This paper focuses on the economic issues arising from two uses of genomics: 1) the development of gene therapy; 2.) and use of pharmacogenetics to identify a patient's genotype before treatment to exclude those who will not benefit or who may be harmed. We conclude that private-sector investment aimed at developing gene therapy for monogenic diseases is likely to be socially suboptimal. Short-term administration regimens yielding long-term therapeutic benefits are likely to meet payer resistance to large "one-off" costs because of budget constraints or, in competitive systems, concerns that the savings would accrue to future insurers or would attract high-cost patients. For some monogenic diseases, patient numbers may be too small to support commercial development without changes to orphan drug legislation or payer willingness to accept higher cost-effectiveness thresholds. In the case of pharmacogenetics, we conclude that it can often be socially optimal to test before treatment, particularly if the proportion of nonresponders is high, if there is a potential for serious adverse reactions, or if the test is inexpensive. Genetic testing that fragments the patient population could reduce incentives for R&D unless prices are adjusted to reflect the higher expected benefits of targeted treatment per patient. Even in situations where prices are adjusted, patient populations may be too small to make commercial development viable. This problem with small numbers is analogous to that associated with gene therapy for monogenic diseases and may require similar remedies if society values developing treatments for these diseases.
