The Big Deal in Warren’s Prescription Drug Plan

Photograph Source: Chemist 4 U – CC BY 2.0

Earlier this month, Senator Warren put out a set of steps that she would put forward as president as part of a transition to Medicare for All. The items that got the most attention were including everyone over age 50 and under age 18 in Medicare, and providing people of all ages with the option to buy into the program. This buy-in would include large subsidies, and people with incomes of less than 200 percent of the poverty level would be able to enter the Medicare program at no cost.

These measures would be enormous steps toward Medicare for All, bringing tens of millions of people into the program, including most of those (people over age 50) with serious medical issues. It would certainly be more than halfway to a universal Medicare program.

While these measures captured most of the attention given to Warren’s transition plan, another part of the plan is probably at least as important. Warren proposed to use the government’s authority to compel the licensing of drug patents so that multiple companies can produce a patented drug, in effect allowing them to be sold at generic prices.

The government can do this both because it has general authority to compel licensing of patents (with reasonable compensation) and because it has explicit authority under the 1980 Bayh-Dole Act to require licensing of any drug developed in part with government-funded research. The overwhelming majority of drugs required some amount of government-supported research in their development, so there would be few drugs that would be exempted if Warren decided to use this mechanism.

These measures are noteworthy because they can be done on the president’s own authority. While the pharmaceutical industry will surely contest in court a president’s use of the government’s authority to weaken their patent rights, these actions would not require Congressional approval.

The other reason that these steps would be so important is that there is a huge amount of money involved. The United States is projected to spend over $6.6 trillion on prescription drugs over the next decade, more than 2.5 percent of GDP. This comes to almost $20,000 per person over the next decade.

This is an enormous amount of money. We spend more than twice as much per person on drugs as people in other wealthy countries.

This is not an accident. The grant of a patent monopoly allows drug companies to charge as much as they want for drugs that are necessary for people’s health or even their life, without having to worry about a competitor undercutting them.

Other countries also grant patent monopolies, but they limit the ability of drug companies to exploit these monopolies with negotiations or price controls. This is why prices in these countries are so much lower than in the United States.

But even these negotiated prices are far above what drug prices would be in a free market. The price of drugs in a free market, without patent monopolies or related protections, will typically be less than 10 percent of the US price and in some cases, less than one percent.

This is because drugs are almost invariably cheap to manufacture and distribute. They are expensive because government-granted patent monopolies make them expensive. We have this perverse situation where the government deliberately makes drugs expensive, then we struggle with how to pay for them.

The rationale for patent monopolies is to give companies an incentive to research and develop drugs. This process is expensive, and if newly developed drugs were sold in a free market, companies would not be able to recover these expenses.

To make up for the loss of research funding supported by patent monopolies, Warren proposes an increase in public funding for research. This would be an important move towards an increased reliance on publicly funded biomedical research.

There are enormous advantages to publicly-funded research over patent monopoly-supported research. First, if the government is funding the research it can require that all results be fully public as soon as possible so that all researchers can quickly benefit from them.

By contrast, under the patent system, drug companies have an incentive to keep results secret. They have no desire to share results that could benefit competitors.

In most other contexts we quite explicitly value the benefits of open research. Science is inherently a collaborative process where researchers build upon the successes and failures of their peers. For some reason, this obvious truth is largely absent from discussions of biomedical research where the merits of patent financing go largely unquestioned.

In addition to allowing research results to be spread more quickly, public funding would also radically reduce the incentive to develop copycat drugs. Under the current system, drug companies will often devote substantial sums to developing drugs that are intended to duplicate the function of drugs already on the market. This allows them to get a share of an innovator drug’s patent rents. While there is generally an advantage to having more options to treat a specific condition, most often research dollars would be better spent trying to develop drugs for conditions where no effective treatment currently exists.

Under the patent system, a company that has invested a substantial sum in developing a drug, where a superior alternative already exists, may decide to invest an additional amount to carry it through the final phases of testing and the FDA approval process. From their vantage point, if they hope that a successful marketing effort will allow them to recover its additional investment costs, they would come out ahead.

On the other hand, in a system without patent monopolies, it would be difficult for a company to justify additional spending after it was already clear that the drug it was developing offered few health benefits. This could save a considerable amount of money on what would be largely pointless tests.

Also, as some researchers have noted, the number of potential test subjects (people with specific conditions) is also a limiting factor in research. It would be best if these people were available for testing genuinely innovative drugs rather than ones with little or no incremental value.

Ending patent monopoly pricing would also take away the incentive for drug companies to conceal evidence that their drugs may not be as safe or effective as claimed. Patent monopolies give drug companies an incentive to push their drugs as widely as possible.

That is literally the point of patent monopoly pricing. If a drug company can sell a drug for $30,000 that costs them $300 to manufacture and distribute, then they have a huge incentive to market it as widely as possible. If this means being somewhat misleading about the safety and effectiveness of their drug, that is what many drug companies will do.

The opioid crisis provides a dramatic example of the dangers of this system. Opioid manufacturers would not have had the same incentive to push their drugs, concealing evidence of their addictive properties, if they were not making huge profits on them.

Unfortunately, this is far from the only case where drug companies have not accurately presented their research findings when marketing their drugs. The mismarketing of the arthritis drug Vioxx, which increased the risk of heart attacks and strokes, is another famous example.

We can try to have the FDA police marketing, but where there is so much money at stake in putting out wrong information, we can hardly expect it to be 100 percent successful in overcoming the incentives from the large profits available. There is little reason to think that the FDA will be better able to combat the mismarketing of drugs, than law enforcement agencies have been in stopping the sale of heroin, cocaine, and other illegal drugs. Where you have large potential profits, and willing buyers, government enforcement is at a serious disadvantage.

It is also worth mentioning that the whole story of medical care is radically altered if we end patent monopolies on drugs and medical equipment, an area that also involves trillions of dollars over the next decade. We face tough choices on allocating medical care when these items are selling at patent protected prices, whether under the current system of private insurance or a Medicare for All system.

Doctors and other health care professionals have to decide whether the marginal benefits of a new drug or higher quality scan is worth the additional price. But if the new drug costs roughly the same price as the old drug and the highest quality scan costs just a few hundred dollars (the cost of the electricity and the time of the professionals operating the machine and reading the scan), then there is little reason not to prescribe the best available treatment. Patent monopoly pricing in these areas creates large and needless problems.

In short, Senator Warren’s plans on drugs are a really huge deal. How far and how quickly she will be able to get to Medicare for All will depend on what she can get through Congress. But her proposal for prescription drugs is something she would be able to do as president, and it will make an enormous difference in both the cost and the quality of our health care.

This article originally appeared on Dean Baker’s Patreon page.

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Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC. 

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