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Home Publications Blogs Beat the Press The $84,000 Drug Costs $84,000 Because of Government Patent Protection

The $84,000 Drug Costs $84,000 Because of Government Patent Protection

Friday, 30 May 2014 05:17

The Washington Post had an interesting piece discussing the issues associated with the cost of Sovaldi, a new drug designed to treat Hepatitis C. As the headline tells readers, Gilead Science, the manufacturer of the drug, is selling a year's dosage for $84,000. The piece notes that many new drugs are now being developed which will likely carry similar price tags.

At one point the piece raises the possibility of price controls, which it implies would be a government intervention into the market. Actually, the $84,000 price is the result of a government intervention into the market. It is due to the fact that the government grants companies a complete patent monopoly, threatening to arrest those who try to compete in selling the same drug.

While patent monopolies are one way to provide an incentive for research and development, they are an extremely inefficient mechanism. Not only do they lead to a situation in which drugs that would otherwise be cheap (absent patent protection, Sovaldi would almost certainly cost less than $1,000) become very expensive, they provide enormous incentives for drug companies to misrepresent the safety and effectiveness of their product. And they do this all the time, just as economic theory would predict.

In addition, patent monopolies provide incentives for duplicative research as other companies attempt to innovate around a patent in order to get a share of patent rents. The article reports that this seems to be happening in the case of Hepatitis C where other companies are bringing similar drugs to the market.

In short, the problem of high-priced drugs is the direct result of government policy. That point should be front and center in any piece that discusses the topic.

Comments (15)Add Comment
Pricing control
written by s ken brown, May 30, 2014 6:32
is the dream of every American businessman. They have it with pharmaceutical patent monopolies and don't expect a triviality like saving thousands of lives to get in the way. It's the kind of "free" market that business loves and will fight tooth and nail to keep.
Even the math shows the economic rent of this drug
written by Shawn Wilkinson, May 30, 2014 7:23
The cost of treating every estimated patient (go with the boundaries 2.2 million and 3.2 million) at $84,000 each is:

2.2 * 84 * (million*thousand) = $185 billion
3.2 * 84 * billion = $269 billion

This figure swamps the number from the lobbyist in the article about the cost of treating Hepatitis C currently, including liver transplants.

And the $84k is for genotype 2 patients. Genotype 3 patients have to double the dosage for effectiveness, which means double the price, but they have lower cure rates (~89%).

So it would take 20 to 30 years (or even longer) to match the savings with the expenditure. Gross.
Free Markets: Freedom To Be a Monopolist is Not Free
written by Last Mover, May 30, 2014 7:44
In addition, patent monopolies provide incentives for duplicative research as other companies attempt to innovate around a patent in order to get a share of patent rents. The article reports that this seems to be happening in the case of Hepatitis C where other companies are bringing similar drugs to the market.

This practice extends far beyond patents. It has become a primary propaganda tool used by sock puppets to praise "free" markets for encouraging "competition".

Step 1: Monopolist takes over a market. Sock puppets celebrate it as "competitive innovation" that would not have emerged otherwise.

Step 2: A second player moves into the market and prices just under the first player. Sock puppets celebrate it as evidence of "competition" that barely puts a dent in prices.

Step 3: Goverment moves to increase competition in the market with enough entry to result in genuine head-to-head price competition. Sock puppets kick and scream that it's socialism out to destroy markets and raise cost.

Step 4: Market eventually collapses into one monopoly player in each area for "efficiency" reasons, citing there's only enough room for one player given scale economies. Unit cost declines as prices go through the roof and economic predators keep the difference.

Sock puppets insist it's better than any alternatives - even government alternatives that cut cost and price in half or more for same quality.

Step 5: New free market paradigm: Freedom to be a monopolist is not free. It cost much more than freedom to be a competitor. But it's worth it to those willing to pay the price from the supply side ... so they can extract prices from those on the demand side ... right up to their willingness to pay ... to avoid an early death.

Only in America. Freedom. If it's not worth dying for, then it's worth paying for.
Separate but equal
written by Steve Consilvio, May 30, 2014 9:14
Another way to look at it is as a Separate But Equal system.

Why is the one type of labor deserving of special protections and permanent privileges?

Then, these privileges can be transferred. The consumer is chattel for the slave-masters.

Of course, we are all victim and the crime. The system sucks everyone in.

Besides the mathematical forces that make capitalism unstable, these attempts for social-economic privilege just reflect the double-standards of the original framers. You are right on that score.

Just like Kings, people do not want to give up the opportunities that privileges yield. Equality is fine for lip service, but fascists do not want to actually practice it.
Some Minor Corrections
written by Larry Signor, May 30, 2014 9:28
The Sovaldi treatment standard for hepatitis C, genotypes 1,2 & 4 is 84 days at a total drug cost of $84,000.00. Hepatitis C, type 3 requires 168 days of treatment for $ 168,000.00.

This does not change the patent argument, it exacerbates it by cramming revenues into a smaller window of time. Since most liver transplants are end of life care, Sovaldi will initially have only a marginal affect on transplant frequency. If Sovaldi is not affordable, this marginal ineffectiveness will be ongoing. The real beneficiaries of Sovaldi will be Gilead stockholders and executives.
More side-effects
written by Slugger, May 30, 2014 10:41
A further side-effect of the enormous profitability of patented drugs is that they crowd out the making of patentless drugs. Once a medication goes off patent the incentive to continue production decreases sharply. As a consequence, many useful medicines are in short supply. I have a chronic condition which is well managed with a cheap older drug, but my cheap older drug is getting harder to find. The FDA maintains a drug shortage webpage containing many examples of this problem. I recently read that oncology clinics are having trouble finding saline solution for IV's for instance.
I guess the constitution can be considered government policy???
written by pete, May 30, 2014 11:47
Seems kind of odd though. I always think of policy as something that, say, congress and the president can change, like the ACA. Constitutional change is a little more severe, requiring 2/3 of the states approval. Probably a rough sell after the huge growth in the US economy due to technological, patent protected, progress.

PS I currently take two patent-expired drugs, total cost $4 a month. Infinity with no patent protection is an extremely long time for very effective drugs at basically zero cost.
No constitutional issue here
written by Dean, May 30, 2014 2:13

The only reference to patents in the constitution is in Section 8, which describes the powers of Congress starting with the power to tax. The 8th item on the list, right after the power to establish post offices and roads is:

"To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries;"

That's it. Granted patent monopolies is a power that Congress has the option to exercise or not, just as it could choose not to tax. Also, the purpose is quite explicitly to "promote the progress of Science." If patent monopolies impeded rather than promoted progress in science then arguably they would not be constitutional.

so patent law should change from year to year at whim....
written by pete, May 30, 2014 3:08
Seems terribly inefficient to have the law jerked around. Hard to make R&D plans if you know that in a year or two congress might yank the profits out from under ya. Clearly, a huge sea change in research and profits is envisioned, likely not to occur. Currently many universities (i.e., students and profs) benefit from patent royalties.
Patent law has been changing
written by Dean, May 30, 2014 4:46

we have changed the laws -- made them stronger and longer. My own view is leave them exactly as they are. Just put up funding for developing drugs that will be in the public domain from day 1. If the drug companies want to sell their crap in direct competition with generics that will often be better, let them go ahead. It's a free market.
Drug Patents
written by Alan, May 30, 2014 5:40

You cannot pick and choose how the patent system will work. Either all "new" inventions qualify for a patent or none of them do. You may not like how pharmaceutical companies use the patent system but the brutal fact is that they do come up with "new" inventions. The pricing side of things is another story completely and that's where things are not good (disclaimer: I spent 95% of my working career in the biopharmaceutical industry doing regulatory affairs and am not pleased with the direction most of the pricing decisions). We are not seeing any CEOs coming from the research side of things these days (to my knowledge only one major pharma company has a researcher running things).

Sure the government does fund biomedical research but in reality they do a terrible job of drug development and it's my belief that more money is wasted in government funded research than by pharma companies who have to be accountable to shareholders.

I don't know how your proposal to fund drug development out of public money would work in reality. Is the government prepared to absorb all the false leads?
This is correct!
written by Dave, May 30, 2014 7:23
Why is this not the debate in public?
Public Debate
written by Alan, May 30, 2014 7:30
This did go on in public during the Medicare Drug Benefit legislative debate. Unfortunately, the government lost the ability to negotiate prices. The real discussion should be whether the US should follow the lead of every other western country and have some form of price controls. Pharma companies seem to do OK in foreign markets where there are controlled prices.
It's real simple, what the government funds is in the public domain.
written by Dean, May 30, 2014 9:03

this is a real simple story -- no picking and choosing. The government puts up money for research and everything that is produced from the research is in the public domain. That should be very straightforward. Pfizer and Merck are still free to pay for whatever research they want, they just have to take the risk that they will be competing against better drugs that sell for $5 a prescription. In terms of the public taking hits -- no one simply terribly troubled that lots of the money spent on the military goes into the garbage, hard to see any big issue here.

I have an old paper on this http://www.cepr.net/index.php?...cle&id=149 -- it's not exactly the way I would structure the proposal today, but it should give you the idea.

And no, this has not been in the public debate. You must have been thinking of something else.
If we can't win this debate, at least limit patent terms...
written by Dave, June 01, 2014 11:31
If we can't eliminate patents on drugs, the least we could do is limit the term to 5 years or so. It would be better than nothing.

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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.