In last week’s Sunday NY Times, there’s a good roundup of economists’ thinking about how to finance prescription drug research, by Eduardo Porter, with the unfortunate title “Do New Drugs Always Have to Cost So Much?” This kind of article seems to be a specialty of Porter’s. He’s really good at finding the right economists to talk to, but weaker when it comes to his own analysis.
On the pro-reform side, Porter interviews certified genius Michael Kremer, progressive advocate Dean Baker, and Aidan Hollis. Hollis is an economist from Canada whose work I wasn’t familiar with. He seems to take a line somewhat like Marcia Angell and Naderites, except that he makes a lot more sense.
The gist of Porter’s article is that we could get cheaper drugs if research were funded through some alternative to patents. The government could provide prizes for innovative drugs, it could buy up patent rights to new drugs and then license the rights cheaply, or it could simply pay for drug development itself. Porter writes that
some economists say that there is no inexorable economic reason for drug prices to be as high as they are. “Patents are one way to get medical innovation, but they are not a fact of nature,” said Michael R. Kremer, an economics professor at Harvard. “It is worth looking for alternatives.”
The problem with this line of thought is that it draws too strong a connection between the goal of lowering drug prices and reshaping the system for financing innovation. Coming up with alternatives (or better yet complements) to the patent system is a good idea, but its main benefit won’t be lowering drug prices. The benefit will be more medical innovation: for example discovering new ways to use old drugs; research that private industry won’t fund because they can’t make much money from off-patent drugs. The goal of more (and more efficient) medical innovation is the argument that economists Kremer, Hollis, and Baker emphasize (though Baker often decries high drug prices too).
Reform of the system for financing medical research is important and worthwhile (and I plan to discuss it more later in the week on my home blog). But high drug prices simply aren’t much of a problem in the U.S. (though it’s a serious problem killing millions in poorer countries). For one thing, the standard economic case for the inefficiency of patents simply doesn’t apply here.
The usual economic argument is that although patents are needed to subsidize research and development, they have an efficiency cost too. Since patents raise the price of drugs above the cost of production (including “normal profits”) fewer people end up buying them than would if they were sold on a competitive market. There’s a “deadweight loss” because a lot of the out-of-luck people would have been happy to buy the drugs at the competitive price.
But since prescription drugs are often paid for by insurance, this argument about deadweight loss doesn’t apply. If anything, people are all too willing to buy expensive drugs, even when they provide little or no additional benefit over cheaper drugs. Americans currently spend about $200 billion a year on Rx drugs, or about $1,900 per household per year. And most of it, about 70%, is covered by some form of insurance.
The average American actually spends more on cable TV than they do out of pocket on prescription drugs. As far as high prices go, I’d rather see the government tackle the high price of cable TV (which are inflated by unjustified monopoly profits).
Of course, not everyone has insurance, and for the people being forced to choose “between their drugs and food or paying their bills,” the obvious solution is simply to have the government pay for it, as with the Medicare Rx drug benefit. No doubt the Medicare drug benefit has a lot of flaws, and it won’t cover younger people. But it sure is a direct way of making prescription drugs more available. A whole lot more direct than rethinking the whole patent system.