The Economics of Delinkage

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Every economist knows that trade tariffs are bad because they raise the price of the protected product above the free market price. The story is the same with patent monopolies on prescription drugs.

However, there are two big differences. Tariffs in wealthy countries like the United States rarely raise the price of a product by more than 10 to 20 percent. Patent monopolies typically raise the price of the protected drug by around 1000 percent and sometimes by more than 10,000 percent. The other big difference is that prescription drugs are essential to people’s lives or health. This is not a story where we may buy fewer shoes or shirts if a tariff makes the price somewhat more expensive.

All the arguments that economists would make against a 10 percent tariff on shirts also apply to the 1000 percent or 10,000 percent price increases on prescription drugs due to patent monopolies, except the problems are several orders of magnitude larger with prescription drugs. At the most basic level, the patent monopoly leads to enormous inefficiency since drugs that would sell for $10 to $20 per prescription in a free market instead sell for hundreds or thousands of dollars.

Even when people can afford these prices, or their insurance will cover them, these monopoly prices inject an important monetary consideration into what should be a treatment decision based on health considerations alone. We have created a whole industry of pharmacy benefit managers just to deal with monopoly drug pricing. And, when people can’t afford the prices, their health suffers or they die.

Artificial monopolies also lead to corruption, just as economic theory predicts. Drug companies routinely mislead doctors and the public about the safety and effectiveness of their drugs. They would have very little incentive to conceal dangerous side-effects or promote drugs for improper uses if drugs had the same markup as shovels or plastic cups or other goods sold at free market prices.

Patent monopolies also distort the research process itself. In a context where the Hepatitis C drug Sovaldi sells for $84,000, it is desirable that other companies research alternatives, which could bring downward pressure on the price. However if Sovaldi was selling for $200 per treatment, it’s free market price, no one would spend hundreds of millions of dollars developing alternatives to a highly effective treatment. This money would be much better spent developing drugs for conditions where no treatment now exists.

And, patent monopolies encourage secrecy in the research process. Drugs companies want to share as little information as possible in order to avoid aiding competitors. Science advances most quickly when it is open.

A system of direct public funding would allow new drugs to be sold at free market prices, like shovels and paper cups. It would eliminate the incentive to lie about the effectiveness and safety of drugs. And, it would make all research findings and test results fully available to the public and other researchers.

The system of patent monopolies grew out of the medieval guild system. We can do better in the 21st century.