How to Lower the Price of Prescription Drugs

Drugs are cheap. There are few drugs that would sell for more than $5-$10 a prescription in a free market. However, many drugs in the United States sell for hundreds of dollar per prescription and sometimes several thousand dollars per prescription. There is a simple reason for this fact: government-granted patent monopolies.

The government gives patent monopolies to provide an incentive for drug companies to carry through research. This is an incredibly backward and inefficient way to pay for research. It leaves us paying huge amounts of money for cheap drugs. It also often leads to bad medicine.

We can do better and Senator Bernie Sanders has proposed a way. He has introduced a bill to create a prize fund that would buy up patents, so that drugs could then be sold at their free market price. Sanders’ bill would appropriate 0.55 percent of GDP (about $80 billion a year, with the economy’s current size) for buying up patents, which would then be placed in the public domain so that any manufacturer could use them at no cost.

This money would come from a tax on public and private insurers. The savings from lower-cost drugs would immediately repay more than 100 percent of the tax.

The country is projected to spend almost $300 billion on prescription drugs this year. Prices would fall to roughly one-tenth this amount in the absence of patent monopolies, leading to savings of more than $250 billion. The savings on lower drug prices should easily exceed the size of the tax, leaving a substantial net reduction in costs to the government and private insurers.

The Sanders prize fund bill would go far toward eliminating the problems that pervade the drug industry. First, it would end the nonsense around getting insurers or the government to pay for drugs. If drugs cost $5-$10 per prescription, there would be no big issues about who pays for drugs. This would eliminate the need for the paperwork and the bureaucracy that the insurance industry has created to contain its drug payments.

We would also end the phony moral dilemmas we create for ourselves with drug patents. Should Medicare pay $100,000 a year for a drug to treat a rare cancer in an otherwise healthy 80-year-old? This dilemma becomes a quick no-brainer when the drug is available for $200 a year in the free market with no patent protection.

The Sanders prize fund could also put an end to many of the deceptive marketing practices that the industry now employs to push their drugs, overstating the benefits of their drugs and concealing potentially harmful side effects. It is rare that a month goes by when there is not a scandal along these lines. If the drug companies no longer stood to get billions in profits from such deceptive marketing, they wouldn’t do it.

It would also likely reduce much of the waste in the current research process. Drug companies often spend large sums developing copycat drugs that are of little medical value, but can allow them to get a portion of a competitor’s patent rents.

The Sanders prize fund is not the only possible alternative to patents for supporting research on prescription drugs. We could also go the route of direct upfront government funding where the government would contract for the research in advance. We already spend more than $30 billion a year on such research through the National Institutes of Health. This is widely viewed by health experts as money very well spent.

It would be possible to ramp up this funding by a factor of two or three with the intent of replacing patent-supported research. This direct funding would have the advantage that all results would be fully available to researchers and the general public, since that would be a condition of the funding. Representative Dennis Kucinich introduced a bill along these lines a few years ago.

At this point we don’t have to decide the best alternative to patent-supported research for prescription drugs, what we have to do is to get the debate started. The Centers for Medicare and Medicaid Research project that we will spend almost $4 trillion on prescription drugs over the next decade. This is almost $10,000 for every man, woman, and child in the country. It’s long past time that we did some serious thinking to ensure that we are getting good value for this money. The Sanders prize fund bill is an important step in this direction.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This column was originally published by The Guardian.



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Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

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