April 18, 2014
Yet again the NYT has given us a piece talking about trade-offs between the cost and quality of health care. The piece reports that some doctors may not discuss certain treatments with patients because they consider these treatments too expensive. Unfortunately, the piece never discussed the role of patent monopolies in making these treatments expensive.
The point is simple but incredibly important. In some cases, for example open-heart surgery, a medical procedure may genuinely involve a substantial use of resources. In this case, it involves many hours of the time of highly-trained medical specialists. (The pay of these specialists is inflated by supply restrictions, but that is another question.) In such cases there can be an issue of whether some treatments are worth the economic cost. For example, should an otherwise healthy 90-year-old get open heart surgery when we know their life expectancy is just 2-3 years even assuming a successful operation.
However there is a very different story at issue in the cases discussed in this article. These cases all refer to the choice of drugs. The drugs that are very expensive do not necessarily involve a greater cost to the economy than the cheaper alternatives. They are expensive because the companies that sell them have patent monopolies or other protections that allow them to sell drugs at prices that are far above their free market price.
This distinction is important because if there are tough choices here it is only because government policy had created them. If all drugs were sold at their free market price, without patent protection, then the difference in costs would in almost all cases be trivial and doctors need not have any reservations about recommending the one they considered best based on their understanding of the evidence.
Of course patent monopolies serve a purpose in providing an incentive to drug companies to undertake research, but there are alternative mechanisms such as the $30 billion in annual direct public funding provided through the National Institutes of Health. Direct funding would not only eliminate the problems associated with figuring out how and whether to pay for expensive patent protected drugs, it would also likely lead to a much more efficient process and better medicine.
As it stands now, much of the research undertaken by drug companies is intended to garner some of the patent rents earned by competitors. For example, Sovaldi, a new and effective drug for treating Hepatitis C, can cost over $100,000 a year. The enormous rents received by its producer, Gilead Sciences, is leading other companies to try to develop their own drugs that will get around Gilead’s patent. While it would be desirable to have more than one highly effective drug to treat Hepatitis C (some people will react poorly to Gilead’s drug), the research spending to evade Gilead’s patent is almost certainly not the best use of resources given that we already have a drug in this category. If there were no patent rents, this spending would be diverted to more productive areas.
Similarly, Gilead has an enormous incentive to misrepresent the effectiveness of its drug. It makes huge profits on every additional patient it gains. Simple economic theory would predict that it will therefore exaggerate the effectiveness of the drug and downplay or conceal evidence that its drug is ineffective or harmful. And, since there is a serious problem of asymmetric information (Gilead knows much more about its drug than patients and doctors), they are likely to get away with these misrepresentations. For this reason, we are likely to get better treatment if all drugs were sold in a free market without patent monopolies.
Finally, research is likely to advance much more quickly in a context where all findings are quickly put in the public domain where other researchers can benefit from the knowledge. As it stands now, Pfizer or Merck only make results available that advance their sales or are necessary to gain patent protection. However it could and should be a condition of getting public funding that all results are posted on the Internet as soon as practical. This would prevent scientists from needlessly pursuing dead ends. It would also allow the whole scientific community to quickly benefit from any important breakthroughs.
Anyhow, if we are going to start debating whether doctors should discuss medical treatments that are very expensive, we should first have a discussion on the patent laws that make these treatments expensive. We know why doctors might be reluctant to mention very expensive treatments with patients. Why is the NYT reluctant to discuss the patents that make them expensive?
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