Who Drives Innovation?

Last month, many of us heard the story of Brett Hallman. Hallman's mother was early in her pregnancy when she learned her son would have spina bifida, a neurological disease that affects the spinal cord's development and, in the worst cases, makes children with the disorder unable to walk and have brain damage.

But the Hallmans enrolled in a trial that allowed doctors to operate on Brett in utero. The procedure had already used on newly born babies, but doctors found that babies who had surgery before they were born had dramatically improved effects with no increased risk. When Brett was 17 months old, he took his first steps, and doesn't have any of the serious problems usually associated with spina bifida.

The trial was funded through a grant from the National Institutes of Health, the largest provider of public funding for medical research. Each year, the NIH issues millions of dollars in grants to universities, clinics and research outfits around the country, funding research that private, profit-seeking companies wouldn't want to do because of the lack of immediate financial gain.

NIH funding is just one of the components on Republicans' budget chopping block. Obama's budget proposal would increase NIH funding by $1 billion, but the Republican plan to extend federal operations through the end of the year would reduce total funding for the NIH by nearly 6 percent, and cut funds for research grants by as much as half. Reducing funding for the kinds of trials the NIH makes possible would reduce the number of headline-grabbing, life-changing breakthroughs like Hallman's -- and would limit the sorts of advances that ultimately cure and eliminate diseases -- like cancer. "Cutting [this funding] would affect many of the trials we do and would slow progress toward the cure of cancer," says Dr. George Sledge, president of the American Society of Clinical Oncology.

Republicans often trumpet the role of private industry in innovation, and their faith in the free market's ability doesn't shake when it comes to biomedical research. During the years-long health-care debate, conservatives consistently argued against any bill that would increase the role of government in providing health care, including funding for research. At the heart of this argument is the idea that America's private market is the sole driver of innovation, and any government interference makes private companies give up the search for new treatments.

But that's just not true. Government-funded research is a big driver of innovation in the health-care market, doing work private companies aren't interested in and also freeing pharmaceutical firms to do the kind of they're most interested in, because those trials get drugs on the market and highlight their products competitive advantages. As Ian Cockburn and Rebecca Henderson wrote in a 2001 paper for the National Bureau of Economic Research, "The public sector probably plays a more important role in determining private sector productivity in the pharmaceutical industry than in any other industry except defense."

Private companies are always going to be driven to the sorts of research that can lead to making money quickly. More exploratory, open-ended research is best left to the government, and that's true in many fields. We can thank the military's investment arm for the Internet, and NASA for developing materials, like plastics, that make surgeries safer. The developments that make our lives better are often ancillary effects of broad federal research projects. This is the philosophy behind all of the increases Obama wants to make in domestic spending. Despite cuts to a lot of discretionary domestic spending, the president's budget proposal would pump billions into research and development in many fields, not only increasing the budget for the NIH but increasing money for the National Science Foundation by 13 percent and the Department of Energy research by 44 perecent, especially for climate-science research.

For medicine, government-funded research is an essential component of the system. In a 2005 paper in the Journal of the American Medical Association, a team of economists analyzed medical-research funding and found that the NIH, by far the largest public source of funds for medical research, performed essential research that pharmaceutical companies were pulling away from because they made more money in clinical trials to get new drugs approved for the market. They determined more money for research was needed to find out how well hospitals, clinics and doctors delivered care to patients; how best to improve patient safety; and how to identify the most cost-effective treatment strategies for a range of diseases. There was also a great need for research on diseases that affect a small population, and therefore aren't profitable.

The researchers urged lawmakers and policy-makers to be patient with research that does not immediately reap a financial reward: "[T]he promise of earlier advances in the basic understanding of physiology in the 1920s and 1930s or of biochemistry and microbiology in the 1940s, 1950s and 1960s took decades to unfold." That is, we probably wouldn't know the structure of DNA or the human genome map without a mix of public and private investment, and we probably wouldn't have had them if lawmakers had pulled the plug in the name of austerity.

Many NIH-funded trials compare one cancer drug to another, but it's not in any single drug company's interest to compare itself with another, say, older, cheaper drug on the market, because there's a good chance it could lose, Sledge says.

"To give a for-instance, there's a class of drugs used in colon cancer, and it was found largely as a result of government-sponsored trials around the world that if you look at a particular molecular marker, you could pretty easily decide who would respond and who would not respond to that colon cancer drug," he says. "That fairly simple lab test saves the health-care system hundreds of million of dollars per year just by not treating people who won't benefit." Obviously, it's in the drug companies' interest to get their drugs to as many patients as possible, and these sorts of studies don't help their bottom line.

Funding the NIH is a small but critical way the government can use its money to fight the perverse incentives of many players in the health-care industry, and to advance scientific discovery more broadly. Republican cuts in the short term will hurt patients like those in trials run by doctors like Sledge. In the long-term, they will stifle the innovation that will ultimately make us healthier and better off.

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