Magazine article The American Prospect

Patent Medicine

Magazine article The American Prospect

Patent Medicine

Article excerpt

Absurdly high prices have put lifesaving prescription drugs out of reach for millions of Americans and for hundreds of millions of people in developing countries. In large part, patent protection is to blame. The patent system is a trade-off: Consumers pay a monopoly price on a drug for 17 years to provide incentives for firms to undertake research that yields large profits. But the patent system is not the only way to support drug research. Alternatives that have a proven track record of success already exist--specifically, research supported by foundations, universities, and the government. Shortening patent terms and putting most pharmaceutical research in the public domain would cut costs for consumers as well as for government. And contrary to industry propaganda, doing so would not reduce innovation.

This idea may sound radical, but look at the numbers. The drug industry currently spends around $18 billion a year on socially useful research. If research spending grows at a real rate of 3 percent annually, expenditures would total about $240 billion over the next decade. By comparison, the prescription drug plan proposed by Al Gore would cost $250 billion. If the government just picked up the full tab for drug research and did away with patent protection, most seniors would end up paying less for drugs than if the Gore plan were put in place. The federal government would save $10 billion right off the bat, in addition to savings on drug costs incurred in Medicare or Medicaid. And the rest of the population would pay 75 percent less for prescriptions.

When the patent system for prescription drugs is challenged, or when price controls or liberalized importation rules are proposed, we're warned about the perils of stifling innovation and tampering with the market. But patents are themselves a market distortion--an explicit form of government intervention: The government grants a prize (a 17-year monopoly) to people who innovate. This monopoly in effect transfers income from consumers to pharmaceutical companies. But this is neither the only nor the most efficient way to promote innovation.

Pricing patterns in nations without effective patent protection, and on drugs after their patent has expired, suggest that the free market price for drugs averages about one-quarter of the monopoly price. In the United States, which spent approximately $106 billion last year on prescription drugs, consumers would save $79 billion if this patent protection were dropped.

What consumers get for this $79 billion in higher drug prices is $22.5 billion in domestic research from the pharmaceutical industry (another $4 billion is conducted abroad). Consumers pay more than three and a half dollars to the drug industry for every dollar of research induced by patent protection. Another two and a half dollars goes to industry profits and marketing--and to the legal costs, campaign contributions, and political lobbying needed to protect and extend the industry's patent monopolies.

Worse, much of the research conducted by the drug companies is directed not toward breakthroughs to better our lives but toward finding ways around the lucrative patents of competitors. When a drug company scores a big hit with a drug like Viagra or Claritin, competitors patent comparable but slightly different drugs so that they can enjoy a slice of the market. In a world with patent protection, this kind of limited competition can be beneficial to consumers. After all, some competition is better than none; also, a copycat drug may incidentally benefit people who react poorly to the original drug. In a competitive market, however, pure copycat research would be dropped in favor of research funded by public sources and likely to produce real improvements. [See Merrill Goozner, "The Price Isn't Right," TAP, September 11, 2000.]

It is difficult to pin down how much of the industry's research spending is devoted to copycat drugs. …

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