Intellectual Privilege and Pharmaceutical Patents

Back when healthcare-debate status signaling/peer pressure was all the rage on the Facebook, Glen Whitman had an insightful comment in response to a call for more government intervention. I can't link directly to the comment because it's on Facebook, but one portion of his response stuck out:

Here's the fact: the vast majority of important medical advances over the last 40 years have been made in the U.S. This is true despite the fact that the EU has a population 50% larger than ours. Why? Well, there are lots of factors. But surely one important factor is monetary compensation; that is, profit. U.S. pharmaceutical sales account for 45% of worldwide pharma sales. The prospect of profit is the incentive for companies to create new products. Other countries, with price controls and supply-based restrictions, contribute much less on a per capita basis. Those countries are, in effect, free-riding on the financial contributions of Americans to medical research.

I have not yet read all of Tom Bell's work on IP (Bell is Glen's co-blogger at Agoraphilia), but I know he is some kind of IP skeptic. How would Tom approach the pharmaceutical innovation argument Glen makes here? After all, patents are a form of government (or at least legal system) granted monopoly. Maybe this form of government intervention is justified on economic efficiency grounds, but maybe it isn't. And it is certainly more difficult -- if not impossible -- to justify government granted monopolies on non-consequentialist, deontological grounds. (So much the worse for deontology, says the consequentialist.)

I'm not sure what pointing out other countries' price controls and free-riding does for Glen's argument. A government granted monopoly is a lot like a price control - monopolies by definition set price by reducing quantity supplied relative to what price and quantity would be under a competitive market.

Further, wouldn't it be in our "national interest" (ugh) to free-ride on other countries' innovations? If our system of government granted monopolies is just as artificial and contrived (and some would argue anti-free-market) as other countries' price controls and supply-based restrictions, what evidence is there to justify the current arrangement? Perhaps if we reduced the financial incentive to innovate by lessening the duration of pharmaceutical patents (to zero?), other countries would be less able to free-ride and have greater incentive to contribute to the global public good of advancing human knowledge and technology.

Share this

Micha, "...monopolies by

Micha,

"...monopolies by definition set price by reducing quantity supplied relative to what price and quantity would be under a competitive market..."

This doesn't apply in cases where price discrimination is both possible and practical, which is the case for US pharma products. The US and US manufacturers suffer no harm from supplying heavily discounted products to Canada, Europe, Africa, where-ever, as long the products cannot be re-imported.

OTOH, the primary welfare economies of Europe contribute very little to the US standard of living outside of some luxury products.

Regards, Don

I don't understand. How does

I don't understand. How does price discrimination, which I agree exists in the pharmaceutical market, affect my claim about the definition of monopolies as a setter of price through reduced supply? True, when a monopolist can price discriminate, prices more clearly reflect the "true" slope of demand curve, but the monopolist is still restricting supply and/or raising price relative to market competition. So, for example, Americans are still paying more for their drugs (once those drugs are invented, of course) under the current system of patents than they would be under a system with little or no patent protection for drugs, where the marginal cost of producing a generic drug is close to zero.

comments don't need subjects

On a pragmatic level, eliminating US patent protection kills medical innovation dead. If the EU becomes less able to free ride on the US that will not spur innovation there. Now, maybe we're OK with this. If lack of IP protection means no one innovates unless they can profit without that protection, and we get much less innovation in total, the costs of socializing the health care system (which is going to happen anyway) are reduced.

On a principled level, patents are either right or wrong and none of these numbers matter one little bit. I believe it's very obvious that they are wrong, but it's also very obvious that at least as far as medical patents are concerned we are better off with them than without them in a utilitarian sense.

On a pragmatic level,

On a pragmatic level, eliminating US patent protection kills medical innovation dead.

This claim is disputed by a number of economists. They often point to alternatives such as prize systems used by scientific societies - a contemporary example being something like the X Prize - or other philanthropic donations (of both time and money) funneled through university or other non-profit research facilities, or independently wealthy scientists.

If the EU becomes less able to free ride on the US that will not spur innovation there.

I don't know. It might. Libertarians often argue that if the U.S. stopped acting as the world's policeman and reduced its military expenditures oversees, other countries would have an incentive to pick up the slack and spend more on the public good of defense. I guess national defense is not as much of a public good as technical innovation if you look at the nations of the world as individual actors with a singular national interest (in which case the public goods problem of national defense becomes somewhat -- but not entirely -- private).

I believe it's very obvious that they are wrong, but it's also very obvious that at least as far as medical patents are concerned we are better off with them than without them in a utilitarian sense.

Again, many economists and legal theorists dispute the obviousness of the utilitarian justification.

Further, wouldn't it be in

Further, wouldn't it be in our "national interest" (ugh) to free-ride on other countries' innovations?

In some sense. But it is not in our congressional interest, because pharmaceutical companies are well represented by lobbyists.

You describe a convincing tragedy of the commons, if nations were rational utility maximizers. But they are not. Nations don't act like people because their governments are insane. Sometimes this is a good thing.

FDA controls make it very

FDA controls make it very expensive to be in the drug-selling business. Given that it is so expensive to be in the drug-selling business (thanks in large part to FDA controls), then those companies who are in the drug-selling business need a large income in order to stay in business. One way for them to get that large income is to have a monopoly on valuable drugs. Hence patents.

FDA controls force roughly the following model on pharmaceutical companies: develop a massive number of drug candidates in the labs, then test them on animals, then test them on humans for safety, then test them on humans for efficacy, then do a really massive test on many hundreds of humans, and then finally, if all goes well, get FDA approval and start recouping your investment by charging through the nose thanks to your patent-based monopoly. At each stage the candidates narrow. All those drugs that are ultimately failures in the testing have to be financed along with the meager handful of drugs that are successful.

Moreover, the FDA, being a bureaucracy, needs to have all the is dotted and the ts crossed in just the right way. It therefore imposes a bureaucratic structure on the whole study process which must be followed. If you want to sell both in the US and in Europe then you need to make sure that your study is designed to satisfy both bureaucracies.

Additionally, it doubtless helps to have a revolving door between the FDA and pharmaceutical companies, which helps to cement their good relations. Indeed, it may be more right than wrong to think of pharmaceutical companies as branches of the state, so closely do they work with it and so completely do they depend on its approval. Since the FDA's decision can make or break a company, that makes the FDA truly the boss of that company, and if the government is your boss, then it is probably more right than wrong to consider you to be an employee or agency of the government. So you can think of pharmaceutical companies as essentially the state, doing science.

What other examples do we have of the state, doing science? NASA is an example. How can the infamously wasteful government branch NASA possibly afford to remain in existence? Easy: use the power of the state to get taxpayers to pay for NASA. How can the infamously wasteful government branch pharmaceutical companies possibly afford to remain in existence? Easy: use the power of the state to force customers to pay through the nose for drugs by forcibly preventing competition.

The government uses its power to force people pay for its own wastefulness, its own scandalous inefficiency.

Is there a better way? There may very will be: laissez-faire. Get rid of the FDA, free medicine from the clutches of the state.

Do I have a precise vision of how things would be without state intervention? No - it is too far different from today for me to accurately guess what it would be like. Heck, I can't even make the much easier guess of how many people will buy the iPad in the first year, or whether Apple will ever allow more than one app to be active at the same time.

if all goes well, get FDA

if all goes well, get FDA approval and start recouping your investment by charging through the nose thanks to your patent-based monopoly

Next comes the step where you rely on your narrowly granted FDA approval to expand your market into as many medical niches as possible, thus making a mockery of the whole approval process.

Then, layer on top of this the heavily licensed insurance industry that has to hire buildings of administrators to micro-manage each doctor visit and prescription. Why so much cost spent on administration? Otherwise people try to scam their hyper-expensive insurance company.

I have trouble believing that the current US model is the only way that medical researchers could provide products of value to customer/patients.

I saw the South African medical insurance mandates fall away after the Apartheid government crumbled. After 18 months, doctor visits paid in cash were cheaper than the co-pay had been under insurance. The most expensive emergency treatment (heart attack) at a world class private hospital required a $3,000 deposit on check-in; this was the maximum cost the hospital thought possible in a nearly-laissez-faire environment.

A good idea..

A government intervention seems like a good idea because I think that the government really needs to step in and take action when it comes to the healthcare debate which is an important matter that shouldn't be ignored.