E-DRUG: Alternatives for the patent system?
[Drug prices are growing out of control in the USA [and the rest of the world;
Is there any alternative to the patent system for funding drug research?
The executive summary below is from a report submitted to WHO Commission on
Intellectual Property Rights, Innovation and Public Health (CIPIH) by Dean
Baker, co-director of the Center for Economic and Policy Research (CEPR).
The full paper can be downloaded from
More info re CIPIH at http://www.who.int/intellectualproperty/en/
CEPR is at http://www.cepr.net
Financing Drug Research: What Are the Issues?
by Dean Baker, co-director of the Center for Economic and Policy Research (CEPR)
Rising drug prices are placing an ever larger burden on family budgets and the
The Center for Medicare and Medicaid Services estimates 2004 expenditures at
$207 billion (more than $700 per person), and projects that annual spending
will grow to more than $500 billion by 2013 (more than $1,600 per person). The
immediate cause of high drug prices is government granted patent monopolies,
which allow drug companies to charge prices that are often 400 percent, or
more, above competitive market prices.
Patent monopolies are one possible mechanism for financing prescription drug
research. Rapidly increasing drug costs, and the economic distortions they
imply, have led researchers to consider alternative mechanisms for financing
drug research. This paper outlines some of the key issues in evaluating patents
and other mechanisms for financing prescription drug research. It then assesses
how four proposed alternatives to the patent
system perform by these criteria.
The most obvious problem stemming from patent protection for prescription drug
is the huge gap it creates between the cost of producing drugs and the price.
In addition, to making drugs unaffordable in many cases, high drug prices also
lead to enormous economic inefficiency.
Patent monopolies cause economic distortions in the same way that trade tariffs
or quotas lead to economic distortions, but the size of the distortions are far
greater. While trade barriers rarely increase prices by more than 10 to 20
percent, drug patents increase prices
by an average of 300- 400 percent above the competitive market price, and in
some cases the increase is more than 1000 percent. Simple calculations suggest
that the deadweight efficiency losses from patent protection are roughly
comparable in size to the amount of research currently supported by the patent
system approximately $25 billion in 2004.
Projections of rapidly rising research costs, and therefore a growing gap
between price and marginal cost, imply that the deadweight loss due to drug
patents will exceed $100 billion a year by 2013.
As economic theory predicts, government granted patent monopolies lead not only
to deadweight efficiency losses due to the gap between the patent protected
price and the competitive market price, but also to a variety of other
distortions. Among these distortions are:
1) excessive marketing expenses, as firms seek to pursue the monopoly profits
associated with patent protection data from the industry suggests that
marketing costs are currently comparable to the amount of money spent on
2) wasted research spending into duplicative drugs industry data indicates
that roughly two thirds of research spending goes to developing duplicative
drugs rather than drugs that represent qualitative breakthroughs over existing
3) the neglect of research that is not likely to lead to patentable drugs;
4) concealing research findings in ways that impede the progress of research,
and prevent the medical profession and the public from becoming aware of
evidence that some drugs may not be effective, or could even be harmful.
In addition, the patent system for financing prescription drug research poses
large and growing problems in an international context. Disputes over patent
rules have increasingly dominated trade negotiations. Furthermore, problems of
enforcement have persisted even after agreements have been reached. These
problems are likely to worsen through time, as the pharmaceutical industry
seeks to increase the amount of money it extracts from other countries through
This paper examines four alternatives to the patent system:
1) A proposal by Tim Hubbard and James Love for a mandatory employer-based
research fee to be distributed through intermediaries to researchers (Love
2) A proposal by Aidan Hollis for zero-cost compulsory licensing patents, in
which the patent holder is compensated based on the rated quality of life
improvement generated by the drug, and the extent of its use (Hollis 2004);
3) A proposal by Michael Kremer for an auction system in which the government
purchases most drug patents and places them in the public domain (Kremer
4) A proposal by Representative Dennis Kucinich to finance pharmaceutical
research through a set of competing publicly supported research centers
All four of these proposals finance prescription drugs in ways that allow most
drugs to be sold in a competitive market, without patent monopolies. These
proposals also would eliminate many of the economic distortions created by the
Hay and Zammit (2002) suggest a variant of the Kremer auction system, in which
only patents that are especially important for public health (e.g. an AIDS
vaccine) are put up for auction and bought by the government. Under this
system, many drug patents would remain privately held, with drugs sold in the
same manner as they are now.
These proposals, along with other plausible alternatives to the patent system,
deserve serious consideration. Current projections for drug spending imply that
patent supported prescription drug research will lead to ever larger
distortions through time. For this reason, it is important to consciously
select the best system for financing prescription
drug research, not to just accept the patent system due to inertia.