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Home Publications Blogs Beat the Press Government Granted Monopolies Lead to Corruption: The Case of Prescription Drugs

Government Granted Monopolies Lead to Corruption: The Case of Prescription Drugs

Sunday, 25 November 2012 08:44

There is a large economic literature that shows how trade protection, which might raise the price of products by 15-20 percent, leads to political corruption. The argument is that the beneficiaries of this protection will use their political power to try to maximize the rents they get from this protection.

For some reason economists have not shown the same concern over the granting of patent monopolies which can raises the price of the protected product many thousand percent above the free market price. This is especially an issue in the case of prescription drugs. Drugs that would sell for $5-$10 per prescription as generics in a chain drug store instead sell for hundreds or even thousands of dollars per prescription because of the government granted patent monopoly. The matter is complicated further by the enormous asymmetry in knowledge: the drug company knows much more about their drugs than doctors or patients.

The Washington Post has an excellent front page story that documents how drug company abuses in the research process have been a growing problem over the years. Unfortunately when discussing solutions it does not consider the idea of just taking the financing of clinical trials out of the hands of the industry as proposed by Nobel Laureate Joe Stiglitz. This idea was introduced into legislation earlier this year by Senator Bernie Sanders.

Comments (7)Add Comment
A Baby Step Towards A Fairer Patent Policy
written by Robert Salzberg, November 25, 2012 8:19
The National Institute of Health conducts numerous drug trials on it's own and through grants. When it comes time for successful new drugs developed by NIH to go to market, NIH just gives away the patent rights to a drug company. Even worse, when the federal government, through Medicare, Medicaid or TriCare, buys those drugs, it pays the same as it would if it had nothing to do with the drugs development.

A first step would be for the federal government to receive drugs it develops and gives away to drug companies at cost for federal health program beneficiaries.
written by urban legend, November 25, 2012 3:21
Does the $5-10 generic cost also include the cost of (and reasonable profit on) research and development, or hasn't that already been amortized long before generic manufacturers get into the picture? If not, then you cannot say the generic cost is a true market cost.

For all the waste that's built into the current system, the industry will be able to marshall a strong public campaign emphasizing its many enormous wonder-drug successes over the past 100 years or so. Patents are also an integral part of the history and culture of Western business. That's why it's a waste trying to eliminate patent protection entirely for a single industry.

Rather than tilting at windmills against "patent monopolies," which have generally been considered for a few hundred years (including with no controversy in the U.S. Constitution) an essential element for encouraging innovation in a free market economy, and which now have a worldwide recognition scheme that would have to be undone, it would be better to do the harder and more politically realistic work of (1) seeing how much of the excess profit can be taken out by passing legislation allowing the government to negotiate drug prices for Medicare and allowing importation from counties with strong regulatory schemes like Canada; and then, if that's not good enough, (2) figuring out how and building public support for changing the specifics of patent law as applied to drugs and eliminating the parts that allow for unreasonable profits beyond those necessary to provide the proper incentives.

A prize system is inherently a centralized bureaucratic process, in contrast to patents which primarily depend on distributed enforcement through the court system. Patents by definition create a temporary monopoly. Always have. Reciting that truism does not contribute anything to the discussion. What would be more useful is identification of specific examples of abuse and discussion of changes -- prevention of evergreening or giving courts the authority to declare profiteering on orphan drugs unreasonable, for example -- that could be made to eliminate the abuses.
Response to urban legend
written by Jennifer, November 25, 2012 5:53
Nobody is talking about eliminating drug patents but the pharmaceutical industry is the poster child for abuse of the patent system--see the excellent The Truth About Drug Companies by Marcia Angell for details. As RS and others are always pointing out about 90% of the drug development is done by NIH--yet the taxpayer does not benefit fom this in any substantial way. If NIH was allowed to complete the process--do its own trials and manufacture its own drugs (which could be contracted out) there probably would not be pharmaceutical industry.
written by skeptonomist, November 26, 2012 7:58
The NY Times has an editorial today about severe shortages of some drugs, but mentions nothing about the economics. What is going on there? Are those all particular drugs generic (off-patent)? Such shortages might be an argument for maintaining high prices to keep production up, but might also be an argument for production by non-profits or governments.
Thanks for link. Post also has a link to startling story on some anemia drugs too.
written by Rachel, November 26, 2012 8:16

including the following: "It was just so easy to do -- you put this stuff in the patient's arm, and you made thousands of dollars," said [chair at U. S. C.]. "An oncologist could make anywhere from $100,000 to $300,000 a year from this alone."

Article notes that one of these drugs, often used for cancer and dialysis patients: 'For several years [the drug] ranked as the single costliest medicine under Medicare: U.S. taxpayers put up as much as $3 billion a year for the drugs.'
The counterfeit problem
written by FoonTheElder, November 26, 2012 10:27
The price gouging by drug companies is also the reason that there is a huge counterfeit drug problem.

The real cost of the drug compared with the sale price is so low, that there is a huge incentive to create fake drugs. The margins are so high that there counterfeiters can also make a huge margin.

If the cost of real drugs was lower, the lower margin for counterfeiters would not be worth the risk.
Too Much Information?
written by Mitch Beales, November 26, 2012 3:08
I was appalled when I picked up the "colon prep" for my scheduled colonoscopy and there was a copay of $60. A quick look online revealed that this "medication" was >$100 from Canadian pharmacies. This is for "technology" that has been around for centuries. The purpose of patents is to encourage the development of new technology. The current situation results in the purchase of patents by large corporations in order to suppress new technology while at the same time abusing patents to make outrageous profits on miniscule changes in age old technologies. A major overhaul is required to assure that the actual inventor of a new technology gets a reasonable financial return for her innovation in addition to the fame and altruism which tend to be the prime movers of such individuals. The outrageous returns on patents only encourage corporate abuse without actually stimulating innovation.

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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.