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Saturday, January 6, 2024

Drug Patent Monopolies Cost Each Family $5,000 per Year

The opposite of a free market

By Dean Baker

It is incredible how ideology can be so thick that it prevents even highly educated people from thinking clearly. We saw this fact on display in a Washington Post piece on prescription drug prices by its columnist, Bina Venkataraman.

Venkataraman points out that we are seeing significant advances in developing new drugs and treatments, but many of these innovations are selling for ridiculous prices. Her lead example is Casgevy, a treatment that can cure sickle cell anemia. The developer of this treatment is charging $2.2 million for it.

She argues that the price could be radically reduced if the research was funded at least in part by non-profits, governments, or companies willing to accept lower rates of return. This is, of course, true, but her ideology prevents her from seeing clearly the issues involved.

In fact, government and foundations already pay for about 30% of the research and development costs for new drugs, which Venkataraman neglects to point out. These benefactors only rarely share in royalties for the medicines whose development they helped finance.

After arguing for developing drugs in ways that allow for lower prices, she asserts in the last paragraph:

“But there are steep costs to letting the market determine what’s best for a society’s well-being.”

The whole point is that we are not letting the market determine what’s best for a society’s well-being. We, or our politicians, have decided to grant lengthy and strong patent monopolies to encourage companies to innovate. There are other, and less expensive, ways to achieve this.

This is not just a point of semantics. Granting patent monopolies is a policy choice, not a natural market feature. These patent drug monopolies are just how the government has chosen to finance innovation. If we argue against patent monopolies, we are not arguing against letting the market decide how resources should be allocated. Instead, we are arguing against using this specific government mechanism to determine the allocation of resources.

Imagine Patented Water

An excellent argument exists against the patent monopoly system for financing prescription drug development. The obvious one, as Venkataraman points out, is that these monopolies can lead to ridiculously high prices for drugs and treatments.

This is for the obvious reason that people with the resources, either their own money or access to good insurance, are willing to pay huge amounts to preserve their health or save their own life. But these high prices are almost entirely due to the patent monopoly. Water is also necessary for our life and health. Still, it is usually reasonably cheap since there are no monopolies on the water itself, and distribution systems are either public services or charge regulated prices.

In the case of prescription drugs, it is almost always cheap to manufacture and distribute them. In a free market, they would generally sell for less than ten percent of the price of drugs subject to patent monopolies and often less than one percent. Paying for drugs would not be a significant problem, provided they were available in a free market without patent monopolies.

While the world’s poor find even generic prices expensive, if drugs were sold at free market prices, aid agencies and private charities could realistically look to cover the cost, as has been the case with AIDS drugs in Sub-Saharan Africa. In some cases, as with Casgevy, the price involves paying trained medical professionals to provide this treatment. This cost would still be faced even without the patent monopolies, but the total expense would be far more manageable.

Incentives To Lie

When drug companies can sell their products for mark-ups of several hundred percent, or even several thousand percent, they have enormous incentives to push their drugs as widely as possible. This means exaggerating the potential benefits while minimizing the side effects and risks associated with their drugs.

The extreme case of this lying was the opioid crisis, where drug manufacturers knew that their drugs were highly addictive and pushed them with the claim that they were not. This led to far more abuse, which ruined the lives of hundreds of thousands of people.

From 1999 through 2021 at least 645,000 Americans died from opioids. In 2022, almost 80,000 people died. If the 2023 death toll is roughly the same, the butcher bill to date will exceed 800,000 American lives.

Legal Bribery

While opioids are an extreme case, drug companies routinely pay doctors to promote their products and lobby politicians and government agencies to have their drugs used as widely as possible. To take a prominent recent example, through intensive lobbying, Biogen got the Food and Drug Administration to approve its Alzheimer’s drug, Aduhelm, over the objections of an independent FDA advisory panel.

The drug’s trials showed little evidence of effectiveness and severe side effects. The decision was later reversed. Biogen planned to sell Aduhelm for $55,000 for a year’s dosage. However, if sold as a low-cost generic, there would have been little incentive to push a drug in this situation, where the evidence did not show it to be an effective treatment.

Secrecy Encouraged

The quest for monopoly control over a new drug or technology encourages secrecy in research rather than an open exchange of knowledge among scientists.

A drug company wants to maximize its ability to gain the fruits of its research spending and minimize the extent to which competitors could benefit. For this reason, they are likely to closely guard their research findings and limit the ability of researchers to share information by requiring them to sign non-disclosure agreements.

Such secrecy almost certainly impedes the development of technology since science advances most rapidly when research is freely shared. The Human Genome Project provided a great example of such sharing, where the Bermuda Principles required that results be posted on the web as quickly as possible.

If we relied on direct public funding for research, expanding on the $50 billion a year we now spend through NIH and other government agencies, we could impose comparable rules, requiring that all research findings be quickly available on the web. This would allow researchers everywhere to benefit swiftly from any breakthroughs. It would also steer them off dead ends uncovered by other researchers.

In addition, if the focus is on public health rather than creating a patentable product, this route of direct funding would also encourage research into dietary or environmental factors that could significantly impact health. The patent system provides no incentive to research these issues.

Serious Discussion Required

Our system for developing new drugs is a disaster. While we can point to great successes, these come at enormous cost. This year, we will spend over $600 billion on prescription and non-prescription drugs. This comes to almost $5,000 per family. This is real money.

We would almost certainly be spending less than $100 billion if these drugs were sold in a free market without patent monopolies or related protections. And, even when people get third parties, either private insurers or the government, to pick up the tab, the high price requires them to jump through all sorts of hoops to get the necessary approvals. This bureaucratic nonsense would be a pain for anyone, but it is tough on people in bad health.

Discussing alternative systems seriously is much more challenging if we work under the illusion that government-granted patent monopolies are somehow the free market. They are a government policy, just like direct research funding would be a government policy. We need to have a serious debate on which policy provides the best mechanism for supporting the development of new drugs and not be saying nonsense things about interfering with the market determination of outcomes.

Dean Baker co-founded the Center for Economic and Policy Research in 1999. His areas of research include housing and macroeconomics, intellectual property, Social Security, Medicare and European labor markets. He is the author of several books, including "Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer."