Patent Profits and Drug Pushers

February 17, 2019

Dean Baker
The Hankyoreh, February 17, 2019

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Last month the Attorney General of the State of Massachusetts filed a lawsuit against Purdue Pharma, one of the country’s leading pharmaceutical companies. The suit alleges that the company intensively promoted the painkiller, OxyContin, to doctors and their patients by claiming that it was not addictive, even though there was evidence that the drug was highly addictive.

The claim at the center of the suit puts Purdue Pharma at the center of the opioid epidemic in the United States. By widely pushing OxyContin to enhance its profits, Purdue was getting hundreds of thousands, perhaps millions, of people addicted to painkillers. In many cases, this addiction proved to be life-destroying, causing people to lose jobs and families, and in some cases resulted in death by suicide or overdose.

If the allegations in the suit are true, we can all agree that the people who decided to push OxyContin based on false claims are really awful people. But, we also have to look carefully at the incentive structure that led to this outcome. This is not just a story of people acting badly.

The basic story with OxyContin, as with other drugs, is that pharmaceutical companies are in a position to make large amounts of money by increasing sales because the government gives them patent monopolies on these drugs. This allows them to sell their drugs at prices that are typically several thousand percent above the free market price.

They could be selling a patent-protected drug for hundreds or even thousands of dollars per prescription when it would sell as a generic for $10 or $20. These enormous mark-ups give drug companies huge incentives to promote their drugs widely.

While the case of OxyContin is extreme, there have been many instances in recent decades where drug companies allegedly misrepresented the safety and effectiveness of their drugs to increase sales. A paper I wrote with Ravi Katari a few years back, identified five drugs where there was a settlement over claims of misrepresenting the safety and effectiveness of drugs. (OxyContin was one of the drugs.) Summing the costs in terms of illness and premature deaths, we calculated the cost of misrepresentations for just these five drugs was over $300 billion.

Clearly, this figure is just the tip of the iceberg. There have been many other cases where drug companies have lost lawsuits or paid fines related to misleading claims about their drugs. We can be assured that whatever has come to light is just a fraction of the abuses that actually occur since the drug companies are not going to publicize instances where they break the law.

But the problem is not just that people who work at drug companies are bad people. They do bad things because we give them incentives to do bad things.

Specifically, the problem is patent monopolies that allow them to charge prices that are far above the free market price. It is unlikely that many people would tell lies that endanger lives to increase the sales of paper clips or shoelaces. These products are both sold at a profit, and companies would obviously like to increase their sales, but the small margins involved are not likely to make it worthwhile for sales representatives to push dangerous lies about their products.

The fact that patent monopolies give incentives for bad behavior is hardly a secret; this is basic economics. But, it is part of the story of using patent monopolies as an incentive for researching and developing new drugs. An inevitable outcome of this incentive structure is the incentive to promote drugs in contexts where they may not be helpful or could be harmful. The hope is that regulation will limit such abuses, but when there is so much incentive at stake, this is an uphill battle.

We could look to alternative mechanisms for financing drug research, most obviously direct government funding. Governments already support research, but mostly at a more basic level. In the United States, this support is currently about $40 billion a year, which is not much less than the $70 billion in research spending by our pharmaceutical industry.

We could look to expand this public funding and have the additional money directed towards developing drugs and bringing them through the testing and approval process. In that situation, all new drugs could be produced as generics and sold at their free market price.

In addition to ending the problem of drug affordability, this would also eliminate the incentive for drug companies to increase sales by misrepresenting the safety and effectiveness of their products. (Such misrepresentations would be more difficult in any case, since all the research and testing information would be fully public.)

While overhauling the way the development of prescription drugs is financed would be a huge task (industry sales worldwide are over $1 trillion a year), this is not a change that has to be put in place all at once. There could be public funding of research in a limited number of areas, for example, heart disease or cancer, which could go side-by-side with patent supported research. If the public funding in these areas successfully produced innovative drugs that were available at generic prices, there would be support for expanding the funding to more areas.

Needless to say, the pharmaceutical industry will strongly resist changes to a model that has proven very profitable. However, the biggest obstacle at the moment seems to be one of imagination. Many of the people involved in policy debates on drug prices literally cannot even conceive of developing drugs without patent monopolies.

The abuses around the marketing of OxyContin highlight the problem of the patent monopoly system for financing the development of new drugs. If we don’t want to see more OxyContin-like instances, we have to have a serious debate about alternative mechanisms.

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