
Senator Sanders' bill is an innovative way to support this more general 
need. By creating a fund and a mechanism for rewarding scientists who 
make their work freely accessible, the bill could increase dramatically 
the range of work accessible freely. Most scientists prefer that their 
work is easily accessible. Giving them even a chance at a fund that 
might compensate for that free access is likely to induce many more to 
make their work freely accessible.
    This is especially valuable for HIV/AIDS research, and for those 
who depend upon it. The burden of this disease is not exclusively born 
by those who can afford the high cost of journals. It is instead 
primarily born by people living in the regions with the least access to 
medical information. Creating incentives for free distribution of HIV/
AIDS-related research will have a dramatic impact on those regions most 
heavily burdened by this disease, and could provide a model for further 
innovation in research incentives for other critical diseases.
    The same point is true of other open source resources in science--
including data, materials necessary to replicate funded research (cell 
lines, model animals, DNA tools, reagents, and the like), and patents. 
These resources too can all be licensed in a manner consistent with the 
principles of open science. For the same reasons such licensing of 
publications would benefit HIV/AIDS research, open licensing of these 
resources would as well. Between 2000 and 2011, for example, the USPTO 
granted more than 2,000 HIV/AIDS related patents to universities, 
colleges, and foundations. Incentives to free access to these 
inventions might be incredibly important to new discoveries.
                 the importance of this legislation now
    The importance of this bill is that it would create incentives for 
scientific innovation where insufficient incentives exist right now. 
But in a critical way, the bill itself represents an innovation in 
legislation where there are insufficient legislative incentives 
existing now.
    It is commonplace to note Congress' attention to matters that 
involve significant gains or losses to well-funded special interests. 
But it is likewise rare for Congress to act in contexts in which there 
is no clear, well-funded interest that benefits from Congress' 
intervention.
    This bill contradicts that cynical rule. There is no ``open 
source'' industry that would support, either through lobbying or 
campaign contributions, the experiment that this bill envisions. There 
is no well-funded interest group that is likely to make this its No. 1 
cause. Instead, this bill is a response to a type of market failure in 
government policymaking--the tendency to legislate only when strong 
private interests push--by proposing a substantive reform that responds 
to a market failure in the translation of scientific discovery--the 
failure to price innovations close to their marginal cost.
    Much of my own work over the past 4 years has pointed to, and 
criticized, this cynical rule about the behavior of Congress. But I am 
happy to testify in support of a bill that weakens my own argument for 
that cynical rule. I don't know of anyone who would predict that a bill 
such as this could pass a Congress whose elections are funded as this 
Congress' is. But it would be wonderful for such a prediction to be 
proven wrong.

    Senator Sanders. Thank you very much.
    Last but certainly not least of our panelists is Jamie 
Love. James Love is the director of Knowledge Ecology 
International (KEI), the winner of a MacArthur Award--you see, 
I get a little bit intimidated standing up here with all you 
smart people. I've got Nobel Prize winners, MacArthur--for 
Creative and Effective Institutions.
    Mr. Love is also the co-chair of the Trans Atlantic 
Consumer Dialogue Intellectual Property Policy Committee and 
chairs the Essential Innovations board of directors. He serves 
as an advisor to U.N. agencies, national governments, 
intergovernmental organizations, and nongovernmental 
organizations on innovation and intellectual property rights, 
and has been working on the potential for Prize Funds for 
medical innovation for at least a decade. And Jamie is somebody 
I've known for a long time and much admire.
    Jamie, thanks very much for being with us.

STATEMENT OF JAMES PACKARD LOVE, DIRECTOR OF KNOWLEDGE ECOLOGY 
  INTERNATIONAL; CO-CHAIR OF TRANS ATLANTIC CONSUMER DIALOGUE 
     INTELLECTUAL PROPERTY POLICY COMMITTEE, WASHINGTON, DC

    Mr. Love. Thank you. I'd like to start by saying my 
prepared statement is 14 pages long, and rather than attempt to 
read it in 5 minutes, I will provide a summary.
    Today, we are asking that the Congress should undertake a 
radical and transformative change in our incentive system for 
HIV/AIDS. This is a big ask, of course. So why should Congress 
consider something as radical and transformative as it relates 
to AIDS?
    Part of the answer is that the current system is flawed in 
important ways, many of which were referred to by the other 
speakers. But these flaws would be acceptable if there was no 
other feasible way to stimulate innovation. I'm here today to 
echo the views of several of the other witnesses and to say 
that the Prize Fund approach is better than the existing system 
and, indeed, so much better that logic, evidence, and duty 
compel the Congress to make the change.
    As elected representatives, we ask you to improve our lives 
and to find better ways to solve old problems. The Prize Fund 
is a reform that builds on everything that is well-known about 
the economics of innovation. It eliminates the artificial 
scarcity of new medicines and addresses well-known flaws in the 
current system of granting product monopolies.
    The current system places a crushing financial burden on 
patients and the broader public, often at the expense of access 
itself. The current system does not appear to be sustainable or 
appropriate for dealing with the HIV pandemic which requires 
high levels of access to new drugs, not only in the United 
States but throughout the world.
    Others have referred to a number of basic facts that the 
United States, for example, has 1.2 million persons living with 
HIV. And with new infections, that number is growing every 
year. I can remember when the size of the community was 
considered 200,000 people, and now it's 1.2 million people. And 
5 years from now, it will be more than 1.2 million people.
    You mentioned the cost of Atripla--the average wholesale 
cost of Atripla being $25,000 a year. That's actually a fairly 
inexpensive calculant in the current environment in the United 
States. Some of the more expensive regimes, even for treatment 
of naive patients, could be as much as $35,000, and for people 
that have developed drug resistance, which a lot of patients 
will--that will happen to them over the period of their 
treatment. It's a lifelong treatment at present. The treatments 
could be $50,000 to $75,000 per year.
    I don't see how you take a country with 1.2 million people 
that have that condition and impose those kinds of astronomical 
costs. The CDC currently says that 64 percent of the people 
living in the United States that are HIV-positive are not 
receiving drugs. Recent studies also show that people--when 
they are taking drugs that the risk of re-infection goes down 
by as much as 95 percent.
    Some of the companies are now trying to encourage people 
that are not even HIV-positive to take drugs in order to 
prevent retransmission if they are high-risk groups. There's no 
way you can do that at the current prices.
    Now, the bill proposes a $3 billion reward fund for 
innovation split into three different types of innovations. It 
has an end-product prize, which is similar to the economic 
incentive you have out of the monopoly at present. But it's 
better, because it rewards innovations based upon the 
improvement of health outcomes bench-
marked against existing drugs, and it stops the rewarding of 
products which are just comparable to existing drugs.
    I will note that of the 15 largest selling products in the 
United States today for AIDS, 13 of the 15 were registered by 
the FDA after 2003. I'm sorry--before 2003. They're like 9-
year-old products in terms of the underlying drugs that are 
used in them. I mean, some of them are fixed-dose combinations 
that have come on the market earlier, but they're made up of 
older drugs, basically.
    We spend probably easily about $8 billion a year more every 
year than we have to for AIDS drugs at current prices right now 
to support the cost of the monopoly. With that, you've gotten 
approximately one drug a year out for the last 25 years, of 
which most of them are no better than the existing drugs and 
are just minor variations on the same drug, just as FTC is 
almost an identical drug to 3TC, a product that was first 
registered in 1995.
    So the Prize Fund would reform that incentive by--instead 
of just saying that you get money if you replicate what these 
other drugs do with minor improvements, it would say that--it 
would look at what you do to improve health outcomes 
benchmarked against existing drugs. So it would de-incentivize 
copycat drugs, but it would incentivize things that actually 
did something that is medically new and would benefit the 
patients the most.
    So that's the reform of the end product. And it's 
calibrated, by the way, at about three times what the industry 
says it costs to produce a single drug on a risk-adjusted cost-
to-capital basis just for the U.S. market, which is only 24 
percent or 25 percent of the world's GDP. So it's actually a 
fairly generous allocation.
    It also adds an Open Source Dividend of $150 million a year 
to incentivize people to open source access to libraries, to 
data, to materials, and to patented inventions, of which there 
are thousands in the HIV area, to make it easier for drug 
developers to get the kind of research that Professor Stiglitz 
and Professor Lessig referred to that is necessary for the R&D 
process.
    And, finally, it opens the door for the development of 
competitive intermediaries to fund upstream research further on 
through a competitive system where employers and insurance 
companies would choose the manager of their money for dealing 
with this issue that's referred to as a so-called valley of 
death in the development area, but in an open source manner. 
Taken together collectively, this is like a nuclear option for 
the pharmaceutical sector.
    Instead of one sector in the AIDS sector--if it would work 
in the AIDS sector, which is a completely dysfunctional market 
right now, where things are completely unsustainable, where you 
have literally the inability at the present to deal with the 
population, the growing demand, and you have tens of millions 
of people outside the United States right now who are 
suffering--a huge crisis in funding right now and 
sustainability for AIDS treatment outside the United States. It 
would take this market, and if it would work here, it would 
create enormous pressure to rethink the rest of the problem for 
cancer drugs, for diabetes, and for all sorts of other areas.
    Senator Sanders. Not so loud. Somebody may hear you.
    [Laughter.]
    Mr. Love. And so the challenge is the government. If you 
have a system that doesn't work, and it's about innovation, can 
you innovate, and can you do something different?
    Thank you very much.
    [The prepared statement of Mr. Love follows:]
                Prepared Statement of James Packard Love
    My name is James Packard Love. I am pleased to testify today in 
support of S. 1138, the Prize Fund for HIV/AIDS.
    I am the Director of Knowledge Ecology International (KEI), a non-
profit organization that is concerned with the management of knowledge 
and human rights. A significant part of our work focuses on the 
development of and access to new medicine technologies, including in 
particular new medicines, vaccines and diagnostic devices. KEI was 
created as a new corporation in 2006 to carry out the work done earlier 
by the Consumer Project on Technology (CPTech) and the Taxpayer Assets 
Project (TAP), two projects of the Center for the Study for Responsive 
Law (CSRL). Including the work for KEI, CPTech, and TAP, I have worked 
extensively on issues relating to medical innovation since 1991, when I 
was asked to review an agreement between Bristol Myers Squibb (BMS) and 
the National Institutes of Health (NIH) for the commercial development 
and sale of Taxol, a drug for cancer invented by the NIH.\1\ Since 
1991, I have been involved in more than two decades of research and 
analysis into various aspects of the drug, vaccine, and medical device 
industries, including, for example, the economics of discovery and 
commercial development, the efficacy, efficiency, and fairness of 
various incentive mechanisms to stimulate investments in private sector 
R&D, the pricing of medicines and vaccines (including products 
developed with government support), the setting of research and 
development priorities, intellectual property right policies, and new 
approaches to supporting research and development, including those that 
encourage more open systems of innovation. A list of several 
publications on these topics is available at http://keionline.org/
jamie.
---------------------------------------------------------------------------
    \1\ Subcommittee on Regulation, Business Opportunities, and Energy, 
of the Committee on Small Business, U.S. House of Representatives. 
Exclusive Agreements between Federal Agencies and Bristol-Myers Squibb 
Co. for Drug Development: Is the Public Interest Protected? July 29, 
1991. Hearing Record. Serial No. 102-35.
---------------------------------------------------------------------------
    Since 1994, I have worked on both domestic and international 
aspects of these issues. Since 2000, I have been a consultant, advisor, 
or expert for the World Bank, the United National Program on 
Development (UNDP), the World Health Organization (WHO), UNITAID, the 
U.N. Human Rights Council, the World Intellectual Property Organization 
(WIPO), the Global Fund for HIV/AID, Tuberculous and Malaria (TGF), 
regional intergovernmental bodies including the European Parliament, 
the European Patent Office (EPO), the African Union (AU), and several 
national governments and NGOs. I am the U.S. co-chair of the Trans 
Atlantic Consumer Dialogue (TACD) Policy Committee on Intellectual 
Property, the Chairman of Essential Inventions, the Chairman of the 
Union for the Public Domain, and a member of a number of committees, 
and task forces, such as the 2.3(c) Committee (to implement paragraph 
2.3c of the WHO Global Strategy on Public Health, Innovation and 
Intellectual Property).
the current and looming crisis in the market for new drugs for hiv/aids
    My earliest work on treatments for HIV/AIDS drugs was focused on 
the pricing of AIDS drugs in the United States, including cases where 
the U.S. Government had played an important role in funding the 
research and development. One insight was that the pricing of drugs 
invented with extensive public support was at least as aggressive as 
the pricing of products developed without such support, and indeed, 
often the government supported inventions were more expensive. Another 
insight was that the pricing of a product had almost no relationship to 
actual private sector outlays on research and development for that 
product, or to its costs of manufacturing. In the absence of 
competition, typically due to some type of government enforced monopoly 
such as the exclusive rights associated with patents, orphan drug 
designations, pediatric testing, or regulatory test data reliance, 
prices were set according to the seller's perception of the patient's 
willingness to pay. For treatments for AIDS, a potentially lethal 
disease, the better the drug, the higher the price, moderated only by 
the unwillingness of insurance companies, employers and governments to 
reimburse high-priced drugs. In the early days of the HIV/AIDS 
pandemic, the combination of a politically influential patient 
community and a relatively small number of persons receiving treatment 
made it possible for drug companies to be very aggressive in terms of 
prices, as the costs of the drugs were absorbed by the larger 
population. In the United States, after 1996, when effective three-drug 
antiretroviral therapy (ART) was first introduced, the number of AIDS-
related deaths plummeted. With fewer deaths and but thousands of new 
infections each year, there was a steady rise in the number of persons 
living with HIV, which today the Centers for Disease Control and 
Prevention (CDC) estimates to be more than 1.2 million persons in the 
United States.




    At present, CDC estimates there are roughly 50,000 new infections 
per year, many of them relatively young, and 16 thousand AIDS-related 
deaths. Depending upon assumptions regarding deaths from other causes, 
the number of persons living with HIV continues to grow by several 
thousand per year.
                    the cost of antiretroviral drugs
    Since 1987, the FDA has approved 25 new molecular entities in six 
classes of antiretroviral drugs, or roughly one new product per year. 
These drugs are normally taken in 3 or 4 drug combinations, according 
to the relevant treatment guidelines. Over time, patients may develop 
resistance or suffer from the side effects of a particular regime. 
Given the advantages of some of the newer drugs, and the continued 
monitoring of treatment, the standard of care is periodically revised. 
Some of the older AIDS drugs have gone off patent, and are available 
from generic suppliers, but as the standard of care has evolved, there 
is a focus on the newer drugs that are still protected by patents or 
other intellectual property rights.
    For U.S. consumers, the cost of commonly used AIDS drug regimes has 
increased significantly. In 2000, the combination of d4T+3TC+NVP was 
available at just over $10,000 per year. Today the four recommended 
regimes for treatment naive patients range have an average wholesale 
price of $25,000 to $35,000 per year, and ``salvage'' regimes for 
patents that have developed resistance to several drugs are often far 
more expensive.




    The AWP of the products bears no relationship to the costs of 
manufacturing. The range of prices for products varies considerably, 
particularly when expressed as the price per formulated active 
pharmaceutical ingredient (API). (See Table 2)
    In the United States, the leading HIV drug Atripla (TDF/FTC/EFV) 
sells for more than $57,000 per formulated kilo of active 
pharmaceutical ingredient (API). Pfizer and GSK sell Maraviroc in both 
150 and 300 mg tables, for the same price. Depending upon the dose, the 
price ranges from $63,000 to $126,000 per kilo of API. J&J's drug 
rilpivirine is sold for $9,653 per year in the United States, or $1.058 
million per formulated kilo of API. In contrast, outside of the United 
States, the best prices for the most commonly used generic AIDS drugs 
are between $212 and a $1,101 per kilo of API.\2\ If rilpivirine, a 
drug with a daily dose of only 25 mg per day, was available from 
competitive suppliers as a generic drug in large quantities, it would 
likely be available for less than $10 per year from manufacturers.
---------------------------------------------------------------------------
    \2\ Prices for generic drugs outside the United States depend upon 
economies of scale and the number of generic suppliers. Because of the 
complicated intellectual property rights for AIDS drugs, the number of 
patients who were treatment naive, and the severe resource constraints 
in most developing countries with significant incidence of HIV 
infections, only a handful of the current set of antiretroviral drugs 
are manufactured in large quantities in developing countries, and all 
of these products are now available at less than $1,000 per kilo of 
API. If the United States was to adopt the HIV/Prize Fund legislation, 
the number of affordable generic antiretroviral drugs would be 
expanded, and include more of the products registered by the FDA since 
2005, the year the WTO required patents be granted for pharmaceutical 
products.
---------------------------------------------------------------------------
    With efficient procurement and distribution, it would not be 
difficult to obtain generic supplies of many AIDS drugs from 
manufacturers for 1 to 3 percent of the U.S. prices, or less than 
$1,000 per formulated API.



                lack of price competition in u.s. market
    Even with the extensive intellectual property rights protection in 
the United States for antiretroviral drugs, one might expect more price 
competition, particularly for similar drugs within the same therapeutic 
class, available from eight different manufacturers. The U.S. FDA has 
approved 8 Nucleoside Reverse Transcriptase Inhibitors (NRTIs), 11 
protease inhibitors (PIs), 5 Nonnucleoside Reverse Transcriptase 
Inhibitors (NNRTIs), and drugs in three new classes of drugs (fusion 
inhibitors, entry inhibitors--CCR5 co-receptor antagonists, and HIV 
integrase strand transfer inhibitors). Even though these products have 
medical differences, there is enough similarity and substitutability to 
expect some price competition, but prices are still quite high, and 
have increased over time, despite the growth of registered products and 
the expiration of patents for some older products. There are several 
explanations for the paucity of price competition among manufacturers, 
including the fact that end users are often insulated from price 
differences by third party reimbursement agents, and because the 
medical differences can be important for some patients, and it is 
unwise to frequently switch drug regimes, among and between classes of 
antiretroviral drugs. However, another reason is that there is a great 
deal of collusion between drug manufacturers, both for AIDS drugs and 
treatments for other diseases. BMS, Gilead, Merck, Pfizer, J&J, GSK and 
Abbott all cross license products from each other. Pfizer and GSK 
recently combined their HIV products to be managed by ViiV Healthcare. 
For several products, global rights for the same drug are split among 
companies in different parts of the world. For example, BMS sells EFV 
in the United States as a stand-alone product under the brand name 
Sustiva, and combines EVF with two other drugs in Atripla, a 
combination product sold by Gilead. Merck sells EFV outside of the 
United States under the brand name Stocrin. Roche sells Viracept in 
Europe, and ViiV sells the drug elsewhere, including in the United 
States. The fixed dose combination Complera includes rilpivirine, a J&J 
product, with the Gilead drugs TDF and FTC. GSK and Gilead have an 
agreement to commercialize TDF for chronic hepatitis B in several Asian 
countries. Abbott, Pfizer, GSK and Merck recently announced various 
collaborations to develop diagnostic tests for cancer. These are just a 
few of the cross licensing and marketing agreements between the 
companies that ``compete'' in the U.S. antiretroviral market.
           rate of growth of market for antiretroviral drugs
    In 2011, IMS reported sales of $9.782 billion for the top 15 
antiretroviral drugs for HIV/AIDS, based upon average wholesale 
receipts, before off invoice discounts and rebates. This is up from 
$8.799 billion in 2010, an increase of 11.2 percent in 1 year, 
following a trend of double digit increases in national outlays on 
antiretroviral drugs.

                   Rate of Increase in U.S. ARV Sales
------------------------------------------------------------------------
                         Year                           Percent increase
------------------------------------------------------------------------
2007.................................................               10.7
2008.................................................               14.5
2009.................................................               15.5
2010.................................................               12.2
2011.................................................               11.2
------------------------------------------------------------------------

    Assuming 1.2 million persons living with HIV, and 36 percent of the 
current HIV+ population receiving ARV drugs, this amounts to $8,151 per 
HIV+ person, and $22,643 per person receiving ARV drugs. Any effort to 
implement treatment as prevention would dramatically change the rates 
of increase.
                      patients receiving treatment
    Historically, several factors have influenced the numbers of 
persons on treatments. In the past, given the high cost of drugs and 
the side effects from taking drugs, the primary considerations were the 
patient CD4 count or other measures of patient health, as well as 
patient awareness of infections. Over time, there have been stronger 
arguments for beginning ART earlier, both to improve patient outcomes, 
and also lower rates of reinfection. New ``treatment as prevention'' 
norms may lead to a dramatic increase in the numbers of patients who 
would be using drugs, including in some scenarios, patients who are not 
HIV+ themselves, but: who are having sex with persons who are HIV+.
    Estimates of the number of patients actually receiving treatments 
in the United States vary. CDC estimates that more than one in five 
persons living with HIV do not even know they are infected. One 
recently published study estimated that only 24 percent of persons 
living with HIV in 2006 were regularly receiving ART.\3\ The CDC 
recently estimated the number of persons receiving ART to be about 36 
percent of the HIV-positive population.\4\ The Kaiser Foundation puts 
the percent of persons ``not in regular care'' at 50 percent of those 
diagnosed with HIV,\5\ or about 40 percent of persons who are HIV+.
---------------------------------------------------------------------------
    \3\ Gardner EM, McLees MP, Steiner JF, Del Rio C, Burman WJ., The 
spectrum of engagement in HIV care and its relevance to test-and-treat 
strategies for prevention of HIV infection. Clin Infect Dis. 2011 Mar 
15;52(6):793-800.
    \4\ New Hope for Stopping HIV, CDC Vitalsigns, December 2011. 
http://www.cdc.gov/VitalSigns/HIVtesting/index.html.
    \5\ Fact Sheet: The HIV/AIDS Epidemic in the United States, March 
2012.
---------------------------------------------------------------------------
    Some health experts are calling for dramatic increases in the 
numbers of persons receiving antiretroviral drugs.
    One obvious factor in access to treatment is the availability of 
insurance or reimbursements for the many persons living with HIV that 
have low incomes. Many of those patients now seek to obtain treatment 
from various federally funded or subsidized programs, including the 
State-run and co-funded AIDS Drug Assistance Programs, known as ADAPs.
                         adap cost-containment
    In recent years, the ADAP programs have faced a difficult crisis in 
funding. One aspect of the crisis has been waiting lists in several 
States. According to the National ADAP Monitoring Project, in 2011, 14 
States reported waiting lists for treatment, reaching 9,298 individuals 
by September 1, 2011. Since then, special Federal appropriations were 
made available which helped at least temporarily lower the numbers on 
waiting lists. As of May 3, 2012, there were 2,704 individuals who have 
registered and qualified for treatments, but are on waiting lists in 10 
States.
    Since September 2009, six State ADAP programs have lowered the 
standards for financial eligibility, in order to control costs. 
Illinois, North Dakota, Ohio and South Carolina lowered the eligibility 
level to 300 percent of the Federal Poverty Level (FPL). Utah now uses 
250 percent of FPL, and Arkansas uses 200 percent. The previous 
standard as 400 percent of the FPL. The changes led to the 
disenrollment of 445 individuals in Arkansas (99), Ohio (257), and Utah 
(89). Illinois, North Dakota, and South Carolina grand fathered 
existing clients, and will only apply the new income standards to new 
applicants.
    As demand ``has not dwindled,'' ADAP Watch predicts ``the waiting 
lists will likely plateau and grow again in the coming months,'' and 
more cost containment measures are anticipated.
    In addition to wait lists and lowered standards for incomes, ADAP 
Watch reports the following cost control strategies have been 
implemented from April 1, 2009, to April 11, 2012:

      Alabama: reduced formulary, capped enrollment.
      Arkansas: reduced formulary.
      Florida: reduced formulary, transitioned 5,403 clients to 
Welvista from February 15 to March 31, 2011.
      Georgia: reduced formulary, implemented medical criteria, 
participating in the Alternative Method Demonstration Project.
      Illinois: reduced formulary, instituted monthly 
expenditure cap ($2,000 per client per month); disenrolled clients not 
accessing ADAP for 90-days.
      Kentucky: reduced formulary.
      Louisiana: discontinued reimbursement of laboratory 
assays.
      Nebraska: reduced formulary.
      North Carolina: reduced formulary.
      North Dakota: capped enrollment, instituted annual 
expenditure cap.
      Puerto Rico: reduced formulary.
      Tennessee: reduced formulary.
      Utah: reduced formulary.
      Virginia: reduced formulary, restricted eligibility 
criteria, transitioned 204 clients onto waiting list.
      Washington: instituted client cost sharing, reduced 
formulary, only paying insurance premiums for clients currently on 
antiretrovirals.
      Wyoming: capped enrollment, reduced formulary, instituted 
client cost sharing.
      ADAPs Considering New/Additional Cost-containment 
Measures (before March 31, 2013***).
      Alaska: reduce formulary.
      Arizona: instituting client cost sharing.
      California: instituting client cost sharing.
      Georgia: instituting client cost sharing.
      Virginia: enrolling clients into PCIPs.

    At present, the USA faces a growing crisis in treatment for HIV/
AIDS, and it is directly associated with the intellectual property 
right system. What was once a relatively small population of persons 
with a ``rare'' disease is now a health condition for more than 1.2 
million persons. As the population of persons living with HIV grows, 
and the prices for products rise, patients face increasing barriers to 
access, and society as a whole finds it harder to bear the cost. It is 
highly unlikely that the United States will achieve adequate coverage 
of patients, at best standards of care, unless we try something 
radically different.
                    the hiv/aids prize fund approach
    The HIV/AIDS Prize Fund Approach is a radical change from the 
existing system, and for HIV/AIDS, that is a good thing. By de-linking 
R&D costs from drug prices, the Prize Fund makes it possible to 
eliminate price sensitive drug formularies and other ADAP cost-
containment measures, dramatically reduce the burden on employers and 
others who pay for AIDS drugs, and make the new ``treatment as 
prevention'' strategies feasible. The Prize Fund would also 
dramatically reform and improve the economic incentives for drug 
developers, including by providing new incentives to open source and 
share research on new treatments for AIDS.
                        the old incentive system
    At present, we grant time limited legal monopolies to make, sell, 
distribute and use new drugs and vaccines. Following extensive lobbying 
by drug developers, the time limits on these monopolies continues to 
grow, as do the many ways that such monopolies can be claimed. For AIDS 
drugs, patents on new compounds, new uses of old compounds, methods of 
heat stabilization, the use of gel tabs and enteric coatings on pills, 
fixed dose combinations, and countless minor improvements in products 
receive patent protection, exclusive rights to test data, orphan drug 
exclusive marketing rights, and other legal monopolies. Collectively 
these monopolies lead, very predictably to high prices, aided by both 
tacit and explicit collusion among leading AIDS drug developers. Faced 
with aggressive monopolies on the selling side, reimbursement agencies 
either shift huge costs to others, or find ways to limit access to 
treatment. The cost of legal monopolies for AIDS drugs in the United 
States was probably well over $8 billion in 2011. Despite the huge 
outlays, only about one new drug per year has been registered, and most 
of these have been medically unimportant me-too products. If the annual 
cost of the monopoly is currently more than $8 billion, and growing, 
this is an expensive way to pay for innovation.
                        the new incentive system
    The Prize Fund for HIV/AIDS proposes more than $3 billion per year 
in prize fund rewards. This would provide ample incentives for the 
development of new products, and also implement a much more efficient 
reward design, by tying innovation rewards to improvements in patient 
outcomes, when benchmarked to existing medicines. This single change in 
the incentive system would dramatically refocus private sector R&D 
toward projects that were medically more important.
    The $150 million in open source dividends would dramatically 
enhance the speed at which we introduce medically superior treatments.
    If implemented in the United States, the prize fund would 
dramatically expand access, allowing us to reverse the rate of growth 
in infections, stimulate development of better products, and 
potentially save taxpayers and employers more than $5 billion per year.
    The size of the prize fund for HIV/AIDS would be 0.02 percent of 
the gross domestic product of the United States. The money for the 
prize fund would come from governments and health insurance providers, 
according to:

     The ratio of the number of persons receiving treatments 
for HIV/AIDS that are insured in the private sector to the number of 
persons receiving treatments for HIV/AIDS who received insurance or 
reimbursements or care from the public sector.
                              prize design
    The prize fund money would be used to pay for:

    End product prizes. These are rewards for products that receive FDA 
approval and which are used to market. To be eligible to receive an end 
product prize a person shall be:

    (1) in the case of a qualifying treatment for HIV/AIDS that is a 
drug or biological product, the first person to receive market 
clearance with respect to the drug or biological product;
    (2) in the case of a manufacturing process for a qualifying 
treatment for HIV/AIDS, the holder of the patent with respect to such 
process;

    Section (b) of the bill sets out a number of criteria for such 
prizes. Among them:

          A new product or process is eligible to receive such 
        prizes for 10 years.
          The prizes would be based upon the number of patients 
        using products, and the ``incremental therapeutic benefit of 
        the qualifying treatment,'' bench-
        marked against existing therapies, or for the benefits of the 
        new process.
          There would be a cap on the amount that any single 
        product could receive.

    Open Source Dividend Prizes. At least 5 percent of the prize money 
will be allocated to ``open source dividends,'' to reward ``the persons 
or communities that openly shared knowledge, data, materials, and 
technology on a royalty-free and nondiscriminatory basis.'' The system 
for managing the open source dividends would include ``time-limited 
period of nominations for persons or communities whose contributions 
were considered useful, including the evidence to support such 
nominations to describe the significance of the contribution.'' These 
prizes, which would be greater than $150 million per year at current 
levels of GDP, would create a powerful economic incentive to open 
source knowledge, data, materials and technology, which should directly 
benefit product developers.
    Decentralized management of upstream prizes, by competitive 
intermediaries. The prize fund will have the possibility of authorizing 
multiple non-profit entities to manage parts of the prize fund, to 
either manage some of the funds for the open source dividend prizes, or 
to give prizes for upstream R&D projects. This money will be given to 
``communities that provide open, nondiscriminatory, and royalty-free 
licenses to relevant intellectual property rights.''
    The competitive intermediaries would be funded by private sector 
employers.

         Section 10(a). Such intermediaries shall compete for 
        funding from non-Federal entities that co-fund the Fund.

                 background on the prize fund approach
    The ideas presented in S. 1138, for rewarding innovation with cash 
prizes rather than monopolies, is both old and new. KEI has a web page 
with extensive background on the use of innovation inducement prizes 
here: http://www.keionline.org/prizes. While prizes have been used to 
stimulate and reward innovation both before and after the patent system 
was developed, interest in prizes as a mechanism has increased sharply 
in recent years.
    Academic work on innovation prizes was reinvigorated by the work by 
Brian Wright in 1983, and Michael Kremer, Steven Shavell and others in 
the 1990s,\6\ as well as by the pioneering efforts of Michael Kremer 
and his collaborators to fashion new prize type mechanisms (the Advance 
Purchase Commitment and Advanced Marketing Commitment models) to reward 
development of new treatments for malaria and other diseases. Also, 
following interest in the crisis in the AIDS market, Dean Baker began 
to question the economic efficiency of monopoly rewards for new drug 
development--proposing as an alternative expanded direct government 
funding of drug development.
---------------------------------------------------------------------------
    \6\ 1983. Brian Wright. The Economics of Investment Incentives: 
Patents, Prizes, and Research Contracts. American Economic Review. 73: 
691-707, 1998. Michael Kremer. ``Patent Buyouts: A Mechanism for 
Encouraging Innovation.'' Quarterly Journal of Economics 113: 1137-67, 
2001. Steven Shavell and Tanguy van Ypersele. ``Rewards versus 
Rights.'' Journal of Law and Economics. 44: 525-547. Previously 
published as ``Rewards versus Intellectual Property Rights.'' 1998 
Harvard Law School, Olin Center for Law, Economics & Business, 
Discussion Paper No. 246. Also, see: http://keionline.org/prizes/cites.
---------------------------------------------------------------------------
    In 2002, Tim Hubbard and I were invited by Aventis, the 
pharmaceutical and life sciences company now owned by Sanofi, to meet 
with top level executives to develop scenarios for drug development 
that did not depend upon patents or other legal monopolies. By the end 
of 2002, Tim Hubbard and I developed, with the collaboration of several 
Aventis executives, a new paradigm for drug development that included 
three major features--a global R&D treaty to address the need to 
address the sustainable sharing of R&D costs, the use of innovation 
inducement prize funds to reward successful innovations, and the 
creation of new ``competitive intermediaries'' funded by employers, 
insurance companies, or individuals (under mandates), to provide 
funding for various open source and upstream R&D projects or 
achievements. This was meant to co-exist and complement existing 
government grant and contract programs, like those administered by the 
NIH. This work was further developed in articles and research papers 
and presented at a series of workshops and seminars from 2002 to 2004, 
including two at Columbia University with Jeffrey Sachs.
    The notion of de-linking drug development incentives from product 
prices was independently being developed by others, such as the 
economist Burton Weisbrod, who wrote an editorial in the Washington 
Post on the topic in August 2003.\7\ Will Masters was also developing 
similar prize fund models to reward innovations in agriculture.
---------------------------------------------------------------------------
    \7\ Burton Weisbrod. ``Solving The Drug Dilemma.'' Washington Post, 
August 22, 2003.
---------------------------------------------------------------------------
    The key challenges in developing the prize fund approach were to 
address the sources of sustainable funding for the prize fund, and to 
explain how prize payments were set when the path to innovation was 
uncertain, the risk-adjusted costs of development was unknown and/or 
variable, and the true value of the products are unknown at the time of 
product development.
    Hubbard and I proposed a competitive model, where the amount of the 
prizes themselves would be determined by the supply and demand for 
innovation, by competing for shares of a prize fund of a fixed size. 
Anticipating that valuation of innovations was difficult when products 
were new, Hubbard and I proposed a system whereby innovations were 
eligible to compete for prize fund shares every year for 10 years, 
adjusting claims each year on the basis of best evidence of utilization 
and benefits of innovations.
    The valuation of the ``end product'' prizes would be based upon the 
incremental impact of the innovations on health outcomes, compared to 
older bench-marked products, subject to the flexibility to have non-
linear payoffs, caps on rewards, the use of option pricing models to 
capture the benefits of redundancy for products that might fail or be 
held in stockpiles, and other nuances. Given the stochastic nature of 
innovation, and the ability of developers to pool risks, the system 
would work if the size of the prize fund was large enough, and if the 
anticipated payoffs were closely enough correlated to social values of 
innovation.
    To address the challenges of valuing pre-commercial innovations, 
Hubbard and I proposed systems of competitive intermediaries, that need 
only justify their valuations to entities (employers, insurers or 
individuals) that choose the intermediary.
    In 2004, Representative Sanders expressed interest in drafting a 
bill to implement a version of the prize fund approach for the U.S. 
market. H.R. 417 was subsequently introduced in the 109th Congress. The 
Sanders bill included several of the basic ideas that have been 
incorporated in several subsequent proposals on prize fund.

     The bill did not eliminate the patent system, but did 
eliminate the patent monopoly once products were registered for sale 
with the FDA. Patents still could be used to establish claims on the 
prize fund rewards, and drug developers could also receive rewards even 
without patents.
     The valuation was based upon the incremental value of the 
innovation, benchmarked against older products.
     Products participated in the prize fund for 10 years, 
competing against each other for shares of a fund of fixed size.

    Subsequent to the development of the Sanders bill, there was a 
proliferation of various prize fund proposals, including several in 
2008 and 2009 in the context of the work of the World Health 
Organization (WHO) on public health, innovation and intellectual 
property rights, a 2004 proposal by Aidan Hollis for a voluntary 
mechanism that was later transformed into the 2009 Health Impact Fund 
proposal with Thomas Pogge, and a growing literature on medical prizes 
from a diverse group of other academics, practitioners and journalists, 
including, for example, Joe Stiglitz, Carl Nathan, Thomas Erren, Ron 
Marchant, Joseph DiMasi and Henry Grabowski, Stan Finkelstein, Peter 
Temin, Sara E. Crager, Matt Price, Jorn Sonderholm, Paul Hynek, Talha 
Syed, Terry Fisher, Thomas Erren, Adam Mann, Hafiz Aziz ur Rehman, Paul 
Wilson, Amrita Palriwala, Richard Bergstrom, A. Gandjour, N. Chernyak, 
Jan Keunen, Evert van Leeuwen, Gert-Jan van der Wilt and Tina 
Rosenberg, to mention a few.
    Among the several papers on this topic that I have co-authored, 
particularly relevant are:

      2009. James Love and Tim Hubbard. ``Prizes for Innovation 
of New Medicines and Vaccines.'' 18 Annals of Health Law. 155.
      2007. November. James Love and Tim Hubbard. ``The Big 
Idea: Prizes to Stimulate R&D for New Medicines.'' Chicago-Kent Law 
Review. Volt. 82, no. 3.
      2005. James Love and Tim Hubbard. ``Paying for Public 
Goods.'' In Code: Collaborative Ownership and the Digital Economy. 
Edited by Rishab Aiyer Ghosh. MIT Press, Cambridge. 207-229.
      2004. James Love and Tim Hubbard. ``A New Trade Framework 
for Global Healthcare R&D.'' PLOS Biology. 2(2): e52.
      2003. A New Trade Framework for Global Healthcare R&D, 
Access to Medicines and the Financing of Innovations in Health Care, 
Paper presented at Workshop Hosted by the Program on Science, 
Technology, and Global Development, The Earth Institute at Columbia 
University, and the Consumer Project on Technology, Washington, DC, 
December 4.
      2003. James Love. ``From TRIPS to RIPS: A Better Trade 
Framework to Support Innovation in Medical Technologies.'' Paper for 
the Workshop on Economic issues related to access to HIV/AIDS care in 
developing countries, Agence nationale de recherches sur le sida, 
Marsielle, France, May 27.

    The 2009 articles in the Annual of Health Law provide the most 
concise explanation of the evolution of the core prize fund design 
features that are found incorporated the S. 1138, including the bill's 
open source dividend and competitive intermediaries proposals. The 
rationale for competitive intermediaries is also discussed in the 
article in Code.
    I also highly recommend the new April 2012 report by the World 
Health Organization's Consultative Expert Working Group on R&D, which 
discusses the issue of de-linkage at some length.
                      the international dimension
    While my testimony has focused on the domestic aspects of S. 1138, 
the international dimension is quite important. There are tens of 
millions of poor people living in developing countries who are HIV+ and 
who will die without sustainable access to treatment. Since the WTO 
rules on drug patents were enforced in 2005, it has become increasingly 
difficult to obtain affordable generic versions of AIDS drugs in 
developing countries. Not only would S. 1138 greatly benefit people 
living in the United States, but it would radically transform the 
market for AIDS drugs throughout the world, and make a vast 
contribution to the struggle to make treatment for HIV/AIDS sustainable 
for tens of millions of poor people living outside the United States.

    Senator Sanders. Well, thank you very much.
    Let's do this informally. Let me start off with an ethical 
question.
    And I noticed, Dr. Lessig, in your biography, among many 
other achievements, you deal with ethics. I think the average 
American would be extremely upset to know that people are 
dying, not because we don't know how to treat those people--
that's one sad aspect of life--but that they can't afford what 
is, in fact, a minimal cost in terms of the real production of 
the product to save their lives. It's like somebody over there 
dying and nobody's going out and reaching out a hand and 
bringing them in. They're drowning in a swimming pool.
    What are the ethical implications of that?
    Mr. Lessig. Of course, I agree that there's a significant 
ethical question raised by the problem you describe of somebody 
not voluntarily stepping forth and saving a drowning child. But 
I think this problem is actually worse, because as Jamie was 
just emphasizing, the government is intervening in this market 
already. Its intervention is in the form of an exclusive right 
called a patent. The consequence of that intervention is to 
produce a market where only a tiny slice of those who are 
affected by the disease can actually get access to the drug.
    There's a different way for the government to intervene. 
The government could intervene, as Professor Stiglitz has 
described and as your bill has made possible, in a way that 
would facilitate a wide range of people being able to have 
access to the drug.
    So I think the precise ethical question is when you have 
two modes of intervention, and you select one that certainly 
will exclude the vast majority of people who need access to 
this drug, what possible justification could there be for that? 
And I don't think there is.
    Senator Sanders. In other words, the government is 
proactively preventing people from getting the treatment.
    Mr. Lessig. By choosing one mode of intervention over the 
other.
    Senator Sanders. Other comments on the ethical implications 
of what we're talking about?
    Mr. Stiglitz. I would just add one thing, which is the 
government winds up paying for the research, anyway. So it's 
the public's money. The effect and the way the system is 
designed, the public's money is not being used in an equitable 
way.
    Senator Sanders. Well, let me add to that. And tell me what 
I'm missing here. Ideally, I think what medicine is about is 
providing the treatment when people need it. And we've got a 
couple of physicians up here, at least.
    And, Dr. Akhter, if somebody does not get the medicine that 
they need, and their illness continues, and they end up in the 
hospital, at a huge expense, are we saving money as a system by 
not providing the medicine when somebody needs it? What are the 
financial implications of this?
    Mr. Stiglitz. Mr. Chairman, we see this every day. I mean, 
it's obviously a lot more expensive when somebody gets to the 
hospital and then has to be in the intensive care unit. And 
then you spend hundreds of thousands, if not millions of 
dollars, to really no avail. There's no good outcome at that 
point.
    And so it is basically foolish to be in that position when 
you could do some preventive work up front, when you could 
provide the medication. Not only do you save the person's life, 
but also you prevent the transmission of the disease to the 
others. So you are not only providing a treatment to the 
individual, but you're also protecting the society, and I think 
that is the bigger question for us to discuss.
    Senator Sanders. So for $200, roughly speaking, for the 
HIV/AIDS cocktail--by not providing that $200, somebody will 
end up at the hospital, suffer--a great financial cost to the 
society. That does not make a whole lot of sense, I think.
    Mr. Stiglitz. That does not make economic sense. It does 
not make professional sense, from a medical standpoint. But 
that also does not make public health sense----
    Senator Sanders. Right.
    Dr. Stiglitz [continuing]. When you are leaving this 
individual untreated, and the person continues to spread the 
disease to others.
    Senator Sanders. All right. Other thoughts on that general 
subject?
    Mr. Oldham.
    Mr. Oldham. Yes. I think that--one of the things we 
mentioned was that we're living in a time of treatment as 
prevention. Well, if the treatment is going to be $25,000 as 
opposed to $200--300,000 people of the 1.2 million don't know 
they're infected. So if we increase testing, if we go by the 
national AIDS strategy, and try to get them in treatment, we 
have to be able to afford to do that. So this legislation would 
make that more possible.
    Senator Sanders. OK. Other thoughts--yes.
    Mr. Love.
    Mr. Love. We've been told of cases where--some 
jurisdictions where people are not tested to see if they're 
HIV-positive while they're inmates in prison until they're 
released, because the institution doesn't want to bear the high 
cost of paying for the drugs.
    Senator Sanders. I mean, it really would be--responding to 
that would be--I mean, it really is laughable if it wasn't so 
tragic, isn't it? Imagine that--not diagnosing somebody because 
you can't afford to pay for their treatment.
    Ms. Moon.
    Ms. Moon. Thank you. I think the point that the--the 
importance of prevention and the huge positive externalities of 
preventing new infections both in this country as well as 
worldwide has been well emphasized. And if we imagine how the 
public would react if an AIDS vaccine was developed and it was 
priced at $25,000 or $35,000 per person per year, I think that 
really drives home some of the ethical quandaries that we're 
facing, some of the big challenges.
    But I wanted to get back to the point that Professor Lessig 
raised regarding the fact that IP systems are, in fact, 
government interventions in the market. The U.S. Government 
does intervene in the market here in the United States. But we 
also know that the U.S. Government has been pushing for more 
stringent IP standards worldwide, including in developing 
countries, starting in the 1980s with the negotiation of the 
TRIPS agreement, and, more recently, through demanding certain 
types of provisions in free trade agreements that are being 
negotiated, demanding higher and higher and higher IP 
standards, knowing full well what the implications are for 
access to medicine. So I think the ethical questions reach far 
beyond the damages to our own society here at home and stretch 
really worldwide.
    Senator Sanders. All right. Let me ask you, Dr. Moon, a 
dumb-bunny question of which I know the answer, but some people 
watching this on TV may not know. Why is that? What are the 
economic forces involved here? Is it an accident that the U.S. 
Government is telling poor people around the world and their 
governments essentially what you're saying, that they're going 
to have to pay more for drugs to keep people alive? How does 
that happen?
    Ms. Moon. Well, I think there are others on this panel who 
can speak more regarding--speak more on the problems with the 
way our own government is functioning and the way that our own 
trade policies are designated--sorry--are decided upon. But I 
think one rationale that has been put forward for why it is in 
the U.S. interest to push for stronger IP standards abroad is 
the idea that we want other countries to pay higher prices for 
medicines to, therefore, contribute more to research and 
development. That's the rationale that's been given.
    Of course, whether or not that's effective, and whether or 
not that is acceptable in countries where people are living on 
$100 per year, $200 per year, is another issue altogether, but 
what I think is quite interesting to consider today is that 
there are, in fact, interesting alternatives that have been put 
on the table. Next week at the World Health Assembly, 193 
member States will come together and debate the recommendation 
that governments come together and start to negotiate a binding 
convention for R&D which would set more predictable, 
sustainable, and fair methods for sort of calculating 
contributions for every country to contribute to R&D so that we 
don't have to rely on high prices.
    Senator Sanders. Anyone want to add to the question of how 
it just so happens that the U.S. Government goes around the 
world telling developing countries that they have to pay, in 
some cases, prices for drugs that their people simply cannot 
afford?
    Dr. Stiglitz.
    Mr. Stiglitz. First, let me just highlight the seriousness 
of this issue. We have bilateral trade agreements with a number 
of countries and propose them with others. One of the 
developing countries that we had proposed an agreement with 
was--the president was a doctor, and he had given the 
Hippocratic oath to do no harm. And I explained to him that it 
was inconsistent with that for him to sign the bilateral trade 
agreement with the United States, because by doing that, it 
would deny access to lifesaving medicine to his people.
    The reason these provisions are included is obviously 
clear. The U.S. special interest--these are not free trade 
agreements that we have. They're managed trade agreements--if 
they were free trade agreements, they would be a couple of 
pages long--we get rid of all our trade barriers; you get rid 
of all your trade barriers; all our subsidies; their subsidies. 
These go on, as you know, for hundreds of pages, because they 
are really special interest pieces of legislation.
    And a special interest that has played a very important 
role in shaping trade negotiations are intellectual property 
interests--entertainment industries and the drug companies, 
particularly. And their concerns have been more to maximize the 
rents that they get out of their drugs than maximizing 
innovation or maximizing the health of the world.
    An example of a provision of particular concern goes well 
beyond issues of patents--goes to issues like data exclusivity, 
which means that in other countries, they cannot use data, even 
when it's partly financed by the U.S. Government, to license 
generic drugs that would provide the basis--that are equivalent 
and that would enable poor people in their countries to get 
access to drugs, as you pointed out, at as little as 1 percent 
of the cost of the patented drugs. The whole structure of many 
of these agreements is to discourage generic medicines and, 
therefore, to make medicine less accessible, which means to 
hurt health.
    Senator Sanders. Well, let me jump from--yes.
    Mr. Love.
    Mr. Love. To answer that, the policy of really going after 
medicine really took off in the 1980s, initially. But then 
toward the end of resident Clinton's term, there was this 
activism by AIDS activists particularly about access to AIDS 
drugs in Africa. And Vice President Gore and President Bush--
they moderated their position. President Clinton issued an 
Executive order.
    And to the surprise of a lot of people, George Bush kept a 
lot of those reforms in the early part of his Administration. 
He endorsed the Doha Declaration on TRIPS and Public Health in 
2001. And on May 10, 2007, he entered into an agreement with 
the Democrats in the House of Representatives to protect access 
to medicine in developing countries that it dealt with by 
eliminating the requirement for data exclusivity in developing 
countries. That was the agreement they reached to moderate 
their demands on patent extensions and other issues.
    Now, the Obama administration is in a new trade agreement, 
called the Trans-Pacific Partnership Agreement, right now. 
They're meeting this week in Dallas--they're meeting in Dallas 
as we speak on this issue. The Obama administration is now 
reneging on the May 10 agreement. They're now re-upping the 
demands for data exclusivity and patent extensions. Vietnam is 
part of that negotiation. Peru is part of that negotiation. You 
know, it's designed to affect very poor countries.
    The new proposal the U.S. Government has is called the TEAM 
proposal, something or other, on access to medicine. It's 
secret, except if you're a drug company lobbyist, then you can 
be on a cleared advisory board and you have access to that 
information. And they refused to present the text that the 
United States is proposing on this to ordinary citizens and 
taxpayers. It's only available if you can find yourself on one 
of these cleared advisory groups that the U.S. Government has.
    I had one other point, and that is that India recently 
issued a compulsory license on a patent for a cancer drug 
called Nexavar. The drug was priced at $69,000 per year for 
cancer patients for kidney and liver cancer in India, a country 
that recently had a per capita income of $1,300 a year. The 
government said that $69,000 a year in India was not reasonably 
affordable. And I certainly agree with that conclusion.
    Now, subsequently, the Secretary of Commerce of the United 
States traveled to India a few weeks ago and met to complain 
about this, and then Ron Kirk, the U.S. trade representative, 
listed this issue on the recent May 1-April 30 version of the 
new Special 301 Report. So, yes, it's a huge problem.
    And I think one way I'd sort of think about this is in the 
United States, we're increasing the IPR protection, and we're 
raising the prices--internationally, we do it. Nobody thinks 
it's enough to do anything about. It's like we're a frog that's 
being put in a pot of water where it's being turned up 1 degree 
at a time, and we're just going to be cooked.
    If you look at where we're going to be 20 years from now, 
the IPR system today for drugs is worse than it was 5 years 
ago. It's worse than it was 10 years ago. You have to ask 
yourself where is it going to be 20 years from now? This bill 
is an attempt to build a bridge for the future so the future is 
something that's consistent with human rights, consistent with 
universal access, consistent with our values.
    Mr. Lessig. Can I just add one point? As Jamie's 
intervention makes clear, it's a problem that doesn't afflict 
one party in this government. So let me amend my comments about 
the uniqueness of this event. It's also significant that this 
is an independent Senator raising this issue, because, 
obviously, the need to keep the IP interests--both 
pharmaceutical companies and Hollywood--happy is something that 
both the Democrats and the Republicans are addicted to. And 
there's no way out of that particular addiction so long as we 
have this structure of funding.
    Senator Sanders. Let me just pick up on that. A number of 
years ago, when I was in the House of Representatives, I went 
on a congressional delegation to South Africa, and it was 
bipartisan, tripartisan. And I will never forget sitting in a 
room with the president of South Africa--that was after 
Mandela--and he was being berated, berated, for standing up to 
the pharmaceutical industry at that time and suggesting that 
the people in his very, very poor country needed drugs that 
they could afford. And he was being attacked by Democrats and 
Republicans.
    So you're right. I think this is very much a bipartisan 
concern.
    I want to jump to another issue. I speak now as a member of 
the Budget Committee and a former mayor of a city.
    Dr. Akhter, when we talk about very, very expensive 
treatments for HIV/AIDS at a time when we know the same 
treatment is available abroad because of U.S. funding, by the 
way, at 1 percent of the cost, what does it mean--DC has--you 
have educational problems, you have infrastructure problems, 
and every State in the country--virtually every State is 
feeling serious financial constraints right now. What does it 
mean to be paying very, very high prices for medicine when you 
know that it should be available at a much lesser price?
    Dr. Akhter. Mr. Chairman, with the current prices, they are 
neither affordable nor sustainable, not only in Washington, DC, 
but any other State. This is a major cost driver for us, as 
over the number of years, the number of patients will continue 
to increase, and the cost will continue to increase. And if the 
current way continues, who knows where it will end up?
    Ultimately, we will end up rationing in this country. Where 
we're seeing, right now, 9,000 people don't get it, maybe 
100,000 people will not get it. And that's where things are. 
But speaking strictly from the budgetary standpoint, it busts 
the budget. It's a budget buster. And unless the Federal 
Government does something--the city governments don't have much 
control over it.
    We have gone through every avenue that I know to get the 
discount prices, and that's how 9,400 came to be. We go through 
the Defense Department. We buy in bulk. We do this. But for a 
private citizen to go buy the drugs, a person who is uninsured, 
it could be $25,000 or $35,000 a year. This is not sustainable. 
And if you look at the lifetime cost, a minimum lifetime cost 
of $300,000, it is equivalent to the equity that people have in 
their homes--the average American living in Vermont or in 
Missouri will have in their homes. And so this is really not 
affordable, not sustainable.
    There's another issue, also. When costs are so high, people 
who have no health insurance or people who can't afford it--
they then go and try to buy it from other countries, try to 
smuggle it in, or try to come and register in Washington, DC, 
where the thing may be available, and end up doing something 
that's illegal. So we are asking people who are otherwise law-
abiding--they've been paying their taxes, they've been working 
very hard--we are asking them to do these illegal things 
because we don't have the medications available to them. And I 
think that's really a very fundamental human question in 
addition to the budget question.
    Senator Sanders. Let me jump to another issue. We have been 
talking about the impact of high costs on individuals, people 
dying because they can't afford the artificially high price. We 
talked about the problems facing city and State and Federal 
Government budgets.
    But let me go back to a question or an issue that Jamie 
Love raised as well, and that is, not only is the current 
system forcing--in some cases, mandating that people die 
because they can't afford the treatment, and cities to bear 
undue financial burden because of the high prices, but, 
apparently, the system isn't doing all that well in terms of 
new research and innovation. We are not seeing the kinds of 
breakthroughs--and I think others have mentioned--I think Dr. 
Stiglitz and others have mentioned that in many instances, drug 
companies could make more money from doing me-too products or 
investing in this, that, and the other thing, rather than 
investing in the most important health crisis facing Americans 
and people all over the world.
    Dr. Love, do you want to say a word on that? Or anybody 
else?
    Mr. Love. Well, I'm not a doctor, so I'll just set the 
record straight on that. But the good news is that there's been 
about 25 different new chemical entities that have come on the 
market in the last 25 years. That's a positive thing, because I 
think patients need a complicated mixture of products. They 
need a minimum of three in a highly active antiretroviral 
treatment. A lot of them use four products, and then some 
people use more than that.
    The feasible combinations are complicated, and people have 
resistance. And so it's a positive thing, you know, that 
there's been a pipeline of drugs. So I think everyone that 
works on these issues, at a very minimum, wants to protect the 
fact that there continues to be innovation, products with fewer 
side effects. The reality is, as I mentioned, 13 of the 15 
largest selling products are based on drugs that are at least 9 
years old.
    So given the fact that we're spending $8 billion a year to 
support the monopoly system on this, you know, and you maybe 
have two drugs on this thing that have come on the market since 
1999, I'd have to say the only way you could justify the 
economics of this is if you didn't really try and justify it 
compared to anything else. It has to be compared to flat earth. 
It has to be compared to absolutely nothing at all.
    It cannot possibly be compared to this prize system. And I 
know that the National Academies has been asked to look at 
this, and we're hoping that they'll take a deep look at it. But 
in terms of the thing--the most profitable products for 
companies are the chronic products that you take every day for 
the rest of your life. That's sort of the goal for a company, 
and they just try to get the total maximum--you mentioned 
lifetime earnings. It's exactly right. I mean, they want to 
look at what is a lifetime cap on insurance for somebody or 
something like that.
    But, obviously, with 1.2 million people that are HIV-
positive, a number that's headed north, you know, it just isn't 
really feasible to get the number of patients on here that you 
want. Now, what you want to have is products which--you want 
the money that you are spending, which is probably less than a 
half--I don't know what the exact numbers are.
    If you ask people how much is being actually spent on AIDS 
drugs, you'd say--if we're spending $9 billion in the United 
States on drugs or $10 billion on drugs or whatever the number 
is, you'd have to say, then, how much money are the companies 
reinvesting in R&D? Is it a billion dollars? Is it a half 
billion dollars?
    Senator Sanders. Do we know that?
    Mr. Love. No, you don't know. I mean, I think you could 
make some estimates based on the number of people in clinical 
trials and make some informed estimates about what's spent on 
these clinical trials.
    Senator Sanders. In other words, what you're saying is, at 
least, theoretically, what we would like is the drug companies 
to be investing in trying to find solutions to the most serious 
illnesses that we face.
    Mr. Love. Well, they do make investments. What we don't 
know, given the high cost of the system, is how much they do.
    Senator Sanders. Right.
    Mr. Love. In other words, if prices are higher by $8 
billion, how much of that trickles down into R&D, and is----
    Senator Sanders. Dr. Stiglitz, you are a doctor, right? So 
why don't you----
    Mr. Stiglitz. Not a real doctor, but----
    Senator Sanders. Not a real doctor, but it'll do for this 
committee.
    Mr. Stiglitz. The fundamental problem is that the 
incentives provided by our intellectual property system do not 
direct attention to the areas that are the most socially 
productive. And that's the fundamental problem. So if the 
returns are highest for a me-too drug that doesn't add any real 
value or very little value, that's what they're going to do. 
It's been proven successful. It divides somebody else's profits 
by half. And we know we can do it, because it's been proven.
    So the incentives for the direction of research do not 
accord in any way with social returns. It's particularly true 
if we look at this from a global point of view, because many of 
the diseases are diseases of poor people, and one of the 
attributes of poor people is they don't have money. And when 
you don't have money----
    Senator Sanders. Do you need to be an economist to know 
that? That's my question.
    Mr. Stiglitz. And the result of that is that they aren't 
going to be a profit center for--but we're all affected by 
that, because in world globalization, viruses and bacteria 
don't carry passports and don't know about visas to go across 
boundaries. So we can all be exposed to diseases that 
originate--that are, at one time, a disease of the poor, and 
they become diseases in the more advanced industrial countries.
    The broader point which Jamie has emphasized is if you look 
at the difference between what we pay--government, or we as a 
nation pay for drugs and the cost of production, that's a huge 
amount. I mentioned in my oral testimony studies that showed 
that the gap for the government alone is something like a 
quarter of a trillion dollars a year. Over 10 years, that's, 
you know, over $2 trillion. We're talking about how do we make 
up for our budgetary--this is a big potential.
    If all that money went into productive research, you might 
say, well, it was money well spent. But, in fact, a relatively 
small fraction of that money goes into productive research. 
More money is spent on advertising and marketing. And, as I 
again pointed out, much of that goes to trying to reduce the 
elasticity of demand, i.e., to increase market power, to 
increase monopoly profits, rather than to disseminate 
information to make sure our healthcare system is working 
better.
    Senator Sanders. Mr. Oldham.
    Mr. Oldham. Well, I just wanted to reiterate something, and 
that was that, you know, these two companies that have the 
therapeutic vaccines--they don't have the money to produce it. 
One of them now, Bionor in Norway, actually has a way--this 
works in human beings. But you have to have enough money to get 
through the second level of trials at FDA so that they could 
actually say that we have something that actually works, 
because some of these medications where you have to take such 
complicated regimens--and it's worth it, because it does save 
your life or it prolongs life.
    But with the vaccine, it may fit into being more realistic 
in people's lives, because if I'm feeling healthy and I have 
HIV, even at a high level, I'm not going to--I have to take 
care of family, raise money, do things like that. You may not 
adhere to your regimen. The therapeutic vaccine is a 
breakthrough that can make that kind of difference, and we 
don't have enough money to develop it.
    Senator Sanders. OK. Thank you.
    Yes, Dr. Moon.
    Ms. Moon. I think Mr. Oldham raises a very important point 
about prizes which we've not really touched on today, which is 
that the benefit of the prize mechanism is that, in fact, it 
opens up a problem to be solved to a much broader population of 
potential solvers than other methods. And I think what he has 
reminded us of is that despite the major advance that 
antiretroviral therapy does offer, it's far from perfect--it's 
difficult to maintain--and that there are, in fact, lots of 
other areas of scientific inquiry that could, in fact, yield 
benefits, and that mechanisms for innovation that are, in 
fact--that encourage risk taking, that encourage breakthrough 
innovation, are needed. And one of the strengths, really, of 
the Prize Fund, I think, is the possibility of encouraging 
solvers from everywhere, from every corner, to come forward and 
put their ideas on the table.
    Senator Sanders. OK. Does anybody--we've been here for an 
hour and a half, and I don't want to keep you longer than 
necessary. Is there anything that anyone wants to add or raise 
that we haven't touched upon?
    Jamie.
    Mr. Love. In my written statement, on pages 5 and 6, I made 
some reference to the cross-licensing agreements between the 
companies that sell AIDS drugs. On the face of it, you'd think 
you'd have a lot of competition in the AIDS drugs market. 
There's eight different manufacturers that are among the 
leading people that have antiretroviral drugs. And you have a 
lot of me-too drugs that suggest maybe you'd have competition 
within the same therapeutic class. You have, in some classes, 
eight or nine products that are in the same therapeutic class.
    Why is it you don't observe much price competition? And 
part of it is the legal collusion that you observe between 
companies. Bristol Myers and Gilead, Merck, Pfizer, GSK, 
Abbott, and Roche all cross-license their products in various 
ways in the HIV area, or outside of the HIV area.
    And they're so often in bed with each other, back and 
forth, and, in some cases, one company will sell the drug in 
the United States, another company will sell it in Europe or 
other countries. Or there might be a fixed-dose combination, 
like Atripla, the leading one, that involves products from 
both--in the United States, Bristol Myers and Gilead. So it's 
hard to know. Are they partners, or are they competitors? And 
the prices would suggest that they're more like partners than 
competitors.
    Senator Sanders. All right. Let me--yes.
    Dr. Stiglitz.
    Mr. Stiglitz. Just two comments I want to add. You, I 
think, were right in thinking about this as an experiment, an 
innovation in innovation, and thinking about how we can develop 
a better innovation system, not just for AIDS, but for health 
and beyond health for research more broadly.
    And I just want to reiterate that in thinking about the 
innovation system, there are a couple of other parts. I mean, 
the patent system will continue to play some role in, for 
instance, ideas that we haven't even thought about. In health, 
the prize system is particularly well suited, because we have a 
more well-formulated notion of what we need, and, therefore, it 
is particularly effective in that area.
    Some other areas where--for instance, in climate change, it 
can be particularly effective. We know what we need in terms of 
more efficient batteries. So there are certain areas where the 
prize system is very well-suited, other areas where the patent 
system may still play a role.
    The third and really important part is government-funded 
research itself. That has been very effective in the area of 
health--NIH, NSF. And in thinking about allocation of resources 
to prizes and across innovation, one has to balance all three 
of these components of our innovation system.
    And then more particularly in the area of health, one of 
the points that was referred to earlier was that our system of 
testing is a very costly one. Drugs to be made available have 
to go through a set of tests. There's a lot of belief that that 
testing system is inefficient. And it certainly raises problems 
of conflicts of interest, because, typically, the drug company 
does its own testing, and we know some very dramatic stories of 
that conflict of interest playing out in ways that led to 
probably the death of other people.
    So I think one thing to consider going forward is thinking 
through more deeply reform of the ways that our system of 
testing is conducted. And that system of testing is one of the 
mechanisms by which the drug companies exercise monopoly power 
and act as a barrier to entry--to making R&D and the drug 
market less competitive.
    So I think that one wants--this is a really important bill 
in opening the door. And I do hope that you'll pursue trying to 
push that door further in other ways.
    Senator Sanders. We sure will. But let me just say this in 
thanking all of you for being here. I am more than aware that 
there is only one name on the piece of legislation. I'm also 
more than aware that I have been the only Senator at this 
hearing today.
    But I believe--and I think you will all agree with me--that 
the time is long overdue for us to place that flag down and to 
move forward vigorously in a concept that can save millions of 
lives around the world, that could open up huge vistas of new 
research and development, and make our health system much 
stronger and much more cost-effective. All of us--nobody here 
is naive. We know the obstacles that stand in front of us. We 
know the very, very powerful special interests that spend huge 
amounts of money on lobbying and campaign contributions who do 
not want us to proceed.
    But I think we have an idea, and that as a result of the 
work all of you are doing in your separate areas, it is an idea 
that is spreading, not only in this country but around the 
world. And I think as more and more people learn about what we 
together are trying to do, the day in which legislation like 
this is passed will come sooner. And when it comes sooner, it 
will be of profound importance to people in our country and 
around the world.
    So I just want to thank you, not just for being here, 
because I know each and every one of you has spent perhaps a 
lifetime or many, many years working on this issue and issues 
like this. We very much appreciate you coming here to the 
Senate today and thank you very much for your contributions.
    Thank you. The hearing is adjourned.

    [Whereupon, at 11:35 a.m., the hearing was adjourned.]

                              


