$200 billion in higher drug prices buys $25B in drug research ... huge markups created by patent monopolies are an invitation to corruption.

Firefighters and Prescription Drugs | Monday 02 June 2008 |
by: Dean Baker, t r u t h o u t | Perspective
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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.
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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. ...
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. ...