The opposite of a free market
By Dean Baker
Venkataraman
points out that we are seeing significant advances in developing new drugs and
treatments, but many of these innovations are selling for ridiculous prices.
Her lead example is Casgevy, a treatment that can cure sickle cell anemia. The
developer of this treatment is charging $2.2 million for it.
She
argues that the price could be radically reduced if the research was funded at
least in part by non-profits, governments, or companies willing to accept lower
rates of return. This is, of course, true, but her ideology prevents her from
seeing clearly the issues involved.
In
fact, government and foundations already pay for about 30% of the research and
development costs for new drugs, which Venkataraman neglects to point out.
These benefactors only rarely share in royalties for the medicines whose
development they helped finance.
After
arguing for developing drugs in ways that allow for lower prices, she asserts
in the last paragraph:
“But
there are steep costs to letting the market determine what’s best for a
society’s well-being.”
The
whole point is that we are not letting the
market determine what’s best for a society’s well-being. We, or our
politicians, have decided to grant lengthy and strong patent monopolies to
encourage companies to innovate. There are other, and less expensive, ways to
achieve this.
This is not just a point of semantics. Granting patent monopolies is a policy choice, not a natural market feature. These patent drug monopolies are just how the government has chosen to finance innovation. If we argue against patent monopolies, we are not arguing against letting the market decide how resources should be allocated. Instead, we are arguing against using this specific government mechanism to determine the allocation of resources.
Imagine
Patented Water
An
excellent argument exists against the patent monopoly system for financing
prescription drug development. The obvious one, as Venkataraman points out, is
that these monopolies can lead to ridiculously high prices for drugs and
treatments.
This
is for the obvious reason that people with the resources, either their own
money or access to good insurance, are willing to pay huge amounts to preserve
their health or save their own life. But these high prices are almost entirely
due to the patent monopoly. Water is also necessary for our life and health.
Still, it is usually reasonably cheap since there are no monopolies on the
water itself, and distribution systems are either public services or charge
regulated prices.
In
the case of prescription drugs, it is almost always cheap to manufacture and
distribute them. In a free market, they would generally sell for less
than ten percent of the price of drugs subject to
patent monopolies and often less than one percent. Paying for drugs would not
be a significant problem, provided they were available in a free market without
patent monopolies.
While
the world’s poor find even generic prices expensive, if drugs were sold at free
market prices, aid agencies and private charities could realistically look to
cover the cost, as has been the case with AIDS drugs in Sub-Saharan Africa. In
some cases, as with Casgevy, the price involves paying trained medical
professionals to provide this treatment. This cost would still be faced even
without the patent monopolies, but the total expense would be far more
manageable.
Incentives
To Lie
When
drug companies can sell their products for mark-ups of several hundred percent,
or even several thousand percent, they have enormous incentives to push their
drugs as widely as possible. This means exaggerating the potential benefits
while minimizing the side effects and risks associated with their drugs.
The
extreme case of this lying was the opioid crisis, where drug manufacturers knew
that their drugs were highly addictive and pushed them with the claim that they
were not. This led to far more abuse, which ruined the lives of hundreds of
thousands of people.
From
1999 through 2021 at least 645,000 Americans died from opioids. In 2022,
almost 80,000 people died. If the 2023 death toll is roughly
the same, the butcher bill to date will exceed 800,000 American lives.
Legal
Bribery
While
opioids are an extreme case, drug companies routinely pay doctors to promote
their products and lobby politicians and government agencies to have their
drugs used as widely as possible. To take a prominent recent example, through
intensive lobbying, Biogen got the Food and Drug Administration to approve its
Alzheimer’s drug, Aduhelm, over the objections of an independent FDA advisory
panel.
The
drug’s trials showed little evidence of effectiveness and severe side effects.
The decision was later reversed. Biogen planned to sell Aduhelm for $55,000 for
a year’s dosage. However, if sold as a low-cost generic, there would have been
little incentive to push a drug in this situation, where the evidence did not
show it to be an effective treatment.
Secrecy
Encouraged
The
quest for monopoly control over a new drug or technology encourages secrecy in
research rather than an open exchange of knowledge among scientists.
A
drug company wants to maximize its ability to gain the fruits of its research
spending and minimize the extent to which competitors could benefit. For this
reason, they are likely to closely guard their research findings and limit the
ability of researchers to share information by requiring them to sign
non-disclosure agreements.
Such
secrecy almost certainly impedes the development of technology since science
advances most rapidly when research is freely shared. The Human Genome Project
provided a great example of such sharing, where the Bermuda Principles required that results be posted
on the web as quickly as possible.
If
we relied on direct public funding for research, expanding on the $50 billion a
year we now spend through NIH and other government agencies, we could impose
comparable rules, requiring that all research findings be quickly available on
the web. This would allow researchers everywhere to benefit swiftly from any
breakthroughs. It would also steer them off dead ends uncovered by other
researchers.
In
addition, if the focus is on public health rather than creating a patentable
product, this route of direct funding would also encourage research into
dietary or environmental factors that could significantly impact health. The
patent system provides no incentive to research these issues.
Serious
Discussion Required
Our
system for developing new drugs is a disaster. While we can point to great
successes, these come at enormous cost. This year, we will spend over $600
billion on prescription and non-prescription drugs. This comes to almost $5,000
per family. This is real money.
We
would almost certainly be spending less than $100 billion if these drugs were
sold in a free market without patent monopolies or related protections. And,
even when people get third parties, either private insurers or the government,
to pick up the tab, the high price requires them to jump through all sorts of
hoops to get the necessary approvals. This bureaucratic nonsense would be a
pain for anyone, but it is tough on people in bad health.
Discussing
alternative systems seriously is much more challenging if we work under the
illusion that government-granted patent monopolies are somehow the free market.
They are a government policy, just like direct research funding would be a
government policy. We need to have a serious debate on which policy provides
the best mechanism for supporting the development of new drugs and not be
saying nonsense things about interfering with the market determination of
outcomes.
Dean Baker co-founded the Center for Economic and
Policy Research in 1999. His areas of research include housing and
macroeconomics, intellectual property, Social Security, Medicare and European
labor markets. He is the author of several books, including "Rigged: How
Globalization and the Rules of the Modern Economy Were Structured to Make the
Rich Richer."
