Government-Granted Patent Monopolies Are Not the Free Market

December 29, 2023

It is amazing 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 great 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.

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 here is that we are not letting the market determine what’s best for a society’s well-being. We, or our politicians, have decided that they want to grant lengthy and strong patent monopolies as a way to encourage companies to innovate.

This is not just a point of semantics. Granting patent monopolies is a policy choice, it is not a natural feature of the market. These monopolies are a way that 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, we are arguing against using this specific government mechanism for determining the way resources are allocated.

There is a very good argument 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 life. But these high prices are almost entirely due to the patent monopoly. Water is also necessary for our life and health, but it is usually reasonably cheap, since there are not monopolies on it.

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. It generally would not be a major problem to pay for drugs, if they were available in a free market without patent monopolies.

While the world’s poor would 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 a treatment. This is a cost that would still be faced even without the patent monopolies, but the expense would be far more manageable.

Patent Monopolies Provide 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 incentive to push their drugs as widely as possible. This means exaggerating the potential benefits and also 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.

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 FDA to approve its Alzheimer’s drug Aduhelm, over the objections of its independent advisory panel.

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

Patent Monopolies Encourage Secrecy

The quest for monopoly control over a new drug or technology encourages secrecy in research. A drug company wants to maximize its ability to gain the fruits of its research spending and minimize the extent to which competitors can 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 quickly benefit from any breakthroughs. It would also steer them off dead ends uncovered by other researchers.

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

Serious Discussion Requires Recognizing that Patents Are Not the Free Market

Our system for developing new drugs is a disaster. While we can point to great successes, these come at enormous cost. We will spend over $600 billion this year 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 sort of bureaucratic nonsense would be a pain for anyone, but it is especially hard on people in bad health.

It is much more difficult to have serious discussions of alternative systems if we work under the illusion that government-granted patent monopolies are somehow the free market. They are a government policy, just like direct funding of research would be a government policy. We need to have a serious debate of 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. (I discuss this issue in chapter 5 of Rigged [it’s free].)


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