The rationale for granting patents for new drugs is to give companies incentives to research new and better drugs. Allowing them a monopoly for a period of time allows drug companies the opportunity to recoup the cost of their investment and make a profit from their research.This is the good story of patent protection. But as every economist knows, any act of government intervention has unintended consequences. A patent monopoly allows drug companies to sell drugs at prices that are far above their free market price. This is especially true with major breakthrough drugs that can sell for prices that are several thousand percent above their free market price because of their health benefits. For example, the Hepatitis C drug Sovaldi sells for $84,000 for a three-month course of treatment in the United States. A generic version is available in India for less than $1,000.This enormous gap between the price for which a patent-protected drug can be sold and the cost of production to the manufacturer creates a huge incentive to promote the drug wherever possible. This includes pushing the drug for uses for which it has not been approved by theFood and Drug Administration or other national regulatory agencies. There is also an incentive to conceal evidence that a drug may be less effective than claimed or even harmful.As we know, people respond to incentives. This means drug companies will act in ways that are harmful to the health of patients in order to take advantage of the huge profits available from patent monopolies. To get some idea of the costs in terms of increased mortality and morbidity, Ravi Katari and I calculated the costs associated with five prominent instances in which drug companies either lost a court case or reached a settlement because they had misrepresented the safety or effectiveness of their drugs.By our calculations, the cost of the increased mortality and morbidity associated with the improper marketing of these five drugs was $382 billion over the 14-year period from 1994 to 2008, or just over $27 billion a year (in 2014 dollars). This is roughly the same amount as the industry claims to have spent on research over this period. In other words, the harm caused by inaccurate marketing and disclosure of information for just these five drugs, is comparable in value to all the research performed by the drug industry during the same period.To be clear, the allegations in these five cases are that the companies deliberately concealed information or misrepresented research findings. This would mean that the damage was not the result of inevitable mistakes, but rather deliberate actions motived by profit.Our calculations are very imprecise, but they suggest the enormous costs society may incur as a result of the perverse incentives that patent monopolies provide to drug companies. These five drugs were selected because they were especially egregious examples, but there are dozens of other instances where evidence has been produced showing drug companies misled the public about the safety or effectiveness of their products. And the cases that have come to light can only be a subset of the instances where drug companies have withheld or misrepresented information that could reflect badly on their drugs.Of course this is not the only problem with patent financed drug research. Patent monopolies provide an incentive for drug companies to develop copycat drugs rather than seek out drugs for conditions for which no treatment exists. They also encourage secrecy, which impedes the progress of research. And the high drug prices that result from the monopolies create enormous complications for whoever gets stuck with bill, whether it is the patient, an insurance company, or the government.In the case of Sovaldi, there has been much hard-wringing about whether insurance companies and the government should pay $84,000 for every person suffering from Hepatitis C, or whether this cost should only be incurred for especially severe cases. There would be much less hand-wringing if the issue was paying $900 for a generic version of the drug.There are alternative mechanisms for financing research. Nobel Prize winning economist Joe Stiglitz has proposed a prize system in which the government would buy up the patents for drugs that are shown to be effective and then allow them to be sold as generics. Alternatively, we can go the route of directly financing research through the government. The United States already spends more than $30 billion a year on publicly funded biomedical research through the National Institutes of Health. If this sum was tripled, it could likely replace the funding now being supported through patent monopolies and then all new drugs could be sold at generic prices.This matters now because a major thrust of the Trans-Pacific Partnership (TPP) is to make patent protection stronger and longer. A predictable outcome of the efforts in this area is many more instances of patients being harmed by drug companies concealing or misrepresenting their research findings. Our paper suggests that patents are an extremely inefficient way to support research because of the perverse incentives they provide drug companies. It would be unfortunate if the drug companies are able to use the TPP to further entrench a system that has so many negative side effects.By Dean Baker, co-director of the Center for Economic and Policy Research
