In polite circles being called a “protectionist” is almost as bad as being a convicted felon. No self-respecting person wants to be associated with protectionism. For this reason, anyone who advocates trade tariffs, quotas, or other policies that look protectionist always has a very good explanation as to why their agenda is not in fact protectionist.
Therefore, it is not surprising that the drug industry would take umbrage at having their patent protection labeled as “protectionism.” However, the reality is that the patent monopolies received by the drug industry probably cause more economic damage than all other forms of protectionism combined. They increase the price that patients in the United States pay for prescription drugs by more than $150 billion annually and probably add a similar amount to drug prices elsewhere in the world.
And this is just the beginning. Economists predict that when government protection creates monopoly profits, it provides an incentive for corruption, as firms seek to maximize these profits.
The drug industry has been following this script enthusiastically. Virtually every week there is a new story in the media detailing how the prescription drug industry used a portion of its monopoly profits to make payoffs to doctors to promote their drugs. These payoffs can take many different forms. In the past, drug companies often paid doctors’ expenses to attend seminars at expensive resort locations.
While this practice is less common following a crackdown, the industry has alternative methods. It can pay exorbitant speaking fees to favored doctors. It also can pay excessive fees to doctors who participate in clinical trials. And, the industry can still make outright kickbacks, as the New York Times recently reported was the case for an anemia drug that is administered in doctors’ offices.
In addition to effectively bribing doctors to prescribe their drugs, the industry also has enormous incentive to mislead the public about the safety and effectiveness of their drugs. There is a constant flow of allegations of concealed or even falsified research findings, as drug companies try to hide research that reflects poorly on their drugs. In addition, researchers are often paid to write articles on a company’s drug, or in some cases to put their name to an article that the company itself produced.
The list of sins in the prescription drug industry can be extended at some length, but the basic story should not be any surprise to anyone who has taken any economics. When patent protection allows prescription drugs to sell for more than a hundred times their competitive market price, you would expect to see a cesspool of corruption. The prescription drug industry has acted as economists would expect.
At this point, the shareholders in drug companies are screaming about the research and development into new drugs that is financed through patent protection. According to the pharmaceutical industry, they spend more than $40 billion a year on this research. The Congressional Budget Office puts this figure at closer to $30 billion. Just looking at the U.S. numbers, we spend $150 billion a year in higher drug prices to get $30 billion a year in research from the pharmaceutical industry – that’s a bad deal where I learned my arithmetic.
But, it gets worse. Close to two thirds of the industry’s money goes to develop copycat drugs. This makes sense in a world with patent monopolies -- finding a drug that seizes part of the market share of the latest blockbuster can be very profitable -- but in a world without this government distortion, it is unlikely that two-thirds of research dollars would go to developing drugs for conditions for which an effective treatment already exists. Pulling out the spending on copycat research, we pay $150 billion a year in higher drug prices to finance $10 billion in research on breakthrough drugs. That sounds like a really bad deal.
The drug industry likes to pretend that we have no alternatives. This is nonsense. The government already spends close to $30 billion annually on biomedical research through the National Institutes of Health. While most of this money goes to fund basic research, there is no reason that the funding could not be vastly expanded, with the additional money going to support the research, development, and testing of new drugs.
This funding could even be funneled through private contractors. The conditions would be that all research findings are made fully public in a timely manner, so that all researchers can benefit from them, and also that all patentable discoveries would be placed in the public domain.
Such an approach would allow all new drugs to be sold as generics at Wal-Mart for $4 a prescription. In additional to the enormous savings to patients, insurers, and the government, this would eliminate the incentives for corruption in medicine.
Patent monopolies are relic of the feudal guild system. It is time that we moved the development of prescription drugs into the modern era. We just need some politicians who are opposed to protectionism.