Dean Baker is co-director of the Center for Economic and Policy Research
Drugs are cheap. Patent monopolies are expensive. These are simple facts that everyone should know but for some reason few do.
The point here is simple; the vast majority of drugs are cheap to produce. Chain drug stores sell hundreds of generic drugs for $5-$7 per prescription. They can do this profitably because few drugs require expensive chemicals or manufacturing processes.
However, many brand drugs sell for hundreds or even thousands of dollars per prescription. This is due to the fact that drug companies have patent monopolies on these drugs. The government will arrest anyone who produces these drugs without the permission of the patent holder. Since drugs can be essential for people's health and/or life, if they can find a way to pay any price demanded by the drug companies, they will.
The higher prices due to patent monopolies are the reason that many people have difficulty paying for drugs. If all drugs were sold in a free market as generics, paying for drugs would not be a serious issue except for the very poor.
Of course, patent protection is the way in which drug companies finance their research. It costs a lot of money to research new drugs and then test them to establish their safety and effectiveness and bring them through the Food and Drug Administration's approval process.
However, there are more efficient mechanisms than patent monopolies to finance drug research. Vermont Senator Bernie Sanders is proposing one such mechanism, a prize system, be adopted to support research on AIDS drugs.
This system, which has been proposed by Nobel Prize winning economist Joseph Stiglitz, among others, would set up a $3 billion-a-year prize fund to buy out existing and future patents for AIDS drugs. The fund would compensate drug companies and researchers for their work. The patent would then be placed in the public domain so the drug could be sold in the free market as a generic. AIDS patients would no longer have to struggle to find ways to pay for their drugs; they would be sold at prices comparable to other generic drugs.
This may sound like some big socialist give away, but only to people who have difficulty understanding economics. Under our current system, the government is giving something of enormous value to the drug companies: a patent monopoly. It will instead be buying out this monopoly and allowing drugs to be sold in a free market. As any economist can tell you, eliminating the monopoly and allowing a free market should lead to enormous savings.
In the case of AIDS drugs, much of the savings would accrue directly to the government, since the government pays for the bulk of AIDS treatment through Medicaid and other programs. The savings to the government from getting AIDS drugs at free market prices is likely to vastly exceed the money spent on the prize fund.
We will be able to put a more precise dollar amount on these savings if the Congressional Budget Office (CBO) can be persuaded to score Senator Sanders Bill (S.1138). There will be a hearing on this bill later in the month, which will include testimony from Professor Stiglitz, among others.
It is worth noting that a prize fund is not the only alternative to patent-supported research. The government already spends $30 billion a year supporting biomedical research through the National Institutes of Health (NIH). This research wins praise from across the political spectrum for its high quality and cost effectiveness.
While most NIH funding is devoted to basic research, there is no reason that this funding could not be expanded to cover the cost of developing and testing new drugs. The research could even be contracted out to existing drug companies or new ones who want to compete for funding.
The advantage of this system over a prize system is that all of the research findings would be immediately placed in the public domain. A patent prize system would encourage secrecy as companies try to prevent competitors from benefiting from their work. This secrecy has led to enormous waste and duplication in the research process.
By contrast, if the government were funding the research upfront it could make full disclosure of all research findings a condition of accepting the funding. Not only would any patents resulting from the research be placed in the public domain, but all the research that was relevant to drug's development would also be in the public domain.
We can argue over the relative merits of different alternatives to the system of patent-supported research in prescription drugs; however it is essential that we start this discussion. Currently we spend close to $300 billion a year for drugs that would cost around $30 billion in a free market. The $270 billion difference is approximately five times as large as what is at stake with extending the Bush tax cuts for the wealthy.
This is where the real money is and we should be talking about it. The hearing on Sanders' bill is a good start. CBO's scoring of the bill would be an excellent follow-up.
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