Drug companies make a fortune off expensive medications.
Suppose your house is burning down with your family trapped inside. When the fire department arrives at the scene, they tell you the rescue will cost $1 million. After all, aren't your family and your house worth the money?
This scenario should not sound outrageous. It is essentially what the pharmaceutical industry does to us when they ask us to pay their patent-protected prices for prescription drugs. The drugs we need for our health or our lives are almost invariably cheap to produce, just as the firefighters might be able to easily stage the rescue once they have arrived at the fire. But the drug companies, like the firefighters on the scene, have a virtual monopoly on their services at the critical moment. Therefore, they are quite likely to get their price.
The drug companies' defenders will argue it takes lots of money to develop drugs. However, to continue with the firefighter analogy, it also takes a lot of money to keep a crew of firefighters trained and ready to answer the call at a moment's notice. Why do we think it makes sense to make the patient bear the cost of drug research at the point when they need a drug, but not to make the owner of the burning house bear the expense of maintaining the fire department?
The most remarkable part of this story is we do not even have a public debate on how we finance drug research. The United States is currently spending almost $250 billion a year for prescription drugs. If drugs were sold in a competitive market, without government-imposed patent monopolies, we could save close to $200 billion a year. The $200 billion in higher drug prices buys a bit less than $25 billion a year in pharmaceutical research, according to the Congressional Budget Office. Paying $8 in higher drug prices for $1 in research does not seem like a very good deal.
Furthermore, as economists who don't work for the drug companies will tell you, the huge markups created by patent monopolies are an invitation to corruption. When a drug company can sell a drug for $500 that costs it $4 to manufacture and distribute, it has an enormous incentive to mislead doctors and the public about the safety and effectiveness of the drug. And, when the drug company performs the research on the drug, and controls the dissemination of research findings, they also have the ability to act on this incentive.
Under the current system, we should not be surprised to find drug companies conceal evidence that their drugs might be ineffective or even harmful. Given the structure of the incentives that the government has created, we should be surprised if drug companies are not dishonest.
There are many different alternatives to patent monopolies for financing drug research. In fact, the US government already spends $30 billion a year on biomedical research through the National Institutes of Health. Virtually everyone, including the drug companies, agrees this government-funded research has been extremely valuable.
Would it make sense to double the level of public funding to pay the full cost of developing drugs, and then let all drugs be sold at $4 a prescription in a competitive market? We could more than cover the cost to the government by the savings each year on drugs purchased through Medicare and Medicaid. If the drug companies did not own our politicians, we would be having this debate.
If totally replacing the industry's research spending sounds like too radical a step, how about the halfway measure of just paying for the clinical trials? After all, this is where the greatest opportunity for corruption exists, with the industry only revealing the data from the trials that it finds useful to release. Here also, the expense to the government of paying for the trials could be more than covered by lower prices on drugs purchased through government health programs.
We should be having a serious national debate on the relative efficiency of the current patent system and various alternative mechanisms for financing drug research. Unfortunately, the drug companies are so powerful that few politicians are even willing to consider alternatives. In fact, the drug companies are so powerful that few media outlets would even print a column suggesting alternatives. In fact, the drug companies are so powerful that few economists would ever consider researching alternative mechanisms.
So, for the foreseeable future, we will expect the owners of the burning house to shell out big bucks to the firefighters coming to the rescue. And we'll just pretend that there is no better way to do things.