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Home Publications Blogs Beat the Press Drug Patents Lead to Corruption #54,187

Drug Patents Lead to Corruption #54,187

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Thursday, 19 December 2013 06:08

The NYT had a great piece about how drug manufacturers contribute money to charities that help people meet co-payments on drugs. The way the deal works is that a drug company will charge a very high price, let's say $50,000 a year, for a drug that may be of limited value compared to lower cost competitors. To discourage its use insurers require a 20 percent co-payment, which would mean patients have to cough up $10,00 a year.

This sort of co-payment would keep most people from using the drug. In order to prevent this outcome, the drug company gives money to its favored charities, which in turn make the patient's co-payment. This gives the patient no reason to go with a cheaper drug. The drug company in this story nets $40,000 instead of $50,000, but they still come out way ahead on a drug that probably costs less than 1 percent of this amount to produce.This is exactly the sort of arrangement that one would expect when the government grants patent monopolies and other forms of protection that prevent market competition. 

 Addendum:

Some comments noted that the drug highlighted in the piece, H.P. Acthar Gel is not protected by a patent. This is true, it has a different form of government monopoly, data exclusivity. This will last into 2017, hence the ridiculously high price.

Comments (10)Add Comment
Why Economic Predators are So Efficient
written by Last Mover, December 19, 2013 6:27

Efficient that is, at extracting every dime available of consumer surplus under the demand curve.

It's called willingness to pay. It means what one would ultimately pay at a maximum threshold price before giving it up altogether in terms of too much opportunity cost lost - whatever is given up in this case, to make the out of pocket payment for the drug.

Consider how powerful an economic predator must be to pull this off, bribing a charity with part of the economic monopoly rent take on the deal which still leaves the predator much better off.

It's not unlike how the financial predators who brought the economy down in 2008 paid insurance bribes to AIG to cover the ultimate possibility of any loss at all, assuring there was simply no risk at all faced by the predators. None whatsover. It was all shifted to the government and taxpayers in the end.

Consumer surplus is important. It reflects whether consumption value on the demand side is maximized on behalf of consumers rather than shifted to sellers who face no competition.

It's bad enough to be out of a job or severely underemployed at the macro level. But that's not enough for the economic predators of Big Pharma, which is after every available dime one has to spend no matter how low the income may be.

One would expect "conservatives" in particular to howl at the top of their lungs about this particular con game outed by Dean Baker. By bribing the charity to make the copayment for the poor, it keeps the monopoly lock on the getting the big money collected for the full overpricing of the drug assessed to insurers and taxpayers.

But no one from the political right is howling are they. It's legal you see, because patent abuse is perfectly legal. Which of course means it's perfectly legal for economic predators to extract as much consumer surplus as possible, since they're from the private sector.

You do see don't you America? Like you know, what Rush Limbaugh said about the Pope being a Marxist and all ... anyone who challenges Big Pharma is a Marxist as well aren't they.

Now shut your whining America and pay up on the copayment and be glad for what you have, not what you could have under legitimate free market competition.
Worse Than Dr. Dean Says
written by Robert Salzberg, December 19, 2013 6:48
Dr. Dean Baker left out that the $10,000 gift to charity is deductible and with corporate taxes at 35%, the drug company really nets $43,500.

But the real deal isn't the co-pays, many/most drug companies selling really expensive drugs have special programs that pay the entire cost if you can't afford it. So a drug that sells for $50,000 a year is free. The drug company deducts $50,000 from its taxes, saving $17,500 on a drug that might cost as little as $50 to produce.

So giving away the drug to poor people is both great PR and profitable. Nice work if you can get it....
How is that abusive?
written by John Glover, December 19, 2013 8:47
There really is no difference between making a gift of the full $50k and giving away the drug for free. In one case you have $50k of revenue and a $50k deduction, and in the other you have zero revenue and zero deduction.

The real scam is what Dean is talking about - how the government grants a monopoly that let's the drug company charge an outrageous price in the marketplace. The fact that they backhandedly support that price through fake charities is just a symptom, not the main problem.

Frankly, I consider what Dean describes as insurance fraud. The real price being charged is $40k, not $50k. The drug company is scamming the insurance company, resulting in higher premiums for the rest of us.
the PR is just as big of a scam
written by Jennifer, December 19, 2013 10:25
“Look at the alternative,” said Dana Kuhn, founder and president of Patient Services, one of the charities. “If they didn’t donate their dollars, people would die.”

Pharma is great about finding a few patients, who are understandably very happy to be treated, to basically shill for these kind of organizations. They know it makes it much more difficult to criticize them that way.
...
written by watermelonpunch, December 19, 2013 11:42

The scam is comprehensive.

The drug companies, the charities, the state government programs involved, and the insurance companies, all get their take.

How this isn't formally viewed as a form of corrupt kickbacks, I don't know.
Both monoplies and price discrimination use to be illegal; how far we've come!
written by Perplexed, December 19, 2013 1:56
"To discourage its use insurers require a 20 percent co-payment, which would mean patients have to cough up $10,00 a year."

This is more formally known as "price discrimination," and used to be illegal. Monopoly pricing alone can no longer satisfy the aggregate demand for greed satisfaction as it cuts out too many, but not all, buyers that will pay the pay (or can get their insurers to pay) the monopoly prices. The obvious solution then, is to combine monopoly prices with price discrimination and tax preferences to maximize the possible revenue stream. For a great read on how 100 years of anti-trust legislation was dismantled over the last 25 years take a look at Barry Lynn's book "Cornered," it a real "eye opener" with great insights into the new forms of monopolies that we have "legalized."

Does anyone else wonder why it is that the only economist that can see the magnitude of this is Dean Baker while almost all others are trying to figure out if inequality could be playing a role in growth and how in the world that could possibly be happening? What kind of caves do they live in? What are the walls lined with that can keep these obvious contradictions with their theories from penetrating?
supply and demand, again
written by Squeezed Turnip, December 19, 2013 5:52
The purpose of the patent, in this case, is to keep the supply arbitrarily low relative to demand. This in turn leads to many different kinds of arbitrage opportunities for the suppliers, who engage not in just plain usury on the consumers, but also on taxpayers. Then some of these same 'whiners' 'winners' have the audacity to run Mediscare™ campaigns because they don't have the fortitude to care for the people they made poor by sucking dry their pensions and health care plans.

Ah, heaven bless and keep you forever and ever, generous heart! There was not a dry eye in the realms of bliss; and amidst the hand-shakings, and embracings, and praisinqs, the decree was thundered forth from the shining mount, that this deed should outhonor all the historic self-sacrifices of men and angels, and be recorded by itself upon a page of its own, for that the Strain of it upon you had been heavier and bitterer than the strain it costs ten thousand martyrs to yield up their lives at the fiery stake; and all said, "What is the giving up of life, to a noble soul, or to ten thousand noble souls, compared with the giving up of fifteen [thousand] dollars out of the greedy grip of the meanest white man that ever lived on the face of the earth?"

(from Mark Twain's Letter to the Earth, adjusted for inflation since the time of writing)
Dean Dean Dean
written by root_e, December 19, 2013 7:21
The article focuses on a drug that has a monopolist producer, but is not protected by patent at all.
root_e, root_e, root_e
written by Squeezed Turnip, December 19, 2013 9:03
Dean never said it was protected by a patent, if you read his comment carefully. I made that mistake myself. Oh well. The fact is that it's a market manipulation. In this case, it's not the patent that's the problem, it's like Last Mover says, it's the pharma company gaming the insurance companies by making consumers complicit in the bilking of others. It's legal. What a screwed up healthcare system we have …
Happy holidays!
shills abound
written by tew, December 19, 2013 9:38
Jennifer writes "Pharma is great about finding a few patients, who are understandably very happy to be treated, to basically shill..."

The use of desperate outliers to pimp a position is not the exclusive domain of pharmaceutical companies. It's stock in trade for politicians, "activists", and a whole host of special interests.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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