I am awaiting details but this proposal from John Edwards is not entirely crazy.
Mr. Edwards said he wanted to discourage pharmaceutical companies from
obtaining long-term patents on medicines for specific ailments like
Alzheimer’s and cancer. Instead, an upfront cash prize would be made
available to serve as an incentive for research on such drugs.
I worry, however, that the prizes will be far too small. Since the social value of breakthrough medicines greatly exceeds the private profit, prizes of tens of billions of dollars would not be unreasonable. In fact, optimal prizes must increase the profits of US drug companies. Can a Democrat like Edwards sell that? And who will decide how the prizes are handed out? Can the US government award billions of dollars in prizes without significant rent seeking?
Partly for these reasons, I would much prefer a patent buyout as suggested by Michael Kremer (Kremer’s paper can also be found in Entrepreneurial Economics.) Let’s at least have a few experiments to buyout say 5 years of the time remaining on some important patents.
Do keep in mind that the problem of expensive drugs is overblown – a typical new drug will go off patent in 12 years anyway. The real issue is how best to increase the incentive to develop new and important pharmaceuticals.
What is crazy, given such data points as “Reagan and AIDS” and “Medicare and Viagra,” is to think that Edwards’ proposed “expert panel” would be immune from political interference.
So who lives in Iowa or New Hampshire… that would go to an Edwards event prepared to ask him a question that might get this issue in play? A softball question might be, do you agree with economists who say we should triple the current Pharma research, and if so, how would you make that happen?
Meanwhile, shouldn’t Americans be ENCOURAGED to resent the burden of that decade of high prices… when Germans and Canadians are free riding? How do we get them to help pull the wagon?
Is there any public policy question that is more likely to dramatically impact your family?
In theory, an upfront cash payment would have the same incentive effect as a 17-year patent, if the upfront cash payment is set as the discounted present value of the stream of future revenues that would flow to the company under the patent system. Of course, this would not be particularly easy to calculate. Alex is right to worry that, under Edwards’s (or anyone else’s plan), the upfront payment might be set too low to create sufficient incentives. Meanwhile, as another commentator notes, because it is not always easy to predict the social value of a particular pharmaceutical at the time it is first introduced, the government might choose to exercise Eminent Domain to acquire property rights in the drug after the fact of production. The use of Eminent Domain presumably would not reduce the incentives to innovate as long as the compensation level is set equal to or higher than the net present value of future benefit streams under the pre-existing patent.
The irony of the drug patent debate is that, of all IP, drugs are probably the area where some form of government monopoly is most needed! There was a paper a few years back that looked at what percentage of inventions in given fields would have been invented anyway (first-mover advantage, blind luck led to the invention, etc.); pharma was very low on that list.
That said, the deadweight loss from patents is quite large (and the “big rectangles” that those with monopoly power create through inefficiency often outweigh the loss from the Harberger triangle). There’s no question that some type of buyout would be much better.
How about a first place ribbon?
I love how you assume John Edwards understands incentives at all. He is too busy playing the class warfare game.
An upfront cash prize? This must be a joke. I have a chemistry set in my basement. I will get to work right away.
Ezra Klein at
http://ezraklein.typepad.com/blog/
apparently has some more details. To quote:
Spoke to some folks at Edwards HQ on their proposal for prize money as a spur for pharmaceutical development. This was muddled in their fact sheet and much of the initial reporting, but this program is not, in any way, a replacement for the current system of patents. It does not, in any way, change the way patents are awarded, or how long they last, or who can apply for them. Rather, it creates a separate and parallel track, a pilot program of sorts, wherein a committee would identify diseases and conditions that would benefit from alternative incentives for innovation, and offer prize money as the reward. An example — not given to me by anyone at the campaign — would be prize money for malaria treatments, as drugs for conditions affecting mainly third-world residents don’t find a lot of urgency in the R&D departments of publicly-traded pharmaceutical companies.
Bill Stepp’s point that we should abolish patents without recompense “just as slave owners were not bought out” misses the fact that the British did, indeed, buy out slave owners. And, in doing so, avoided a war that costs us more than half a million lives. More interesting, I think, is Dave Meleney’s point about those free-riding foreigners. Basically, what we have now is a system where the development costs of drugs are borne by American patients, while many foreign patients only bear the marginal costs of drug production. If we allowed for the reimportation of drugs, wouldn’t this result in one or both of two things? (1) Drug companies would stop selling drugs in foreign countries where the laws mandate that the drugs be sold at prices that do not allow a recovery for R&D costs and/or (2) the price of drugs in foreign countries would increase. In both cases, it seems likely that drug prices in the US would drop.
How about this variation on a patent buyout: The pharma company must submit a price that they would accept for a patent buyout. They must pay a yearly fee based on that price.
If a drug is great, gov’t or private charity would have an incentive to raise the funds to buy out the patent. What keeps the drug company from setting insane buyout prices? If they do then they incurr needlessly high fees that would be a waste of money if no one wants to buy out the drug. The fees could be devoted to outcomes based research to see the best ways to use drugs that already exist.
Since the patent system, and the resulting profits to drug companies, has a proven track record for making new big drugs, why not just leave it alone? If any additional incentive makes sense, and given the free-riding Canadians and Europeans and others, then why not just eliminate all taxes on profits earned by drug companies in the United States?
The place for prizes is where the current patent system does not have any incentive effect, as in nutrition research or drugs with small profit potential. Competing prize givers is another necessity. Why not incentives in the tax system for such prize setups?
Incentives work in complicated contexts. The capital market will smoke out irrationality in corporate management, and correct it, often in spite of ferocious resistance. The incentives working on politicians are somewhat different, where a Darwinian natural selection on successful dissembling is the main survival trait. Do we really want decisions on the direction of drug research determined professional dissemblers working Caplan’s irrational voters?
Italy’s thriving drug industry, like India’s, is largely in manufacturing techniques, not research in new therapies. That is very useful, but not what we are talking about.
MD Fatwa suggests that had Lincoln compensated slave owners the Civil War would have been averted. There is much reason to be skeptical. In fact, compensation for emancipation was often discussed prior to the outbreak of the War. A compensation provision was even included in the penultimate draft of the Emancipation Proclamation included a compensation provision for slave-owners who did not join the rebellion. After the South took up arms, however, compensation was off the table.
Abolitionists would have argued, rightly, why should non-slave owners have to pay slave owners to free their slaves? Doesn’t that imply slavery was moral and the property rights claims of slave owners were true? If that was the case then why shouldn’t slavery be permitted?
The south defined itself by slavery. At the founding it was predicted that slavery was economically on its way out but instead it surged and slave owners insisted on having it spread even to free states that didn’t want it (see Dred Scott). It’s only speculation to think slavery couldn’t have been adapted to the industrial revolution that happened after the Civil War.
The current patent regime encourages extremely high health care costs which represents the most pressing fiscal crisis facing the U.S. It also encourages money wasted on advertising and copycat research by company X wanting to develop the same drug (or a different drug with the same effect) as company Y.
The solution, whatever it may be, needs to perform the task of redistributing the rewards of research from the pharma companies to the consmers.
I would propose:
A: Cutting the patent period from 12 years to 5, cutting the incentive for copycat research, since companies would only be able to profit from the fruits of said research for 2 years. Once competition to produce the same drug is eliminated, advertising expenditures should fall drastically.
B. Requiring all companies to put their products in the public domain after the 5 year period
C. If this patent period produces excess profits for the pharma companies, tax it and put the money in a health care subsidy fund. If it produces insufficient profits (i.e. incentives) subsidize it from an independent health care fund. Similarly, if a 5 year patent does not sufficiently reduce the incentives for copycat drugs, cut it to 4 years and (if necessary) increase subsidies.
The trick is to redirect competition into a race to produce better drugs, not a race to market the same drug, while at the same time minimizing rent seeking on the part of the government.
“A: Cutting the patent period from 12 years to 5, cutting the incentive for copycat research, since companies would only be able to profit from the fruits of said research for 2 years. Once competition to produce the same drug is eliminated, advertising expenditures should fall drastically.
B. Requiring all companies to put their products in the public domain after the 5 year period”
This seems to show some misunderstanding about how patents work. A) is odd for a number of reasons. First the patent period is generally 17 years from issuance or 20 years from first filing. Second, it suggests that the clinical testing period is 3 years when it tends to be in the 7-10 range. Third, so called ‘copycats’ are generally parallel tracked (which makes sense in a 7-10 year development cycle. So when you see something hit market one year after a similar drug hits market, it is almost certainly not a ‘copycat’ in the sense you seem to be using the term. Fourth, ‘copycats’ generally don’t do well if they are functionally identical to the first drug. They often succeed by having a different side-effect profile–which is a great thing, not a bad thing.
Lastly, when something goes off patent, it IS in the public domain, so I don’t understand why you think B) is a change of anything other than the patent period.
I have also mentioned numerous times that pharmaceutical companies are perfectly willing to sell patent rights to the government or anyone else, you just have to negotiate a price. However, the goal is to have a free lunch which is incompatible with such buyouts.
Prizes would work if someone could set them to the right level and for the right targets, but no one is that smart. Prizes make more sense as gap filler for underserved markets. This is a problem since drug development costs are pretty invariant with the target disease’s market size- a drug to treat 100 million costs just as much to develop as one to treat 10,000.
On the issue of whether IP is justified: most libertarians view patents as illegitimate, and I agree with them for the most part. In pharmaceuticals, you would not need patents if you did not have such extensive government regulation in the first place. However that is the world we live in, and without patents, new drug discoveries would essentially stop.
On the issue of me-too drugs being a waste. Most of you don’t know what you are talking about. Me-too drugs usually don’t target completely overlapping populations, and the variety they give in overall profile is a benefit to the population. In essence, a drug class with several marketed drugs provides a broader, more effective treatment since human beings are maddingly disparate in their response to drug molecules.
Mr. Stepp says:
“As Michele Boldrin and David K. Levine point out in their book Against Intellectual Monopoly, there are enough appropriation mechanisms on the market to enable pharmaceutical firms to earn back their cost of capital invested in drug R&D and to make competitive rents.”
But when you go to Boldrin&Levine’s chapter on drug development… towards the end they say the biggest part of R&D (80%) is in the clinical trials… and that they’d have that 80% done by and/or thru the governemt.
Would that Mr. Stepp were right, sadly not. But he raises a good question, what would a world without Pharma patents, but with federally funded clinical trials look like?
Dan Cole,
Could you give a reference for that draft of the EP? That chronology sounds wrong to me, eg, a cursory search suggests a first draft of July 1862. I suspect you’re talking about some other effort, but I’d still like to know what.
Bill Stepp,
If you think modern pharmaceutical research and development resembles the process that brought us penicillin and the polio vaccine, then you are seriously in error.
As for pharma making profits without patents, I simply don’t see how. Any small molecule drug can be copied exactly within weeks of being introduced to the market. A generic company with manufacturing capability at the ready can be on the market soon after that. Any regulatory process that prevents this from happening for the four years you claimed is as purely artificial as the patents you deride. Modern biologicals are somewhat more difficult to completely identify and copy, but this process gets shorter and shorter by the day, and it surely would not take any competent laboratory more than a year to do.
As for the usefulness of me-too drugs, Brent is exactly correct: no one is holding a gun to people’s head. If Nexium (your example) is useless compared to its predecessor, then doctors should not be prescribing it, and insurance companies and the government should not be paying for it.
My point is not that modern drug development resembles the process that made the earlier drugs (although they are more alike than you might think), but that open source, which worked in the case of the polio drug (and the basic R&D was privately funded by the National Infantile Paralysis Foundation) can produce good drugs.
That you don’t see how pharma can profit without patents speaks to your lack of imagination and understanding, not to the reality of the industry.
Generics can produce copies in short order and they will still sell at lower prices and have lower market shares than the originals they imitate.
I agree with the point about the regulatory process, etc. The same process that is shortening the time to imitate a drug is also lowering the cost and time of basic R&D and development.
One last point: the great American solution for looking for health in a pill does more harm than good. Throw out your aspirin and other quackery and never take chemo. Bad bad bad.
Far better to eat right, exercise, etc.
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