Healthy Skepticism Library item: 3051
Warning: This library includes all items relevant to health product marketing that we are aware of regardless of quality. Often we do not agree with all or part of the contents.
Publication type: report
Baker D
Financing Drug Research: What Are the Issues?
Washington DC: Center for Economic and Policy Research 2004 Sep 21
http://www.cepr.net/index.php/publications/reports/financing-drug-research-what-are-the-issues/
Abstract:
Executive Summary
Rising drug prices are placing an ever larger burden on family budgets and the economy. The Center for Medicare and Medicaid Services estimates 2004 expenditures at $207 billion (more than $700 per person), and projects that annual spending will grow to more than $500 billion by 2013 (more than $1,600 per person). The immediate cause of high drug prices is government granted patent monopolies, which allow drug companies to charge prices that are often 400 percent, or more, above competitive market prices. Patent monopolies are one possible mechanism for financing prescription drug research. Rapidly increasing drug costs, and the economic distortions they imply, have led researchers to consider alternative mechanisms for financing drug research. This paper outlines some of the key issues in evaluating patents and other mechanisms for financing prescription drug research. It then assesses how four proposed alternatives to the patent system perform by these criteria. The most obvious problem stemming from patent protection for prescription drug is the huge gap it creates between the cost of producing drugs and the price. In addition, to making drugs unaffordable in many cases, high drug prices also lead to enormous economic inefficiency. Patent monopolies cause economic distortions in the same way that trade tariffs or quotas lead to economic distortions, but the size of the distortions are far greater. While trade barriers rarely increase prices by more than 10 to 20 percent, drug patents increase prices by an average of 300- 400 percent above the competitive market price, and in some cases the increase is more than 1000 percent. Simple calculations suggest that the deadweight efficiency losses from patent protection are roughly comparable in size to the amount of research currently supported by the patent system – approximately $25 billion in 2004. Projections of rapidly rising research costs, and therefore a growing gap between price and marginal cost, imply that the deadweight loss due to drug patents will exceed $100 billion a year by 2013. As economic theory predicts, government granted patent monopolies lead not only to deadweight efficiency losses due to the gap between the patent protected price and the competitive market price, but also to a variety of other distortions. Among these distortions are: 1) excessive marketing expenses, as firms seek to pursue the monopoly profits associated with patent protection – data from the industry suggests that marketing costs are currently comparable to the amount of money spent on research;2) wasted research spending into duplicative drugs – industry data indicates that roughly two thirds of research spending goes to developing duplicative drugs rather than drugs that represent qualitative breakthroughs over existing drugs;
3) the neglect of research that is not likely to lead to patentable drugs;
4) concealing research findings in ways that impede the progress of research, and prevent the medical profession and the public from becoming aware of evidence that some drugs may not be effective, or could even be harmful. In addition, the patent system for financing prescription drug research poses large and growing problems in an international context. Disputes over patent rules have increasingly dominated trade negotiations. Furthermore, problems of enforcement have persisted even after agreements have been reached. These problems are likely to worsen through time, as the pharmaceutical industry seeks to increase the amount of money it extracts from other countries through patent rents.
This paper examines four alternatives to the patent system:
1) A proposal by Tim Hubbard and James Love for a mandatory employer-based research fee to be distributed through intermediaries to researchers (Love 2003);
2) A proposal by Aidan Hollis for zero-cost compulsory licensing patents, in which the patent holder is compensated based on the rated quality of life improvement generated by the drug, and the extent of its use (Hollis 2004);
3) A proposal by Michael Kremer for an auction system in which the government purchases most drug patents and places them in the public domain (Kremer 1998); and
4) A proposal by Representative Dennis Kucinich to finance pharmaceutical research through a set of competing publicly supported research centers (Kucinich 2004). All four of these proposals finance prescription drugs in ways that allow most drugs to be sold in a competitive market, without patent monopolies. These proposals also would eliminate many of the economic distortions created by the patent system. The table below summarizes the assessment of these various systems based on the discussion in the text.
Rating Methods of Supporting Prescription Drug Research
| Â | Patent System | Hubbard and Love | Hollis | Kremer | Kucinich |
| Marginal Cost Pricing | 1 | 5 | 5 | 4 | 5 |
| Excessive Marketing | 1 | 5 | 3 | 4 | 5 |
| Adequate Financing For Bio-Medical research | 4 | 4 | 5 | 3 | 4 |
| Incentives for Copycat Research | 1 | 5 | 4 | 4 | 5 |
| Political Interference in Research priorities | 4 | 3 | 3 | 5 | 3 |
| Secrecy of Research Findings | 1 | 4 | 2 | 2 | 5 |
| International Coordination | 2 | 4 | 4 | 4 | 4 |
These proposals, along with other plausible alternatives to the patent system, deserve serious consideration. Current projections for drug spending imply that patent supported prescription drug research will lead to ever larger distortions through time. For this reason, it is important to consciously select the best system for financing prescription drug research, not to just accept the patent system due to inertia.
