The Legal Column:
Who should capture the value of donated tissue?

Fall, 2005

By Robert A. Katz, JD

Associate Professor of Law and Philanthropic Studies,

Indiana University School of Law - Indianapolis

When implanted into another person, human organs and tissues can significantly enhance or even save a recipient's life. Yet unlike solid organs, most tissues undergo substantial change in their journey from donor to recipient. In recent years, scientists have increased their ability to manipulate or "process" tissues to increase their therapeutic value. Bones can now be demineralized and made into a putty or gel; when packed or injected into bone voids, this material can stimulate the formation of new bone. ¹ Skin can be decelluralized while preserving its biological framework; then it can be absorbed by the body without rejection and promote the regeneration of new skin. ² These and other technologies have been pioneered by several for-profit, publicly traded corporations that sell tissue products and related services. In 2004, the four leading for-profit tissue processors had combined revenues of over $300 million. ³

Tissue processors obtain raw tissue from nonprofit tissue procurement organizations or "tissue banks." Some tissue banks are also organ procurement organizations (OPOs), while others recover only tissues. As with organs, tissues are voluntarily supplied by altruistic donors and next-of-kin. Most tissue banks do not inform potential donors that for-profit firms may process donated tissue. The concern is that such information might discourage donations, as in "I'm not donating my loved one's tissues in order to make money for some corporation's investors." It is also feared that such disclosures might spur donors to restrict for-profit entities from processing their donations. Accordingly, many leaders in the tissue industry oppose a federal proposal to require tissue-procuring OPOs to tell potential donors whether for-profit firms will be involved. ⁴

Public relations aside, is anything wrong with involving for-profit firms in tissue processing? In theory, no, as federal law bans the commodification of donated tissue as such. The National Organ Transplant Act of 1984 (NOTA) prohibits the purchase or sale of body parts for use in transplantation. ⁵ At the same time, NOTA recognizes that participants in the transplantation process must be compensated for their expenses and efforts. To this end, NOTA permits "reasonable payments" for goods and services rendered in connection with transplantation. ⁶ Under NOTA, industry participants wouldn't actually sell donated simply ask a fair price for the value they add to the tissue.

In practice, however, NOTA does not and likely cannot achieve its aims. Although federal law bans the transfer of tissue for "valuable consideration," it does not render such tissue valueless. ⁷ The economic value of donated tissue originates in the willingness and ability of would-be recipients to pay for it. Under NOTA, recipients should pay nothing for the tissue itself - only the value added by tissue banks, tissue processors and other intermediaries. This is precisely what would happen if the tissue industry was perfectly competitive: Intermediaries would earn at most a market rate of return (a.k.a. "normal profits") for the value they add, and recipients would enjoy all the value embodied in the tissue itself.

Among the various intermediaries in the tissue industry, tissue banks follow NOTA's commands most closely: They generally sell tissue for no more than the cost to procure, handle, inspect and ship it, plus normal profits (5-10%) for overhead, capital improvements, etc. ⁸ For-profit processors are not as scrupulous. By design, such enterprises aim to maximize their net profits and so price their products accordingly. This profit imperative weakens the link between what processors charge for tissue and the value they add to it. If the market will bear it, processors will seek "super-normal profits," i.e., more profit than necessary to keep them in the processing business. Moreover, some processors earn super-normal profits, either because their name recognition and brand loyalty enable them to charge more or because their lowered production costs enable them to earn more profit with each sale. These processors appropriate some of the tissue's inherent economic value for themselves, instead of passing it along to recipients. They then distribute the value of donated tissue - a charitable resource - for the private benefit of their investors.

If not processors, who should capture the economic value of donated tissue? If the free market prevailed, donors and their next-of-kin would do so, but society is not ready to let this happen. If NOTA were effectively enforced, recipients would obtain this economic value. But how to make that happen? One way might be to appoint regulators to set reasonable rates of return for for-profit processors and restrict prices to keep firms from exceeding these rates. Another approach requires a modification in NOTA. Under the current regime, tissue banks generally earn no more than normal profits, even if processors are willing to pay more. This arrangement enables - if not invites - processors to appropriate the tissue's economic value and so earn supernormal profits. This appropriation can be stopped, however, by letting tissue banks earn super-normal profits. This change would effectively redistribute the tissue's economic value from processors to tissue banks. Because the market for processed tissue still functions reasonably well, these processors might settle for smaller profits (but not less than normal profits), rather than pass on their increased costs to recipients.

Transferring tissue's economic value to tissue banks could have significant and beneficial consequences. Because tissue banks are organized on a nonprofit basis, they must use any new income to advance their charitable missions and to finance their services, rather than enrich private parties. They would thus have more resources to educate the public about donation and transplantation, provide counseling and bereavement for donor families, improve the quality of their facilities and subsidize transplants for people who need but cannot otherwise afford them. They could also direct the development and production of tissue-based products based on medical need and social concerns, rather than profit. Granted, donors might prefer recipients to capture the tissue's value. If this option is not feasible, however, donors would likely prefer that it go to nonprofit tissue banks rather than for-profit tissue processors, a result more consistent with the altruism that motivated their decision to donate.

Before making any changes, however, we should consider the advantages of the current arrangement. By letting processors capture the economic value of donated tissue, they have more incentive and resources to develop new therapeutic uses for it. And though the status quo does not stop the commodification of donated tissue, it partly conceals it from public view by interposing a nonprofit entity between altruistic donors and profit-maximizing processors. If tissue banks could earn supernormal profits from their activities, the commodification inherent in the tissue industry would become harder to hide. This might deter people from becoming donors. On the other hand, a conscious policy of concealing commodification from donors may itself raise ethical problems.

Footnotes

¹ See, for example, the Grafton ® line of demineralized bone matrix (DBM) products made by Osteotech, Inc. (http://www.osteotech.com/ prodgrafton.htm).

² See, for example, AlloDerm, an acellular dermal matrix made by LifeCell Corp. (http://www.life cell.com/products/95/).

³ For 2004, Osteotech and CryoLife, Inc., reported revenues of $89 million and $62 million, respectively. LifeCell reported "product revenue" of $59 million, and Regeneration Technologies, Inc. RTI) reported "net revenues" of $93 million.

⁴ This proposed rule, written by the Department of Health And Human Services (HHS), sets forth conditions for tissue-procuring OPOs to participate in Medicare and Medicaid programs. See 70 Federal Register 6086 (February 4, 2005) (discussing section 486.342).

⁵ 42 USC § 274e(a).

⁶ Id. § 274e(c)(2).

⁷ Pinkdyck RS, Rubinfeld DL. Microeconomics. 4th ed. Upper Saddle River, NJ: Prentice Hall; 1998:298.

⁸ Anderson MW, Schapiro R. From donor to recipient: the pathway and business of donated tissues. In: Youngner SJ et al., eds. Transplanting Human Tissue: Ethics, Policy, and Practice. Oxford: Oxford University Press; 2003:12-13.

in collaboration with
Dartmouth-Hitchcock Medical Center

The opinions expressed in the journal, Lahey Clinic Medical Ethics,
belong to the individual contributors and do not represent the institutional position
of Lahey Clinic on any subject matters discussed.