Monday, March 7, 2016

A Straightforward Solution to the Drug Patent Dilemma?

I'm sitting here grading essays on pharmaceutical drug patents for my business ethics class. These patents generate a serious problem (which 'll describe in a second), and students were asked to think about how that problem might be addressed. What many of them proposed in their essays is so sensible--indeed, so obvious--that it's a wonder that some version of the strategy hasn't become part of our public policies.

Or maybe it isn't such a wonder after all. Maybe it's what we should expect in a world where business exert enormous influence on government policy.

Big Pharma has lots of money to lobby congress. They have lots of money to finance politicians' election campaigns. And the solution that some of my students propose (the same solutions that some of my brighter students proposed last year, and the year before that, and the year before that) might be great for everyone on planet earth except Big Pharma. But it's not as good for Big Pharma as the status quo.

Here is the problem, in a nutshell: When a drug company invests in the research and development of a new drug, they need the assurance that others who haven't spent the money on R&D won't just step in and effectively steal their intellectual property. Once a new drug has been developed and has passed clinical trials, the actual manufacture may be cheap. So in the absence of intellectual property protections, a predatory company could just wait for others to do all the risky and expensive R&D, and then swoop in and start making the drug for next to nothing. The incentive to actually invest in developing new drugs would disappear, and we'd all be sicker for it.

Furthermore, the payoff needs to be pretty big. Investing in drug R&D is risky, because it may not yield a usable product. A drug needs to meet some pretty exacting specifications in order to be approved for patient use. If it fails the clinical trials--if the side-effects are too severe or the benefits too limited--the R&D investment will have no payoff at all. So, the payoff for a successful product needs to be high enough to motivate taking those risks.

Enter the 20-year drug patent. A patent protects intellectual property, and a 20-year patent offers a big payoff for risky investments. It does all this by giving the company a 20-year monopoly on what they have invented.

Such a monopoly might not stifle all competition. After all, a drug company might develop an effective treatment for MS and a rival company, pursuing its own R&D, might develop an equally effective treatment. Each company holds a patent on its drug, but they compete with each other.

But that doesn't always happen. Sometimes one company has a drug that is substantially better than existing rivals, or has the only treatment for a life-threatening condition that actually works. When that happens, it's great for the company--but the rest of us have a problem.

In a free market, there are two natural constraints on product pricing. First, there is competition among businesses selling comparable products. Second, there is the fact that when prices get too high, potential consumers may decide to walk away and do without rather than buy the product. Raise your price too high, and whatever benefits come from the higher price are offset by lost sales.

But when you have a monopoly on a product essential for life, neither of these natural market constraints applies. And so when a pharmaceutical company has a patent on that kind of drug, they can pretty much ask whatever they want. And they do. According to the textbook my students were using to write their essays, relative to the cost of ingredients, some prescription drugs have mark-ups of 500,000 percent (although 5,000 percent may be more typical).

So--you need patents both to protect intellectual property rights and to incentivize risky R&D. But in the drug industry, eliminating competition for 20 years can mean a total lack of natural market constraints on prices, leading to skyrocketing healthcare costs, people coming out of serious illnesses saddled with crushing debt, rising insurance get the idea.

So what's the solution? There's one approach, repeatedly proposed by my students, that's actually pretty simple. Confer patents with conditions. Two of my students this semester independently came up with the idea of imposing these conditions in the following way: Bestow short-term renewable drug patents (say, 5 years), and impose conditions on renewal (for up to 20 years) based on living up to reasonable pricing standards.

Such legal constraints on pricing wouldn't be illicit government interference in the market, since the government is already regulating the marketplace by bestowing the patent. They'd just be bestowing the patent with conditions, instead of in the essentially unconditional way they do now. They'd be interfering with the market in a way that did something to replace the market constraint on overpricing that their interference (through conferring the patent) has eliminated.

The conditions would have to be reasonable enough that the payoff for developing a new drug would still motivate risky R&D. In fact, the imposition of such conditions could be paired with other reforms that are favorable to drug companies. For example, as things are now, drug companies apply for their patent before the drug has been approved by the FDA, and in some cases the approval process may take years--meaning that the clock on their patent has run down by many years before they can actually start making money. What if an initial 5-year patent, renewable for up to 20 years, didn't kick in until the drug was approved for sale--but was conferred with a range of conditions that curb exploitation of the unique position drug companies sometimes find themselves in? If a company fails to meet the conditions, the drug patent is not renewed after its initial 5-year term. If it meets the conditions, it can continue to enjoy the patent for another 5 years, renewable for up to 20.

These time-frames are mere placeholders for whichever actual time-frames make the most sense in terms of incentivizing R&D while protecting the public welfare. And the conditions on retaining the patent can be reasonable enough to allow drug companies to make healthy profits without risking losing their patents. The precise conditions would be established by independent research informed by prevailing public values, rather than corporate-sponsored research informed by the profit interests of drug companies.

The aim here is to allow drug companies to do well, to make their R&D risks worth it and to protect their intellectual property rights, but to put fair limits (limits that reflect public interests and values) on how much a drug company can take advantage of the desperation of sick and dying people when there aren't competitors vying for the dollars of those same sick and dying people. Because the life-saving treatments are the result of their labors, we let the drug companies enjoy a payoff for their work. But we don't give them unfettered freedom to extract whatever they can get from the desperate people who would die or wither without their help.

The basic strategy strikes me as so reasonable and straightforward that I would almost expect to see some version of it already in place. But while I am no expert on patent law, I can't find anything like it at work curbing drug company exploitation of patent-conferred monopolies. Am I missing something obvious? If not, why is nothing like this in place?

The simplest answer I can find is this: It's not as good for drug companies as the current system, and the interests of drug companies are doing more to influence public policy than the interests of the American people.

Does any other explanation make sense? Are there problems with the solution my students keep coming up with, year after year, that we haven't seen? If so, what are they?