Many self-styled libertarians have been celebrating the rise of Uber. Their story is that Uber is a dynamic start-up that has managed to disrupt the moribund cab industry. The company now has a market capitalization of $17 billion.
While Uber’s market value probably depends mostly on its ability to evade the regulations that are imposed on its competitors, the company has succeeded in transforming the industry. At the least we are likely to see a modernized regulatory structure that doesn’t saddle cabs with needless regulations and fees.
Unfortunately, the taxi industry is not the only sector of the U.S. economy that can use modernization. The pharmaceutical industry makes the taxi industry look like cutting edge social media. The government imposed barriers to entry in the pharmaceutical industry don’t just raise prices by 20 or 30 percent, as may be the case with taxi fares, they raise prices by a factor or ten, twenty, or even one hundred (that would be 10,000 percent).
The basic story is that the industry relies on government granted patent monopolies that give them the exclusive right to sell a drug. As a result, when they have a patent monopoly on a drug that can substantially extend life or improve its quality, drug companies can charge tens of thousands or even hundreds of thousands of dollars. The fact that the drug might be relatively cheap to produce is beside the point.
These exorbitant prices then create huge problems of affordability. Should insurers be forced to pay for these incredibly expensive drugs? How about government programs like Medicare and Medicaid? Should everyone be able to get these drugs, even older people who may not have long to live in any case? And of course these prices are completely out of reach for people in the developing world.
As every econ 101 student knows, the huge gap between the selling price and production costs gives pharmaceutical companies an enormous incentive to push their drugs even in cases where they may not be appropriate. A week rarely goes by when we don’t read about a company pushing “off-label” uses of its drug, meaning uses for which it has not been approved by the Food and Drug Administration (FDA).
In addition, as standard economic theory predicts, drug companies routinely exaggerate the effectiveness of their drugs and conceal evidence that it is less effective than advertised, or in some cases even harmful. And of course drug companies routinely make large campaign contributions to politicians to get government programs to buy their drugs, more generous patent protection, or other profit-enhancing favors.
Given the enormous power of the pharmaceutical industry and the obscure nature of many of the issues involved, we could see drug prices continue to soar indefinitely, as the pharmaceutical industry takes an ever larger share of the family and government budget. But recent events in India offer hope.
Last year India’s Supreme Court rejected Novartis’ patent on the cancer drug Gleevec, which sells for $80,000 a year in the United States. A high quality Indian generic version sells for $1,000. The Indian court ruled that Gleevec didn’t qualify for a patent because it was a combination drug, which used pre-existing chemicals rather than developing a new molecule. Last week India’s patent office argued in the similar vein in rejecting a patent for Abraxane, another cancer drug.
If India persists in making patents difficult to obtain it will threaten the U.S. drug industry’s business model. It will not be possible to sell drugs in the United States for $100,000 if the same drugs are available in India for $1,000, or even less. Either the Indian drugs will come here or the people will go there. Such enormous price differentials are not sustainable.
The industry will be screaming about its need to recover its research costs. It has a point, like the taxi industry, but a very limited one. Patents are an antiquated and inefficient mechanism for financing research. It would make much more sense to have direct public funding. This would not only allow new drugs to be sold as generics from day one, it would also mean that all research findings would be available to other researchers, as well as doctors and patients, from the moment the research has been completed.
Those who think the government couldn’t possibly be an efficient funder of research must not have heard of the National Institutes of Health (NIH), which gets $30 billion a year from the government. Its research has produced a vast amount of major scientific breakthroughs. Its funding enjoys wide support across the political spectrum.
While most of NIH’s funding goes for basic scientific research, there is no reason that the funding could not be doubled or tripled with the explicit purpose of replacing the funding currently supported by patent monopolies. This additional funding would go for the development and testing of new drugs, bringing them through the FDA approval process.
There are many important issues that would have to be worked out in constructing a new mechanism for financing drug research. In normal times it is difficult to imagine Congress or the president ever heading down this path. But if the Indian drug industry makes the patent system unviable, we may finally adopt a 21st century system for financing the development of new drugs.