Econ 101 and Drug Patents

I know that all of you out there keep a copy of HOOKED at your bedside and read a chapter each night before retiring. But in case you've not yet committed the volume to memory, I can take the opportunity of these news items to do a bit of review of a basic concept:
http://keionline.org/node/1147
http://www.guardian.co.uk/commentisfree/cifamerica/2011/may/31/healthcare-pharmaceuticals-industry

The latter article, from The Guardian, is a commentary by economist Dean Baker (whom I quote in HOOKED) on legislation proposed by Sen. Bernie Sanders (I-VT), which is summarized in the first link.

Here's how Baker starts off his commentary: "Drugs are cheap. There are few drugs that would sell for more than $5-$10 a prescription in a free market. However, many drugs in the United States sell for hundreds of dollars per prescription and, sometimes, several thousand dollars per prescription. There is a simple reason for this fact: government-granted patent monopolies."

Now, this comment may strike you as strange, especially if you were to check out the Pharmaceutical Research and Manufacturers of America website (http://www.phrma.org/about/phrma) There you will find the following statement of the drug industry's core values:

PhRMA's mission is to conduct effective advocacy for public policies that encourage discovery of important new medicines for patients by pharmaceutical and biotechnology research companies. To accomplish this mission, PhRMA is dedicated to achieving these goals in Washington, the states and the world:
• Broad patient access to safe and effective medicines through a free market, without price controls;
• Strong intellectual property incentives;
• And transparent, efficient regulation and a free flow of information to patients.

In case you don't know what "intellectual property" is, read "patents." So how can it be that an economist explains that in a free market, drugs would be really cheap, and the reason they cost so much is because of patents that amount to government monopolies (which are of course a violation of the free market); yet PhRMA insists it is for the free market (and against price controls), yet also for patents?

I mentioned in passing (http://brodyhooked.blogspot.com/2011/07/kid-gloves-on-corporate-crime-different.html) that I hope soon to be able to announce the availability of a new book on the subject of economism. Economism, briefly, is the worship of the "free market" as an item of religious faith, though it disguises its religious nature by posing as hard-headed science. Economism, I hope to show, is shot through with internal contradictions and inconsistencies, explaining why its believers have to be faith-based, because neither facts nor logic would support it. PhRMA's two claims of being pro-free-market and pro-patent is just one tiny example of the sorts of contradictions that economism generates--yet at the same time obscures, so that most US politicians and policymakers repeat this nonsense without realizing that it's nonsense.

Baker goes on to explain that a patent is a government-granted monopoly based on a hunch that the extra cost to the public, forced to pay monopoly prices for goods until the patent expires, is a good trade, because the patent forms an incentive to innovate and invent which in turn is a public benefit. This hunch could be well or poorly grounded. Baker argues that right now, we are paying a lot more for drugs through patent monopolies than we are getting benefits from real innovation. If you don't think this is true, you have not been following this blog.

Enter Sen. Sanders. There are wo possible solutions to the mismatch between drug patents and real public benefit. One would be a strictly regulatory approach--change the rules regarding granting patents for new drugs. Demand more evidence of real benefit before granting a patent, or shorten the period of patent protection, or some such. The other approach, which is what Sanders actually has proposed, is a quasi-market approach, using financial incentives rather than regulation. The idea is to impose a tax on both public and private health insurers. The money from the tax would create a prize fund. The prize fund would be used to buy up patents for really useful drugs, as opposed to "me too" drugs. These useful drugs would quickly become generic drugs and would be available cheap.

This, say both Sanders and Baker, would be a win-win. The insurers would more than save in lower drug costs what they paid in the new tax. Drug companies would then have a powerful incentive to discover really useful new drugs, because then they could easily sell the patent for a tidy profit. Baker is perhaps overly sanguine in imagining that in this new system, drug companies would gain no benefit from deceptive marketing of marginally useful or harmful drugs, so they'd simply quit doing that.

Since true believers in economism hate government programs and hate new taxes, and probably hate Bernie Sanders, you can bet there will be little support in those quarters for this proposal. But thanks to Dean Baker for again revealing the hypocrisy of the drug industry's wrapping itself in the "free market" mantle.

ADDENDUM 8/6: A reader much more alert than I was when I wrote this post last night informed me that I had inserted the word "patient" when I obviously meant "patent." This has been corrected above.