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Government-Granted Patent Monopolies Are Driving Up Drug Prices

Without monopolies, drugs are cheap to make and there’s no incentive to lie about their benefits and harms.

Without monopolies, drugs are cheap to make, and there's no incentive to lie about their benefits and harms.

Most of the leading Democratic presidential contenders have put forward a plan to reduce drug prices. But for some reason, none of them have embraced the simple idea of not making drugs expensive in the first place. Specifically, none of the contenders have proposed moving away from the current system of financing the research and development of new drugs through government-granted patent monopolies.

The point is a simple one that should be obvious to people in policy debates. Drugs are almost invariably cheap to manufacture. Drugs that sell as generics, with free-market competition, are rarely expensive. The drugs that cost tens or hundreds of thousands of dollars annually are almost always subject to patent monopolies or some related form of government protection.

If all drugs were sold in a free market, individual patients would not have to struggle to pay for the drugs they need and there would be enormous savings to the economy. We will spend roughly $460 billion in 2019 on prescription drugs. In a free market, these drugs would likely sell for less than $80 billion.

The annual savings of $380 billion is almost 1.9 percent of GDP. It is more than five times the annual food stamp budget. In other words, it is a significant savings.

If we went the free-market route, we would need an alternative mechanism of financing research. The obvious one is direct government funding. The government already spends more than $40 billion a year on biomedical research through the National Institutes of Health and other government agencies. If we doubled or tripled this sum to replace the $70 billion in industry-supported research, we should be able to get comparable results.

In fact, there are reasons for believing the results would be better. If the government is paying for the research, in addition to putting all patents in the public domain, it could also require that all findings be made public as soon as practical. This means that researchers could quickly benefit from each other’s successes and failures, sharing information that is now a tightly guarded secret by the pharmaceutical company sponsoring the research.

The other major benefit of publicly funded research is that pharmaceutical companies would have no incentive to misrepresent the safety and effectiveness of drugs, as was done by the manufacturers of opioids. Without the lure of big patent monopoly profits, there would be no reason to lie about the benefits or potential harms of a drug.

Given the obvious benefits of free-market drugs, it is striking that, even as the Democratic candidates propose sweeping changes in several areas, none of them are willing to suggest alternatives to patent monopoly financing of drug research. This reluctance is difficult to understand.

Turning to the cheap psychology department, there is a widely held view among people on both the right and the left that the market produces inequality. People on the right usually note the inequality and say, it is good. The possibility of great riches gives people an incentive to work hard, take risks, and be innovative.

Those on the left see inequality as bad, and argue for tax and transfer policies to alleviate inequality. But they still see the inequality as coming from the market.

If we can radically alter policies on patent and intellectual property, and in other areas, and have much less inequality, then we cannot say that the market is producing inequality. Rather it is government policies that structure the market that leads to inequality. (This is the argument of my book, Rigged [it’s free].)

Bringing in the cheap psychology, if people on the left see inequality as being a natural market outcome that they want to redress in part through progressive taxes, then they are being generous. By contrast, if inequality is the result of a system that was deliberately rigged to have income flow away from ordinary workers to professionals, Wall Street types, and CEOs, then the question is whether they have the right to benefit from a corrupt system.

Reversing this sort of rigging is not an issue of being generous; it is effectively refusing to steal. Not surprisingly, the relatively well-paid progressive academics, policy wonks and columnists who are most visible in public debates would rather see themselves as generous than the beneficiaries of theft.

OK, the cheap psychology may or may not explain anything. It could be just one more instance demonstrating that intellectuals have a hard time dealing with new ideas.

Anyhow, it should be possible to get the basic point into public debate: Drugs are cheap. The problem is that the government makes them expensive with patent monopolies. It doesn’t have to be this way.

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