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[e-drug] Alternatives for the patent system?

E-DRUG: Alternatives for the patent system?
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[Drug prices are growing out of control in the USA [and the rest of the world; 
WB].
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 
http://www.who.int/intellectualproperty/news/en/Submission-Baker.pdf 

More info re CIPIH at http://www.who.int/intellectualproperty/en/

CEPR is at http://www.cepr.net
WB]

Financing Drug Research: What Are the Issues?

by Dean Baker, co-director of the Center for Economic and Policy Research (CEPR)

[Executive Summary]

Rising drug prices are placing an ever larger burden on family budgets and the 
economy.
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 
research;

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 
drugs;

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 
patent rents.

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 
2003);

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 
1998);2 and

4) A proposal by Representative Dennis Kucinich to finance pharmaceutical
research through a set of competing publicly supported research centers 
(Kucinich 2004).

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 
patent system. 

[Table omitted]

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.
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