Tyler Cowen Recognizes Public Goods Problem of Pandemics: More Money for Drug Companies

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Sunday, 05 May 2013 06:52

Showing the sort of creativity that we have come to expect from economists, Tyler Cowen used his NYT column today to call for giving more money to the pharmaceutical industry as a way to deal with the risks of pandemics. Cowen moves from the true statement that research and development into prescription drugs and public health more generally has a substantial public good character, to the idea that we need to give pharmaceutical companies more money in order to get them to do the research.

In discussing the issue of protecting the public against pandemics Cowen tells readers:

"If anything, the American government — or, better yet, a consortium of governments — should pay more for pandemic remedies than what market-based auctions [of patent rights] would yield. That’s because, if a major pandemic does arise, other countries may not respect intellectual property rights as they scramble to copy a drug or vaccine for domestic distribution. To encourage innovations, policy makers need to bolster the expectation of rewards."

For reasons that Cowen never bothers to mention, he excludes the possibility that patents may not be the best way to finance research. The patent system does provide an incentive to innovate but it also provides an enormous incentive to misrepresent research results and deceive the public and regulators about the quality and safety of drugs. We see this happening all the time, exactly as economic theory predicts. (Think of Vioxx.) The result is considerable damage to public health and an enormous economic waste as money is paid to pharmaceutical industry for drugs that are ineffective or possibly even harmful.

Patents also give an incentive for duplicative research. If a company has a major breakthrough drug that produces high profits then its competitors have a substantial incentive to try to duplicate this drug in a way that circumvents the patent. In a regime where patents provide a monopoly, the availability of potential substitutes will have the benefit of bringing the price down, however if the drug were already selling at its free market price, without a patent monopoly, no one would look to waste resources developing a second drug that essentially does the same thing as the first drug.

Patent financed research also slows progress by encouraging secrecy. Science advances best when results are shared as widely as possible. Companies that are relying on patent financing will only make the bare minimum of their research available to the larger scientific community, providing the information needed to secure patents. They have enormous incentive to withhold any additional information that could provide benefits to competitors.

Patent financing also distorts research toward finding patentable treatments for diseases. If a disease can be best controlled through diet, exercise, or controlling pollutants, patents will provide zero incentive to carry out research in the proper direction. Instead resources will be wasted on trying to develop a patentable drug.

 

There are alternative routes to supporting research. We already spend $30 billion a year on biomedical research through the National Institutes of Health. Even the pharmaceutical industry argues that this money is extremely well spent. There is no obvious reason that funding could not be doubled or even tripled with the idea of replacing the patent financed research currently undertaken by the drug industry.

The funding could be channeled through the private sector, even through the existing drug companies. The difference would be that all research findings would be made publicly available as soon as practical and all patents would be placed in the public domain. 

The model for this sort of funding would be the defense industry. In spite of many incidents of over-payment and outright fraud, public funding in this sector has not prevented the United States from having by far the most powerful military in the world.

Furthermore, a public contractor system in the pharmaceutical sector would have the enormous advantage that everything would have to be made fully public as a condition of getting funding. While there are legitimate grounds for secrecy in the research of weapons systems, there are no legitimate grounds for keeping medical research secret.

Of course this route would likely damage pharmaceutical industry revenue and profits. The patent system allows drug companies to charge hundreds or even thousands of dollars for prescriptions that would sell for $5-$10 in a free market. These monopolies are equivalent to imposing a tax of $250 billion a year or $3.0 trillion over the next decade on the American people. Needless to say, they would be very unhappy about losing this taxing power in exchange for the nickels and dimes they would get paid for carrying through this research.

This might be why economists almost never discuss the topic. Instead we get endless harangues about the need to spend less on Social Security and Medicare as in Cowen's piece today.

 

Note: "Public heath" was changed to "public goods" in the title.