FacebookTwitterGoogle+RedditEmail

Krugman on Drugs

I was glad to see Paul Krugman’s short post explaining some of the economics of the US government negotiating drug prices with the drug companies: the route Donald Trump rejected. I thought I would add a few more points.

First, the monopoly profits earned by the drug companies provide a powerful incentive for rent-seeking. This is the standard story that economists always complain about with trade protection, except instead of talking about a tariff that raises the price of the protected item by 10 or 25 percent above the free market price, we’re talking about a government-granted monopoly that typically raises the price of a factor of ten or even a hundred compared with the free market price. These markups are equivalent to tariffs of 1000 percent or 10,000 percent.

This not only encourages behavior like the payoff from Novartis to Trump lawyer Michael Cohen, it also gives drug companies an enormous incentive to misrepresent the safety and effectiveness of their drugs. We frequently hear stories of drug companies withholding evidence that their drugs are less effective than claimed or even harmful for some patients. Perhaps the most famous was the case where Merck allegedly withheld evidence that its arthritis drug, Vioxx, increases the risk of heart attack and strokes for people with heart disease. Needless to say, the costs from this sort behavior are enormous.

A second point is that we are not talking about a typical consumer buying decision, like buying a car or a cell phone. People buy drugs because they are in bad health and possibly facing death. As Krugman notes, there is typically a third-party payer, either an insurer or the government. Apart from the possibility that this can lead to excessive payments that Krugman discusses, there is also the perverse dynamics this creates.

The price that companies end up getting for their drugs, and if they get it all, depends on the ability of patients to lobby their insurer or the government. Naturally, the drug companies are happy to help in this effort. There is a whole set of industry-funded disease groups that are largely aimed at forcing insurers and the government to buy expensive drugs, often of questionable value, from the drug companies.

This also raises the point that it is pretty crazy that we expect people when they are sick or dying to pay for research that has already been done. In almost all cases, the cost of manufacturing and delivering drugs is cheap, we make it expensive with government-granted patent monopolies. If we asked questions about paying for possibly life-saving drugs at their actual production costs, it would almost always be a no-brainer. But when we have a cancer drug, which may not even work, that a drug company sells for several hundred thousand dollars, it becomes a tough question as to whether the government should pick up the tab or force insurers to do so.

Finally, there is an absurd view in this debate that somehow patent monopolies are the only way to finance innovation. There is no argument that we have to pay for research; no one expects highly skilled researchers to work for free. But we can and do have other mechanisms for paying for this work.

The government already spends more than $30 billion a year on biomedical research, primarily through the National Institutes of Health. This research is incredibly productive by all accounts. There is no reason, in principle, that we can’t double or triple the amount we spend on directly supported research. This would allow all new drugs to be sold at generic prices, without patent monopolies or related protections. By my calculations, this would save close to $380 billion a year (around 2.0 percent of GDP or more than five times the annual budget for the food stamp program). We would also benefit from having all the research findings in the public domain so that doctors and other researchers would have access to it when making decisions for their patients or planning future research.

If this funding route sounds bizarre, think of the military. While there is plenty of waste in the military, we actually do develop very effective weapons systems through direct government funding. (This is not an endorsement of their use.) Furthermore, drug development has a big advantage over the military in that it would all be fully public as a requirement for funding. There is a real rationale for secrecy with military research, even if it is often over-played. There is no excuse for secrecy in publicly funded drug research.

It would be great if Trump’s servile response to the industry on negotiations led to pressure not only for lower prices but modernizing the way in which we finance drug development. Patent monopolies might have been great for the feudal guild system, they are not a good way to finance biomedical research in the twenty-first century.

This column originally appeared on Beat the Press.

More articles by:

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.

Weekend Edition
July 20, 2018
Friday - Sunday
Paul Atwood
Peace or Armageddon: Take Your Pick
Paul Street
No Liberal Rallies Yet for the Children of Yemen
Nick Pemberton
The Bipartisan War on Central and South American Women
Jeffrey St. Clair
Roaming Charges: Are You Putin Me On?
Andrew Levine
Sovereignty: What Is It Good For? 
Brian Cloughley
The Trump/NATO Debacle and the Profit Motive
David Rosen
Trump’s Supreme Pick Escalates America’s War on Sex 
Melvin Goodman
Montenegro and the “Manchurian Candidate”
Salvador   Rangel
“These Are Not Our Kids”: The Racial Capitalism of Caging Children at the Border
Matthew Stevenson
Going Home Again to Trump’s America
Louis Proyect
Jeremy Corbyn, Bernie Sanders and the Dilemmas of the Left
Patrick Cockburn
Iraqi Protests: “Bad Government, Bad Roads, Bad Weather, Bad People”
Robert Fantina
Has It Really Come to This?
Russell Mokhiber
Kristin Lawless on the Corporate Takeover of the American Kitchen
John W. Whitehead
It’s All Fake: Reality TV That Masquerades as American Politics
Patrick Bobilin
In Your Period Piece, I Would be the Help
Ramzy Baroud
The Massacre of Inn Din: How Rohingya Are Lynched and Held Responsible
Robert Fisk
How Weapons Made in Bosnia Fueled Syria’s Bleak Civil War
Gary Leupp
Trump’s Helsinki Press Conference and Public Disgrace
Josh Hoxie
Our Missing $10 Trillion
Martha Rosenberg
Pharma “Screening” Is a Ploy to Seize More Patients
Basav Sen
Brett Kavanaugh Would be a Disaster for the Climate
David Lau
The Origins of Local AFT 4400: a Profile of Julie Olsen Edwards
Rohullah Naderi
The Elusive Pursuit of Peace by Afghanistan
Binoy Kampmark
Shaking Establishments: The Ocasio-Cortez Effect
John Laforge
18 Protesters Cut Into German Air Base to Protest US Nuclear Weapons Deployment
Christopher Brauchli
Trump and the Swedish Question
Chia-Chia Wang
Local Police Shouldn’t Collaborate With ICE
Paul Lyons
YouTube’s Content ID – A Case Study
Jill Richardson
Soon You Won’t be Able to Use Food Stamps at Farmers’ Markets, But That’s Not the Half of It
Kevin MacKay
Climate Change is Proving Worse Than We Imagined, So Why Aren’t We Confronting its Root Cause?
Thomas Knapp
Elections: More than Half of Americans Believe Fairy Tales are Real
Ralph Nader
Warner Slack—Doctor for the People Forever
Lee Ballinger
Soccer, Baseball and Immigration
Louis Yako
Celebrating the Wounds of Exile with Poetry
Ron Jacobs
Working Class Fiction—Not Just Surplus Value
Perry Hoberman
You Can’t Vote Out Fascism… You Have to Drive It From Power!
Robert Koehler
Guns and Racism, on the Rocks
Nyla Ali Khan
Kashmir: Implementation with Integrity and Will to Resolve
Justin Anderson
Elon Musk vs. the Media
Graham Peebles
A Time of Hope for Ethiopia
Kollibri terre Sonnenblume
Homophobia in the Service of Anti-Trumpism is Still Homophobic (Even When it’s the New York Times)
Martin Billheimer
Childhood, Ferocious Sleep
David Yearsley
The Glories of the Grammophone
Tom Clark
Gameplanning the Patriotic Retributive Attack on Montenegro
FacebookTwitterGoogle+RedditEmail