High Drug Prices and the Resistance of Intellectuals to New Ideas

10/06/2015 12:00am

Dean Baker
The Hankyoreh, October 6, 2015

View article at original source.

Health systems around the world are struggling to deal with a new generation of incredibly expensive drugs. While these drugs are often effective in treating otherwise fatal diseases, like cancer, drug companies can demand prices in excess of $100,000 for this new generation of drugs. In most countries this has led to difficult negotiations with public health services. In some cases, the result has been that the government simply refuses to pay to provide its citizens with access to these drugs.

In the United States, where the government does not negotiate drug prices, the issue is often decided on almost a case by case basis. The federal government will have one set of rules for covering drugs and each of the fifty states will have their own rules, as will private insurers. Naturally the manufacturer of the drug lobbies Congress and state legislatures to cover their drugs and sometimes to pressure private insurers to cover the drug as well.

This debate over drug prices and who gets covered would be unnecessary if we had a more efficient mechanism for financing research. Giving a company a patent monopoly over the distribution of a drug, and then having its ultimate compensation determined by how effectively it can pressure governments to pay for the drug, is just about the worse system imaginable.

To get to the basics, drugs are almost invariably cheap to produce. Without patent and related protections, there are few drugs that would sell for more than $100 per prescription, with most just costing a few dollars. Drugs generally do not require rare chemical substances or expensive manufacturing processes. If drugs were sold in a free market without patent protections we wouldn’t have to debate who should get the latest drugs. The decision would be made on medical grounds not financial grounds.

Of course, we need to pay for the research, but patent monopolies are in many ways an especially bad way to finance research even apart from the issue of high drug prices. First, by having compensation depend on the patent monopoly, this mechanism creates a separation between cures and treatments that are not patentable and those that are. Researchers have zero incentive to pursue the former line of research. In fact, their incentive is to conceal findings that suggest treatments like diet or exercise can be effective, since this could undermine the market for patent protected drugs.

The second reason why patent monopolies are likely to slow research progress is that they encourage secrecy in the research process. Companies have no incentive to disclose any information beyond what is necessary to get a patent, since they don’t want to help their competitors. Of course science advances most quickly when research findings are readily available so that all researchers can benefit from them.

A third reason is that patent monopolies give companies an incentive to mislead doctors and the public about the safety and effectiveness of their drugs. This is easy to do in a context where there is an enormous asymmetry between the information available to the drug companies and everyone else. And, when drugs can sell for several hundred times their production costs, there is enormous incentive for such deception.

Unfortunately, many people in policy debates find it hard to understand that drugs can be developed without patents, most obviously with direct funding. The idea is that people would do research because we pay them. This should not be far-fetched, since most people work for paychecks, but somehow many people in policy circles find it difficult to understand that we could pay people to develop drugs.

We actually have some evidence on the effectiveness of direct funding. Along with several aid agencies and private charities, Doctors Without Borders set up the Drugs for Neglected Diseases Initiative (DNDI). After a decade of operation, the DNDI came out with a report card at the end of 2013. Among the highlights, it developed new treatments for both malaria and sleeping sickness. The former had already been used in more than 250 million treatments.

The costs for these innovations were 12 million euros and 6.8 million euros, respectively. By comparison, an economist at Tufts University recently estimated that it cost the pharmaceutical industry $2.6 billion to develop a single drug. This means that the DNDI was able to develop an effective treatment for malaria that has already been used more than 250 million times, for less than 0.6 percent of what it costs the U.S. pharmaceutical industry to develop a new drug under the patent system.

While there are reasons these numbers are not directly comparable, they do suggest that direct funding can be at least as efficient as patent monopolies in supporting research into the development of new drugs. And, if we pay for the funding upfront, we don’t have to run around with furrowed brows deciding who should be able to get expensive drugs. The drugs will be cheap and we will only have to worry about curing people. It would be a huge step forward if we could get people in policy circles to start thinking about alternatives to patents for financing drug research.

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