Home > Uncategorized > Patent monopolies in prescription drugs cause corruption # 43,508

Patent monopolies in prescription drugs cause corruption # 43,508

from Dean Baker

Economists and economic reporters all know that tariffs can lead to corruption. The idea is that if a government-imposed tariff raises the price of a product by 10-25 percent above the free market price, companies have a large incentive to find ways to avoid the tariff. This can mean reclassifying imports to get around the tariff or trying to curry favor with politicians to get exemptions. The New York Times and ProPublica have run several excellent pieces providing examples of such behavior (e.g. herehere, and here).

The reasonable takeaway from these stories is that tariffs should be applied sparingly and with clear purposes in mind. Indiscriminate use of tariffs is likely to lead to large-scale corruption, as corporations use their political power to gain special treatment.

We should be glad that reporters have actively worked to expose the abuses associated with the tariffs Donald Trump has imposed since coming into the White House. But what about the abuses associated with government-granted patent monopolies for prescription drugs? We literally never see a piece pointing out that patent protection creates an enormous incentive for corruption, in fact, one that is far larger than with the Trump tariffs.

Just to get some basic orientation, depending on the country and the product, Trump’s tariffs were generally between 10 and 25 percent. By contrast, government granted patent monopolies often raise the price of a protected drug by at least a factor of ten and often by a factor of one hundred or more. The impact of this protection is therefore equivalent to tariffs of 1,000 or 10,000 percent.

If we think that a tariff of 25 percent provides incentives for corruption, how can we not think that patent protection that is equivalent to tariffs of 1,000 or 10,000 percent provide grounds for corruption? That makes zero sense. Any numerate person who is concerned about the incentives for corruption created by Trump’s tariffs must be concerned about the incentives for corruption created by patent monopolies for prescription drugs.

And, we don’t have to look far. The immediate inspiration for this post is a NYT article on how Pfizer is playing along with Trump in touting his late October date for a vaccine because they hope it will win them favor in any proposals he puts forward to lower drug prices.

If folks are missing the point here, the article implies that Pfizer might push forward for a vaccine approval, before there is sufficient evidence to establish safety and effectiveness, because it hopes Trump will allow Pfizer to enjoy larger patent monopoly rents. So, given Trump’s control of the FDA, we could be getting a vaccine that is either not safe, or effective, or neither, because of Pfizer’s efforts to maximize patent rents. This is exactly the sort of rent-seeking our Econ 101 textbooks all predict.

And, this situation is far from rare. Although it is literally never reported this way, the opioid crisis is largely a story of abuse of patent monopolies. Purdue Pharma and other major opioid manufacturers have paid billions of dollars to settle suits alleging that they misled doctors about the addictiveness of their new generation of opioid painkillers. These companies had incentive to lie about the addictiveness of their drugs because they had government-granted monopolies. If their drugs were selling as generics, it is unlikely they would have made the same sort of effort to push them.

There are many other instances where drug companies have concealed information on the safety and effectiveness of their drugs. The cost from these lies, in poor health and unnecessary deaths, is enormous. Yet, it is never discussed in policy circles.

The refusal to consider the costs stemming from the abuses of patent monopolies would perhaps be more understandable, if there were no alternative mechanisms for financing the development of new drugs and vaccines. But we know this is not true, we just got some great examples with the pandemic.

Moderna, one of the leading contenders to develop a U.S. vaccine, had its research costs pretty much entirely picked by the government. We paid more than $400 million for the pre-clinical research and early phase clinical testing, and then kicked in another $450 million to cover the cost of its Phase 3 clinical tests. While we are — incredibly — still giving the company a monopoly on its vaccine, the fact is that the government basically picked up the full tab for its development costs.

There is no reason that we cannot do this in other circumstances, but without handing out a patent monopoly. In other words, the government can pick up the tab for developing and testing drugs for treating cancer, diabetes, AIDS, and other diseases. When a drug or vaccine goes through the FDA approval process, it can then be sold as a generic that any manufacturer could produce. (I describe a system for financing research in chapter 5 of Rigged [it’s free].)

This could knock $400 billion (five times the food stamp budget or half the military budget) off our annual bill for prescription drugs. It would also eliminate the incentives for corruption created by patent monopolies.

It would be great if we could one day have a serious debate over whether patent monopolies are the best way to finance the development of new drugs and vaccines. But to do so, we need to have a better informed public and policy audience. That means reporting on the corruption that results from patent monopolies, something that the media refuse to do for some reason.

  1. Ken Zimmerman
    November 3, 2020 at 6:26 pm

    Dean, in whose pocket today is the money you want to ‘recover’ to improve the lot of everyday Americans? I take it the money is in the pockets of pharmaceutical companies, drug agents, hospitals, doctors, and politicians who ‘aid’ the above. It appears to me none of these will voluntarily give up that money. Constructing the ACA encountered this same issue. In that case insurance companies had to literally be bribed to allow the ACA to pass. This highlights a more widespread and deeper problem than just the corruption you identify. A cultural problem. Neoliberal policies and neoconservative politics have reordered American priorities such that giving up any profit in any situation is immoral and Un-American. And that it is never correct for government to request such ‘sacrifices.’ And it is both un-Constitutional and criminal for government to force any American person (biological or corporate) to forego a profit where one is even potentially possible. The god of America is now profit. Profit in all situations no matter the consequences. No matter who or what is hurt. Even if America is destroyed in this pursuit. What you call corruption, many Americans now call the god given right to pursue all profit available by whatever means are available. At one time in our history this might have been labeled immoral and even made criminal. Now it is morally righteous and legally permitted. How do we beat this? Donald Trump has made the point repeatedly that forcing him to forego any opportunity for profit while he serves as President is not acceptable, is criminal, and un-American. Is that not leading by example, right?

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