[Economic Report of the President (2005)]
[Administration of George W. Bush]
[Online through the Government Printing Office, www.gpo.gov]



 
CHAPTER 7

The Global HIV/AIDS Epidemic



Societies worldwide face the challenge of curbing the acquired
immunodeficiency syndrome (AIDS) epidemic. The disease has already
killed over 25 million people, and currently over 40 million people
are living with the human immunodeficiency virus (HIV), the virus
that causes AIDS. The impact of HIV/AIDS varies across the world,
both in terms of the scale of the epidemic and the ability to treat
infected individuals. Less-developed countries are particularly
hard-hit on both accounts. Almost two-thirds of all people with
HIV live in sub-Saharan Africa, a region that makes up only
one-tenth of the world's population. At the same time, few infected
individuals in the region receive adequate treatment for the
disease. In addition to the devastation from the immense loss of
life, the disease also has economic consequences that intensify
the humanitarian crisis.
President Bush has made fighting the worldwide AIDS epidemic a
priority of U.S. foreign policy, and he has taken bold action
against the crisis through his Emergency Plan for AIDS Relief.
Understanding the unique challenges presented by this epidemic
is essential to designing policies to prevent the spread of the
disease and to treat those who are already infected. This chapter
discusses the nature of the crisis, its consequences, and what
governments can do to create affordable access to existing
treatments while encouraging research toward the development of
new medical therapies to combat this disease. The key points of
this chapter are:
	AIDS is a global problem with far-reaching
consequences. While the disease's impacts on human
health and mortality are widely recognized, the AIDS
epidemic also has devastating economic consequences
that exacerbate the humanitarian crisis.
	A comprehensive and integrated approach of
prevention, treatment, and care is essential to
quelling the epidemic. In poor countries, treatment
affordability and the lack of health care
infrastructure are major concerns. Compassionate
pricing policies and aid from developed nations can
play an important role in expanding access to
treatment.
	To continue the development of better treatments and
to work toward eradication of HIV/AIDS, drug
companies need to maintain the highest possible
quality of research. Intellectual property laws are
important to ensuring appropriate incentives for
innovation to create the next generation of therapies
and to develop a safe and effective vaccine.

A Global Crisis
The scale of HIV/AIDS is far worse than forecasts initially
indicated over a decade ago. In 2003, there were more new cases
of HIV/AIDS than in any other single year since the disease emerged,
with almost 5 million people becoming infected around the globe.
Roughly 2.9 million people died of the disease in 2003 alone.
In the United States, AIDS is the fifth-leading cause of death in
people 25-44 years of age. The U.S. Department of Health and Human
Services (HHS) estimated that over 400,000 people in the United
States were living with AIDS in 2003, and approximately
850,000-950,000 people were living with HIV. The number of AIDS
cases continues to increase among minority populations, and African
Americans accounted for 50 percent of new HIV/AIDS diagnoses in
2003. One of the most disturbing statistics surrounding the disease
is that approximately 180,000-280,000 people in the United States
are living with an undiagnosed HIV infection. Patients who are
unaware of their infection are less likely to take precautions to
prevent the spread of the disease and are unable to begin effective
treatment. Furthermore, of the estimated 670,000 people who are
diagnosed with HIV/AIDS, roughly one-third may not be receiving
treatment. Taken together, the estimates of those untreated and
untested suggest that close to half a million people in the United
States are living with HIV without treatment.
HIV/AIDS infection levels in some parts of the world greatly
exceed those in the United States. The Joint United Nations
Programme on HIV/AIDS (UNAIDS) estimates that 4.8 million people
worldwide were newly infected with HIV in 2003, which is the highest
number of new infections in any single year since the beginning of
the epidemic in 1981. Approximately 2.9 million people died of AIDS
in 2003, and UNAIDS estimates that over 20 million people have died
from complications of AIDS since the first case was identified.
Estimates suggest that 8,000 people die and 14,000 are newly
infected with the virus each day. Because of aggressive prevention,
treatment, and care efforts, there has been a decline in the number
of deaths among AIDS patients in the United States, while the number
of people living with HIV/AIDS continues to increase in the United
States and globally.
While the epidemic affects virtually every country in the world,
the prevalence of HIV/AIDS varies markedly across regions
(Chart 7-1). Close to two-thirds of those infected are Africans, for
whom HIV/AIDS is the leading cause of death. In seven countries in
southern Africa, at least one out of every five adults is living
with HIV. In Swaziland, the HIV prevalence has reached nearly 40
percent among pregnant women; in South Africa, one in four women
between the ages of 20 and 29 is infected. HIV/AIDS is predominantly
a disease of young people; the majority of people who contract the
disease




become infected by the age of 25. As a result of its
lethality and the relative youth of its victims, HIV/AIDS has
reduced life expectancy by more than 20 years in many African
countries. Life expectancy in some countries is projected to fall
to roughly 30 years within the next decade, whereas in the absence
of HIV/AIDS some were expected to approach or exceed 70 years.
Chart 7-2 shows this dramatic effect in some of the hardest-hit
countries in Africa.
Disease Characteristics and Treatments
The human immunodeficiency virus (HIV) is an infectious agent that
damages the body's immune system. As the viral infection progresses,
individuals lose their ability to fight secondary infections and
certain cancers. The term acquired immunodeficiency syndrome (AIDS)
describes the advanced stages of HIV infection. The virus primarily
infects an important part of the immune system know as the CD-4 or
``helper'' T-cells, which lead the body's attack against infections.
When these cells multiply to fight an infection, they  themselves
become more susceptible to HIV infection. The HHS definition of a
diagnosis of AIDS, established by the Centers for Disease Control
and Prevention, includes all HIV-infected people who have fewer
than 200 CD-4 positive T-cells per cubic millimeter of blood (as
compared to 1,000 or more




in healthy adults). HIV-infected
individuals with higher CD-4 counts can also be diagnosed with
AIDS if they develop one of several types of opportunistic
infections or cancers associated with severely compromised immune
systems.
The symptoms and signs of opportunistic infections common in
people with AIDS can be highly debilitating. Many individuals who
have progressed to an AIDS diagnosis find it difficult to work or
perform basic household chores, and as the immune system continues
to deteriorate, these effects generally worsen. Studies in Western
countries have found that the median time it takes for an untreated
HIV infection to progress to AIDS is about 10-12 years, though the
amount of time varies widely across patients. If left untreated,
the majority of patients will die within one year of the progression
from HIV infection to full-blown AIDS.
Because no vaccine is available, the primary way to prevent HIV
is through the avoidance of behaviors that put a person at risk of
contracting the infection. HIV is not spread through casual contact.
The virus is most commonly spread through unprotected sex with an
infected partner, but it can also be spread through contact with
infected blood. Mothers can transmit HIV to their babies during
pregnancy, birth, or through breast milk while nursing. In the case
of mother-to-child transmission at birth, the administration of
certain drugs during labor can greatly reduce the likelihood of
infecting the newborn.
There is no cure for HIV/AIDS, though the past decade has witnessed
great strides in the treatment of AIDS. Multiple categories of drugs
are now available for combating the disease, but the administration
of individual drugs alone can render the treatment progressively
less effective as the disease develops resistance to the medication.
To minimize resistance and maximize effectiveness, health care
providers use treatments comprised of a combination of several drugs
to suppress the virus. Even though the side effects can be quite
severe, this type of therapy is credited with dramatically improving
the health and life expectancy of HIV-infected individuals.
Advances in treatments have reduced the number of deaths caused
by HIV/AIDS, but despite price reductions by manufacturers and
large-scale international assistance, the price of these treatments
has so far exceeded what most residents of the developing world can
afford. UNAIDS states that, in low- and middle-income countries,
death rates for HIV-infected 15-49 year olds are up to 20 times
greater than those of people living with HIV in industrialized
countries, and differences in access to antiretroviral therapy can
largely account for this trend. Limited health care infrastructure
and a lack of trained health care professionals in poor countries,
coupled with difficulties in accessing even basic care, further
increase the suffering of those that cannot afford treatment.
The Economic Impact of HIV/AIDS
The vast scale of human suffering that AIDS causes and the sheer
number of lives lost to the disease make the epidemic a global
emergency. Its scope extends beyond the immediate humanitarian
crisis as the epidemic affects many aspects of economic and social
development. Roughly 90 percent of worldwide HIV/AIDS cases occur
in Africa, Latin America, the Caribbean, and Asia, where much of
the affected population is already living in poverty. AIDS deepens
poverty, intensifies food shortages, and, in some cases, erases
decades of economic progress.
Direct Economic Impacts on Households
There are several mechanisms by which the disease hinders economic
development, particularly in less-developed countries. First,
HIV/AIDS-related illnesses directly decrease the income of an
affected household. Even if an infected family member is able to
work, a sick worker is likely to be less productive than a healthy
one. Many people with AIDS are unable to work at all. The disease's
eventual lethality and loss of income-earning family members
exacerbates this reduction in a family's income. One study estimates
that in South Africa and Zambia, for example, income in affected
households typically fell by 66 to 80 percent due to AIDS-related
illnesses. Furthermore, 15-24 year olds contract half of all new
HIV infections worldwide, so a large percentage of the current and
future workforce in the hardest-hit countries is dying. By
predominantly affecting the working age population, the disease
leaves too few people to support the aging and young populations,
both within an individual family and within a society. One heavily
impacted sector is agriculture, and failure to produce food can
have particularly devastating effects on households and communities.
The Food and Agriculture Organization of the United Nations
estimated that 7 million agricultural workers died from AIDS between
1985 and 2000, and they projected that 16 million more will likely
die by 2020. In some countries, this could mean a loss of over 20
percent of the agricultural workforce (Chart 7-3).
At the same time that AIDS erodes a patient's productive
capacities, it can impose debilitating costs on other members of a
household. Medical expenses rise with a patient's health care needs,
while other family members may need to miss work or school to care
for a patient. According to the 2004 Report by UNAIDS,
AIDS-care-related expenses on average can absorb one-third of an
affected household's income. Many of these households are already
poor and face adversities such as chronic food shortages. Coupled
with the fact that AIDS patients need more calories than healthy
individuals, the AIDS-induced deepening of poverty and the decrease
in agricultural workers are intensifying these food shortages.


AIDS is more damaging to a household's income than other fatal
diseases. Several studies have found that adults with AIDS use more
health care than those with other illnesses. One study conducted in
Thailand showed that the loss of income from an AIDS death is, on
average, more than 20 percent greater than if the family member had
died of another cause.
Indirect Economic Impacts on Households
In addition to the direct effect on poverty caused by the decrease
in family earnings and increase in family expenditures, HIV/AIDS can
have consequences that indirectly affect households' well-being. For
example, the disease can change the way that affected families make
long-term decisions. Subsistence households may alter their planning
horizons because they do not expect family members to live as long
and because their needs become more immediate due to pressing health
concerns.
When families face the increasing costs described above, children
may be pulled out of school in order to supplement the declining
family income, resulting in a loss in the children's future earning
potential. Moreover, a household might have less incentive to invest
in education because of the dramatic decrease in any one child's
life expectancy. Private-sector firms, which also invest in human
capital through education and training, have similarly diminished
investment incentives when human capital is short-lived. Training
and education can be expensive, but increased skills lead to
long-term financial rewards, which cannot be fully realized when
life expectancy declines. All of these factors can combine to create
a vicious cycle of increased poverty in the short run and an
inability of households to improve their condition in the long run.
Shorter planning horizons can potentially lead to a variety of
other indirect effects, such as quicker depletion of natural
resources and accelerated environmental degradation.
A high prevalence of HIV/AIDS in a community can also place
extraordinary stress on social networks. These networks are
important because they frequently provide an informal kind of
insurance in rural areas of developing countries, where populations
lack access to formal insurance markets. These informal markets
work by pooling risk across diverse households, so those experiencing
good times can help those experiencing bad ones. For example, a
household that loses a crop because of flooding can turn to friends
in unaffected areas for help. These traditional means of dealing
with hardship break down in the case of HIV/AIDS because the disease
is so widespread that it can be difficult to turn to friends and
family for help, since the disease is likely to be directly
affecting them as well. Households also can be burdened indirectly
by impacts on local labor markets, such as when labor shortages
during planting and harvesting seasons affect agricultural yields,
thereby threatening the availability of food for HIV-infected and
noninfected households alike.
Academic research has found evidence of these effects and has
documented still other effects of HIV/AIDS on individual families.
One study finds that in Uganda, HIV/AIDS increases the proportion of
female-headed households who are living in poverty. Another study
finds that, in parts of Kenya, children in affected families
sometimes have no caregivers in their households and ``manage their
own household activities without the supervision of an adult.''
Research conducted in South Africa shows that affected households
allocate more resources to food, health, and rent and less to
education and clothing than nonaffected households, providing
evidence that HIV/AIDS is placing constraints on an entire
generation's capacity to pursue education and higher income in the
long run.
Macroeconomic Impacts
The aggregated effects of HIV/AIDS on individual households can
create serious macroeconomic consequences. Because decreased
mortality and increased education are two of the most significant
factors in determining economic growth, the HIV/AIDS epidemic has
the potential to threaten the economic well-being of entire
societies. As discussed in the previous section, the disease can
decrease the overall level of skills in the workforce through a
number of mechanisms, because skilled workers die of AIDS, children
drop out of school, and firms and individuals invest less in human
capital. This loss of worker skills and capacity reduces economic
growth. The disease can also decrease productivity and distort labor
market decisions, further slowing economic development.
Although there is still a dearth of data documenting these
effects, several economic models estimate reductions in economic
growth rates for African countries. Recent studies tend to find
more significant impacts than previous estimates, most likely
because the macroeconomic impacts become increasingly measurable
as the disease affects a larger proportion of households, workers,
and employers. A report published in 2004 estimates that, over the
period from 1992 to 2002, HIV/AIDS, on average, reduced the rate of
economic growth in 33 African countries by 1.1 percent per year.
This study reports that by 2020, Africa alone could incur a loss
of US $144 billion.
Getting Prevention, Treatment,
and Care to the Field
Combating the HIV/AIDS pandemic requires both a reduction in new
infections and adequate treatment and care for those already
infected. Interventions in countries such as Kenya, the Dominican
Republic, Thailand, Cambodia, and, most notably, Uganda, that have
promoted risk avoidance and risk reduction have helped reduce the
number of new infections and helped reduce the spread of HIV. For
example, the Abstinence, Be Faithful, and correct and consistent
Condom use, or ``ABC'' approach, employs population-specific
interventions that emphasize abstinence for youth and other
unmarried persons, including delay of sexual debut; mutual
faithfulness and partner reduction for sexually active adults; and
correct and consistent use of condoms by those whose behavior places
them at risk for transmitting or becoming infected with HIV.
Another important step toward quelling the AIDS epidemic is the
widespread dissemination of currently available treatments and care.
Recent developments in drug therapy and other HIV-related disease
care can substantially prolong survival and improve the quality of
a patient's life. Indeed, evidence from a recent study suggests that
the death rate from AIDS in some developed countries has fallen by
about 80 percent since more advanced drug therapies became available
in the mid-1990s. Unfortunately, in the world's poorest countries,
where most HIV/AIDS patients live, access to these treatments is
shockingly low. As stated by the President in January 2003:
There are whole countries in Africa where more than one-third
of the adult population carries the infection. More than 4
million require immediate drug treatment. Yet across that
continent, only 50,000 AIDS victims- only 50,000- are receiving
the medicine they need.
Since the President's speech, the United States and international
partners have made major investments to make safe and effective,
low-cost antiretroviral (ARV) treatment more widely available
throughout the developing world. Many people are now on life-saving
therapy in 15 focus countries as a result of the President's
Emergency Plan, and the Global Fund (one-third of whose resources
come from the United States) has also made great strides in placing
patients on ARVs through a portfolio of grants to public-private
consortia throughout the world.
While as recently as two years ago, many analysts believed the
sole problem with access to ARV treatment was that drug prices were
too high for most patients to afford, price cuts by brand-name
manufacturers and the wider availability of generic versions of ARVs
have helped to improve access to these treatments. Nevertheless,
drug prices are still too high for most patients to afford and
health care infrastructures in developing countries have too few
resources for the effective distribution of treatment, even when
drugs are available.
Two of the keys to expanding access to treatment in poor
countries are low prices and generous international aid. Without
low prices, large-scale distribution is probably not possible even
with generous amounts of aid. And even at low prices, many of the
poorest AIDS sufferers will not be able to afford adequate
treatment, since they face still more basic needs such as adequate
food and clean water. Thus low prices and generous aid must go
together for large-scale treatment dissemination to be possible.
A Role for Differential Pricing
Charging different prices to different buyers of the same product
can be an important way to help poor populations access medical
treatment. This practice is pervasive throughout the economy, and
ranges from senior citizen discounts on movie tickets to cheaper
college tuition for low-income families. Competition in a market
and the ability to resell a good make it difficult for firms to
charge different prices because of the opportunity for arbitrage,
the ability to make a profit by purchasing the product at the
lower price and reselling it at a higher price. This demand for
the product at the lower price and supply of the product at the
higher price will cause prices to equalize, a phenomenon that
economists refer to as the law of one price. However, if a good
cannot easily be resold, as with movie tickets and college tuition,
differential pricing is possible. It is often in the interest of a
profit-maximizing firm to charge high prices to some customers while
not relinquishing the ability to sell to other customers who can
afford the product only at lower prices. This disparity might seem
unfair since buyers of the same product are being treated
differently.
Drug companies have the ability to practice differential pricing
because they can possess intellectual property rights. When a firm
is the first to develop a new treatment or vaccine, it is awarded a
patent that allows the company to be the sole seller of the product
for 20 years from the date a patent is filed. (This generally works
out to be approximately 10-14 years from the time the drug is first
available on the market.) Because the development of new drugs
requires costly research and development, patent rights provide
important incentives for firms to take on the upfront costs of
development; the reward for undertaking these risky activities is
the promise of high profits should their efforts to develop a new
drug succeed. (Patent rights and the ensuing incentives for
innovation are discussed at greater length in the next section.)
The market for AIDS drugs is a case in which differential pricing
possibly helps to create societal benefits beyond the profits
enjoyed by firms with market power, by allowing people in poor
countries to pay less for their drugs. This is already a common
practice for pharmaceuticals, and some manufacturers of
antiretroviral treatments have offered the drugs to developing
countries at lower prices than those that apply in the U.S. and
Europe. The AIDS drug PLC, for example, sells for $18 per day in
the United States, but sells for half that price ($9 per day) in
Uganda. The drug companies can make incremental sales at lower
prices without incurring a loss, but if PLC were sold everywhere
for only $9, the companies would not recover their investment in
research and the drug would not be available to consumers in either
country. Consumers paying the higher price for a drug may believe
that everyone should have access to the drug at the lower price.
However, if forced to sell at only one price, the drug companies
will generally need to set the price somewhere between the highest
and the lowest prices under differential pricing, thus creating less
access to the drug. Patients who could only afford the drug at the
lowest price would be unable to purchase it at the standardized
price. Therefore, offering drugs at lower prices in impoverished
countries can play a vital role in increasing the availability of
AIDS drugs in less-developed countries.
Humanitarian Aid
Even with drugs available in developing countries at prices far
below those charged in the United States and other advanced
economies, severe poverty levels will continue to prevent many
AIDS patients from receiving adequate treatment. Effective new
treatments can be produced at an incremental cost of $600 per year,
but most individuals in sub-Saharan Africa live on less than $730
per year. Furthermore, the actual distribution of treatment requires
more than just an affordable supply of drugs; it requires a health
care infrastructure that can adequately implement safe treatment
programs. This is a particular challenge for people living in remote
rural areas.
The Bush Administration has laid out the President's Emergency
Plan for AIDS Relief (the Emergency Plan), a five-year, $15 billion
commitment to fight the disease globally. The President's Emergency
Plan works in over 100 countries around the world while focusing on
15 of the countries most affected by HIV/AIDS, with the goal of
treating 2 million HIV-positive individuals, preventing 7 million
new infections, and caring for 10 million infected or affected by
the disease, including orphans. It prioritizes treatment, care,
and prevention activities as the interventions most likely to
mitigate the disease's consequences and reduce HIV infection.
By prolonging life and restoring health, treatment and care
interventions can increase the productive capacities of individuals,
reduce the direct and indirect costs of care, and allow those
infected and affected by HIV/AIDS to focus on priorities such
as work and school, thereby securing the future of families and
nations. The Emergency Plan's health care approach also sets out
to work within host-country strategies to strengthen and develop
health care networks that will increase access to prevention, care,
and treatment services, since the President recognizes that all are
crucial to winning the fight against HIV/AIDS.
The President's plan also works with international partners to
intensify the worldwide response to the epidemic and to develop
sustained collaborative efforts. The Emergency Plan devotes $10
billion over five years to 15 of the most afflicted countries in
the world. It also commits $4 billion to HIV/AIDS programs in an
additional 85 countries, including international research in support
of new tools for combating HIV/AIDS, and it increases the United
States' pledge to the Global Fund to Fight AIDS, Tuberculosis, and
Malaria by $1 billion over five years. The President made the
inaugural pledge to the Global Fund in May of 2001, and at the end
of 2004 the United States remained the Global Fund's largest donor,
responsible for over 37 percent of its pledges and 33 percent of
its contributions. One success upon which these efforts can build
is the intervention strategies in Uganda, which successfully turned
around the HIV/AIDS crisis in that country. (Box 7-1).
______________________________________________________________________

Box 7-1: Uganda's Success Story
A broad-based national effort and firm political commitment to
fighting the HIV/AIDS epidemic yields results, and no case
illustrates this point better than Uganda's experience. Uganda was
one of the first nations to suffer the disease's impacts, and now
it has become one of the earliest and greatest success stories. As
elsewhere in sub-Saharan Africa, AIDS has caused immense suffering
in Uganda, reducing its population's life expectancy and thwarting
its development. However, the country has experienced substantial
declines in infection rates during the past decade, even as the rate
of new infections continues to increase in most other countries in
the region. The percent of Ugandans infected with HIV peaked at
around 15 percent in 1991, and by 2001 it had fallen to 5 percent.
Prevalence among pregnant women, which is used as a key indicator
of the epidemic's progress, has fallen by more than half in some
areas since 1993, and infection rates among men have dropped by
more than a third.
Under the leadership of President Yoweri Museveni, Uganda's
government brought together groups and leaders from all sectors
of society to address the need to prevent further spread of the
disease and to provide treatment and care for those affected. In
1986, President Museveni directly addressed the epidemic with a
commitment to prevention, and asserted that fighting AIDS was a
patriotic duty of Ugandan citizens. Calling for openness and
communication, he was joined by religious and traditional leaders,
community groups, and nongovernmental organizations (NGOs). In
1992, the President created the multi-sectoral Uganda AIDS
Commission to oversee the national HIV/AIDS strategy.
Interventions in Uganda began with an aggressive public media
campaign to change risky behaviors and the establishment of a
surveillance system to track the epidemic. The campaigns have been
aimed at both the general population and key target groups,
particularly older men and youth, while aggressively fighting
stigmatizing and discriminating against people living with the
disease. Sex education programs in schools and on the radio have
encouraged youth to delay the age at which they first have sex,
have encouraged monogamy, and have focused on the need for safe
sex. Since 1990, a USAID-funded program has contributed to i
ncreases in condom use from 7 percent nationwide to more than
50 percent in rural areas and over 85 percent in urban areas.
In addition, Uganda's HIV/AIDS surveillance system has trained
thousands of community-based AIDS counselors, health educators,
and other specialists. Further testimony to the government's
commitment are the many innovations that have been pioneered
in Uganda, such as HIV/AIDS testing with same-day results and
accompanying counseling services.
The open networks throughout Ugandan society for acquiring
information about HIV/AIDS have resulted in behavioral changes in
its population. The decline in the number of sexual partners of
the average Ugandan is perhaps the most important determinant of
the nation's success in curbing the epidemic, and some have dubbed
this experience a ``social vaccine.'' The country's success suggests
that high-level political commitment coupled with diverse,
multi-sectoral participation can turn the tide in the global fight
against HIV/AIDS.
______________________________________________________________________


Development of New Treatments and Vaccines
While affordable treatments and their effective dissemination are
immediate needs, pharmaceutical companies need to continue to work
toward the development of newer and better treatments as well as
vaccines. This is important not only to improve patients' lives but
also to strive toward the eventual eradication of the disease. In
the United States, the principal reason that the number of AIDS
cases began to decline in the mid-1990s was the introduction of new
drugs for treating HIV. Researchers must continue to innovate in
order to make even better treatments available and develop safe and
effective vaccines. The development of resistance to existing
medication, rendering treatment less effective over time,
underscores this importance.
Incentives for Innovation
Research and development of new drugs is a costly endeavor, and
once developed, new products must go through extensive testing and
marketing. On average, a new drug takes 12 years to develop and
costs $800 million to introduce to the market. For each new drug,
the bulk of these costs are generally paid before production begins.
Since their magnitude does not depend on how much of the drug is
produced, they are known as fixed costs.
Once companies have incurred the fixed costs and a drug is
available in the marketplace, it is often inexpensive to produce the
drug; that is, the marginal cost, the additional cost of producing
one more unit of the drug, is low. It is similarly low-cost for
other companies to copy and produce the drug, thus avoiding the
high fixed investment in research altogether while reaping the
benefits from a lucrative market with low marginal costs of
production. In the absence of intellectual property rights, no
company would want to bear the enormous fixed costs of research
and development if they could simply profit from other firms'
inventions. But without any company investing in these fixed costs,
innovation would be thwarted.
Patent rights provide an important means of giving firms the
incentive to bear the expensive costs of innovation. A patent grants
a company the right to be the sole producer and seller of a product
it develops for a limited period of time (20 years in the case of
pharmaceuticals); thus, a patent protects the innovator from direct
competition so that it can recoup the money it has spent in
developing the new product. This intellectual property right makes
it possible for the pharmaceutical company to sell the new drug at
a price above its marginal cost of production, thereby generating a
high enough profit on its sales to recover its initial investment.
Diseases prevalent in poor geographical areas might not have
lucrative enough markets to provide incentives for private-sector
companies to develop treatments. For example, tropical diseases such
as malaria, which generally occur only in low-income countries, can
have a drug market in which patients are unable to pay enough for
their treatments for firms to recover the high costs of drug
development. The degree to which private companies invest in
research and development could therefore fail to be commensurate
with the social and economic costs of these diseases, including
HIV/AIDS. There are, however, alternative ways to provide incentives
for innovation. Prizes for successful drug invention, patent
buyouts, and advance commitments to purchase the drugs are a few
alternatives that are particularly promising because they encourage
research without disallowing competition once a drug is developed
(Box 7-2).
______________________________________________________________________

Box 7-2: Creative Ways to Encourage Innovation
Patent rights and direct government funding are currently the two
primary means by which the United States government spurs research.
To drive development for an AIDS vaccine, the Bush Administration
endorsed the Global HIV Vaccine Enterprise this past June at the G-8
summit. This initiative will accelerate HIV vaccine development by
enhancing coordination, information sharing, and collaboration
globally. There is also a critical role for the private sector to
play in promoting innovation, especially in the development of a
commercially viable product such as a vaccine.
When a disease predominantly affects a poor population, the
private return to investment in vaccine research is likely to be
quite low, even under well-established patent laws, and even if the
social value of developing a vaccine is high. In other words,
society as a whole may place great value on the lives saved by a
new vaccine, but the ability to pay for vaccines by poor patients
will not adequately represent this social value and will be
insufficient for firms to recover their research expenditures.
Patent rights alone can therefore, in some contexts, provide
insufficient incentives for innovation. They can also create strong
incentives to imitate existing successful inventions rather than to
take on new problems, because competitors can slightly alter a
patented approach in order to develop a competing product. While
this ``free-riding'' off initial research investment creates
competition and drives down prices, it also prevents the original
developer from recouping its research expenditure. Furthermore,
imitation of existing drugs may not be the socially optimal use
of scientific research, since the benefits of saving additional
lives with novel products may very well outweigh the benefits of
lowering the prices of existing drugs.
Direct government funding of basic research can have an important
role but is inefficient when the motivation of the research is a
commercially viable product. It is difficult to know the best
projects to fund and pharmaceutical firms have an advantage over
government officials when it comes to evaluating the potential of
vaccines. Moreover, organized interests can influence the allocation
of government funding resources, and academics may be more
interested in novel scientific discoveries than in the technical
challenges of commercial development.
Advocates of exploring alternate systems for encouraging
pharmaceutical innovation argue that patents and government funding
alone have had difficulties stimulating sufficient research to
develop vaccines for diseases such as malaria, tuberculosis, and
HIV/AIDS. Most research on HIV/AIDS drugs is currently focused on
treatments that will likely be sold in rich countries, instead of
on vaccines, which would likely be less expensive and could be
disseminated widely in poor countries. Indeed,  the research that
is currently being conducted toward an AIDS vaccine focuses
predominantly on strains of the disease prevalent in rich countries
rather than the strains most common in Africa, even though
two-thirds of all new infections occur there.
Several mechanisms have been suggested by economists as
promising ways to further encourage new research and development in
pharmaceuticals. For example, foundations can offer monetary prizes
for vaccine development in order to encourage innovation without
restricting competition in the market once the product is developed.
However, a prize alone would not ensure access to the vaccine by
those who need it. Alternatively, a foundation could ``buy out'' a
patent (that is, it could essentially compensate a firm for letting
its patent expire early). Like a prize, the patent buyout would
provide incentives for innovation that are not tied to the market
for purchasing the drug, thereby promoting research and development
even in markets of poor patients. However, the buy-out may similarly
fail to ensure large-scale access to the vaccine since there is no
guarantee that competition in the vaccine's market will be
attractive to other producers. Particularly if the vaccine is
technically difficult to produce and if safety regulations are
burdensome, firms may not wish to enter the market for a new vaccine.
Some scholars have also suggested that another approach to
encouraging vaccine research would be for a foundation or group of
foundations to make an advance commitment to purchase a vaccine at
a pre-specified price and quantity. Pharmaceutical firms then would
have a secure financial incentive for researching vaccines and
treatments, even if a disease affects predominantly poor
populations, and, once developed, widespread production of the
vaccines could be ensured.
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Despite years of both private and government-sponsored research,
an HIV vaccine remains elusive. Although the disease's many strains
and their ability to evolve rapidly over time present scientific
obstacles, there is also reason to be optimistic that a vaccine will
one day be possible. Some candidate HIV vaccines have already been
shown to protect monkeys against infection and could induce immune
responses in humans. To enhance coordination of research efforts,
the President, with other G-8 leaders, endorsed the establishment of
the Global HIV Vaccine Enterprise and announced plans to establish a
second HIV Vaccine Research and Development Center in the United
States. The Administration has also urged fellow G-8 leaders to
similarly expand their commitment to vaccine development.
Conclusion
The United States and countries around the world must continue to
fight the spread of HIV/AIDS, aid those who are suffering as result
of the epidemic, and work toward eventual eradication of the deadly
disease. Interventions are particularly critical because the
far-reaching economic consequences of HIV/AIDS threaten the
well-being of entire societies. The President has developed a
generous aid package with the Emergency Plan and with donations
to the Global Fund, and the Administration supports the protection
of intellectual property rights. Many other members of the
international community have taken action against the HIV/AIDS
crisis, and the United Nations General Assembly Special Session
on HIV/AIDS in 2001 has affirmed the international community's
commitment to make progress in the struggle against HIV/AIDS.
Governments, donors, and private enterprise around the world must
continue to build upon the successes of these actions to win the
global fight against AIDS.