A Case For Scrapping Drug Patent Monopolies As Incentive For R&D
It is widely accepted across the gamut of economic ideologies that when a monopoly exists a free marketplace becomes inefficient and fails. It fails, because without competition, a monopolist is all but guaranteed to price-gauge consumers. So it’s no wonder that US anti-trust laws were written to safeguard the marketplace from monopolistic (anti-competitive) behavior.
Yet, for over half-a-century, the idea that the pharmaceutical industry should somehow remain exempt from this monopolistic prohibition, has largely gone unquestioned. By being permitted to patent its medicines, BigPharma enjoys a monopoly in the marketplace for a fixed period (20 years or more per drug), where they are free to price-gauge consumers.
The rationale behind drug patent monopolies rests upon the idea that without huge profits assured by this 20+ year price-gauging period, these pharmaceuticals would lack the incentive to invest in costly research and development. In addition, the actual manufacturing of medication tends to be cheap, so without patent-protection would-be-competitors, unburdened by R&D investments, could easily sell many generics for as low as $10 per prescription.
And thus, the drug patent has been widely accepted as a necessary evil.
But by choosing patenting as the preferred incentive for private R&D investment, the government is knowingly handing ‘for-profit’ corporations monopolistic licenses over vital consumer products.
We are not talking about discretionary goods, here — music downloads, books, or software — which people can live without. We’re talking about medicines that often keep people alive, or help to lessen their pain and suffering. In other words, the consumer CANNOT DO WITHOUT many of these products. And the provider, being shielded from competition, is well-positioned to take full advantage of their desperation.
Which is why the Pharmaceutical industry consistently ranks as one of the most profitable industries in the United States.
In response to public outrage over the fact that drug prices consistently rise at a much faster pace than the rate of inflation, the Congressional Budget Office (CBO) conducted a study in 2006 to assess the industry’s R&D expenses.
The study revealed that Federally-funded research has played a HUGE role in the discovery of nearly all new drugs released by the pharmaceutical industry. In fact, the only industry that receives more Federal subsidies for R&D is defense.
Here were some of the CBO’s findings:
- The federal government expended $25 billion on health-related R&D in the previous year alone (2005).
- “Most of the important new drugs introduced by the pharmaceutical industry over the past 40 years were developed with some contribution from public-sector research.”
- “Out of 21 of the most influential drugs introduced between 1965 and 1992, only five were essentially developed entirely by the private sector.”
- “In the past decade, federal outlays on health-related research and development have totaled hundreds of billions of dollars at the National Institutes of Health (NIH) alone.”
- R&D costs for new drugs are usually low, because more often than not, they are merely incremental modifications of already existing drugs.
CBO reported that the amount BigPharma itself contributes towards R&D is a staggering $800 million (2006 dollars) on average per drug release. However, CBO pulled these numbers from a separate study conducted by Tufts Center for the Study of Drug Development, which happens to be financed by — you guessed it — BigPharma itself!
In fact, a recent study published in the journal BioSocieties, entitled “Demythologizing the High Costs of Drug Research,” by Donald W. Light of the University of Medicine and Dentistry of New Jersey and Rebecca Warburton of the University of Victoria, took a hard look at those Tuft numbers. And what they found were HUGE flaws (Note: some of the major flaws are summarized HERE at Slate) which dramatically inflated BigPharma’s R&D costs:
When Light and Warburton correct for all these flaws—well, all the ones that can be quantified—they end up with an average cost of bringing a drug to market that’s $59 million and a median cost that’s $43 million. In 2011 dollars, that’s a $75 million average and a $55 million median.
So the drug companies’ [last stated] $1.32 billion estimate was off, according to Light and Warburton, by only $1.265 billion.* Let’s call it a rounding error.
Therefore, it appears the only credible information that can be gleaned from the CBO study is the taxpayer-funded portion of pharmaceutical R&D, and it is HUGE (to the tune of hundreds of billions of dollars).
A 2008 study entitled “The Cost of Pushing Pills: A New Estimate of Pharmaceutical Promotion Expenditures in the United States,” published by the Public Library of Science, estimated that BigPharma spends nearly twice as much on advertising and promotion than it does on R&D expenditures, contrary to the industry’s claim. Their research reveals that the US pharmaceutical industry is in fact marketing-driven, despite its constant claims that it is research-driven.
In January, BusinessWire published “2011 Trends to Watch in Pharmaceutical Technology” which reported that BigPharma plans to cut R&D costs in 2011, by outsourcing their R&D operations to emerging markets, like China and India.
The CEO of GlaxoSmithKline just announced he’s been aggressively closing R&D operations, and instead partnering with academic research centers (again, government funded) & biotech companies:
One of the more vocal voices in the changing R&D landscape has been GlaxoSmithKline (GSK) CEO Andrew Witty. His company has significantly pared down its fixed R&D costs by closing research facilities, doing less discovery work internally, and pushing more and more responsibility for research to external academic and biotech partners.
It’s the same familiar theme that has come to define much of corporate America: socializing much of the risks and costs, outsourcing the higher-paying technical jobs to low-cost-labor countries, privatizing all the profits, and then evading paying US income taxes (as this Bloomberg article highlights).
Except in this case, the government additionally grants BigPharma a 20+ year competition-free environment with which to fleece the American people, to the detriment of their wallets, their health and their lives.
The US obviously needs to find a new creative way to ensure that financial incentives for private R&D remains, but without granting corporations monopolist-licenses to harm the public. Drug patent monopolies make no economic sense, and have proven to be a resounding failure on every front.
A couple months ago, Vermont Senator Bernie Sanders proposed a major reform bill of the drug patent system that sounds like a winning strategy. The bill would essentially replace drug monopolies with prizes:
He has introduced a bill to create a prize fund that would buy up patents, so that drugs could then be sold at a free market price. Sanders’s bill would appropriate 0.55% of GDP (about $80bn a year, with the economy’s current size) for buying up patents, which would then be placed in the public domain so that any manufacturer could use them at no cost.
This money would come from a tax on public and private insurers. The savings from lower-cost drugs would immediately repay more than 100% of the tax.
The country is projected to spend almost $300bn a year on prescription drugs this year. Prices would fall to roughly one-tenth this amount in the absence of patent monopolies, leading to savings of more than $250bn. The savings on lower drug prices should easily exceed the size of the tax, leaving a substantial net reduction in costs to the government and private insurers.
This would help to bolster R&D investment, by ensuring these firms are handsomely rewarded with all-upfront payouts for their products, which they could then reinvest into their R&D operations. Their huge marketing budgets would evaporate, thus saving them the lion-share of their current expenses. And at the same time, it would inject competition into the drug manufacturer marketplace — essential for ensuring these products remain widely available and affordable to the consumer.
And equally important, it would substantially impact our nation’s runaway healthcare costs by reducing our $300 billion annual pharmaceutical expenditures down to $30 billion. This would help to shore up Medicare and Medicaid, save lives, and put more money back into the pockets of the American people.
Progressive Reactions To The Senate’s Public-Option Compromise
While the Congressional Budget Office reviews the Senate’s new health care reform proposal, the key players are remaining tight-lipped about its details. But news organizations are piecing together from their sources what this public option compromise is beginning to look like.
Dylan Ratigan of MSNBC’s “Morning Meeting” outlined some key components he’s uncovered of the new Senate proposal:
1. Private Health Insurers Offer Non-Profit Plans On Government Exchange:
“It encourages private ensurers to offer non-profit plans that will be negotiated by the federal government, and sold on exchanges that are regulated and run out of Washington. So imagine you’re a for-profit insurance company, now you’re going to be told to run a non-profit insurance plan to compete with yourself.”
2. Trigger Option For Public Plan
“The threat to get them to do this [administer non-profit plans] would be the creation of a government plan which would be a greater threat to obliterate them if they don’t do it, because obviously you don’t want to open a non-profit to compete with yourself unless your only alternative is obliteration.”
3. Expands Medicare / Allows Buy-In
“The deal also lets the uninsured in this country buy into Medicare once they turn 55. […] Reid says there is a public option in there, but many Progressives may disagree with this.”
Here’s some of the initial feedback, thus far, by pro-public option progressives:
THUMBS UP: Howard Dean spoke to the Huffington Post about the new proposal:
The former Vermont governor called the decision to allow consumers between the ages of 55 and 64 to buy Medicare coverage “a big step forward.”
“It opens up Medicare and gives people a real choice,” he said. “And secondly it does something that should have been done the whole way along: instead of creating a new bureaucracy it just uses the one we already have.”
“I’m not a fan of the private market, as you know. However, the private market does work in two countries, Switzerland and the Netherlands, and the way it works is by substantial regulation… If, in fact, this is basically going to be run as if it were the federally employee benefit plan, than this can work. The [Office of Personnel Management] knows how to run this plan and I’ve almost never heard anything bad of the federal employee benefit program.”
“There doesn’t have to be a public option in the bill because I’m some sort of ideological socialist,” he said of his support for a government-run insurance provider. “There had to be a public option because the private sector doesn’t work. And if they can make it work [without a public option], then let’s see.”
“The criteria that I use to evaluate the various proposals is; ‘Is it reform?'” Dean concluded. “And this is reform.”
“I’m disposed towards this,” he said. “It was part of my platform when I ran for president. But look at this. It makes sense. Why have two bureaucracies, including one who hasn’t run this before [the Department of Health and Human Services]… when you can use Medicare?”
THUMBS UP on many aspects of proposal: Senator Bernie Sanders stated last night:
“What you’re looking at is tradeoffs which, in fact, at the end of the day, may be stronger than the very weak public options,” Sen. Bernie Sanders told Rachel Maddow on MSNBC. “The other part of the tradeoff…may also be an expansion of Medicaid. And if you add to Medicaid the development of many new community health centers, you will be providing a lot more health care access to lower income people. If you do an opt-in for people 55 years of age through Medicare, you’re also providing a significant benefit,” Sanders added.
THUMBS DOWN: Senator Russell Feingold issued a statement immediately following the meeting last night:
“While I appreciate the willingness of all parties to engage in good-faith discussions, I do not support proposals that would replace the public option in the bill with a purely private approach,” he said. He added, however, that he will base his vote “on the entirety of what is in the bill, and whether I think the bill is good for Wisconsin.”
THUMBS UP: Senator Rep. Anthony Weiner issued a statement:
“Last night, my Democratic colleagues in the Senate struck a deal that will help us move health care reform forward in the Senate. The details are still sketchy, but there is one remarkable element of the emerging plan: the expansion of the smart single-payer health care plan that serves over 43 million Americans—Medicare.
Extending this successful program to those between 55 and 64, a plan I proposed in July, would be the largest expansion of Medicare in 44 years and would perhaps get us on the path to a single payer model. Medicare provides health care to all Americans over 65 and has an overhead of barely 1 percent. In a debate that hasn’t focused enough on how to genuinely contain costs and deliver affordable health care, this is one idea I like a lot.”
THUMBS UP: Sen. Jay Rockefeller said:
“I’ve got a smile on my face. I don’t smile naturally.”
THUMBS DOWN: Sen. Roland Burris is threatening a filibuster from the left:
“If we have to get 60 and it comes back and it does not have a public option in it, I will not vote for it. It will still take 60 votes to pass it. If we don’t pass a meaningful health care reform bill in this session, we are all going to hang separately,” Burris said. “I’ve listened to my constituents.” He added, “Understand that I have drawn a line in the sand. I’m not much of a dealmaker in this regard.”
Here’s some of the noise emanating from the progressive blogosphere:
THUMBS DOWN: Jame Hamsher of FireDogLake doesn’t like it.
THUMBS DOWN: Markos Moulitsas of Daily Kos doesn’t like it. In responding to an email from Obama, Markos says:
Really? All we have to do is send the DNC $5 and we get ponies? The same DNC that is enabling corporatist Democrats to water down and destroy any hope for health care reform? That DNC?
This is so freakin’ obnoxious I can hardly stand it. We are about to get a turd of a “reform” package, potentially worse than the status quo. We have the insurance industry declaring victory, Republicans cackling with glee, and the administration is using that piece of shit to raise money?
Obama spent all year enabling Max Baucus and Olympia Snowe, and he thinks we’re supposed to get excited about whatever end result we’re about to get, so much so that we’re going to fork over money? Well, it might work with some of you guys, but I’m certainly not biting. In fact, this is insulting, betraying a lack of understanding of just how pissed the base is at this so-called reform. The administration may be happy to declare victory with a mandate that enriches insurance companies, yet creates little incentive to control costs or change the very business practices that have screwed so many people. But I’ll pass.
Democrats are demoralized, and have little incentive to turn out next year. The teabaggers will turn out. If this is how the Obama camp thinks we can energize the base — by promising them a health care pony for $5 to the same Democratic Party that is home to the likes of Baucus, Nelson, Lincoln, Lieberman, and the rest of the obstructionist gang — then we’re in for a world of hurt in 2010.
THUMBS SOMEWHAT UP (over the long haul): Matthew Yglesias writes:
… what the Senate has been negotiating over is the availability of a not-so-hot public option. Still better than nothing, but not transformative, not a game-changer. The Senate’s deal has watered this down even further, involving a sort-of co-op idea plus a triggered public option under circumstances where it’ll be very difficult to ever pull the trigger. Disappointing.
But there’s an important ray of hope here: The compromise will allow people to buy into Medicare. This, in essence, is a version of the original public option idea from before it got watered-down—a nationwide program linked to Medicare. The bad news is that the availability of the buy-in will be limited. People under the age of 55 won’t be able to buy in. And buy-ins will be limited to people on the exchange. As Chris Bowers points out this means the expansion won’t impact very many people “this public option ‘compromise’ would only cover 1.08 million Americans, or only about 25-33% of what the opt-out public option would have done.”
That’s correct. But there’s an important caveat to that. Anything limited to the exchange won’t impact most Americans very much even when reform goes online in 2014. But the exchanges will get much bigger over time. Part of what’s going on in the United States is that the employer-based health insurance system is slowly unraveling. Both the House and Senate versions of reform consist not only of using exchanges to cover the currently uninsured, but also using exchanges to construct a kind of safety net so that as employer-based insurance continues to unravel, people will land softly in exchangeland rather than crashing into the rough ground of the current individual insurance market. The Senate bill will slightly accelerate the decline of employer-based insurance by slowly phasing out the tax subsidy for such insurance. […]
So in addition to pushing for expansion of the buy-in to people outside the exchange, it’s also worth pushing for accelerated opening of the exchange to more-and-more people. In the long run, of course, it’ll also be necessary to fight for further lowering of the age threshold.
RESERVING JUDGMENT FOR NOW: Digby writes:
I believe that had Obama and Reid really been committed to the public option they probably could have found a way to finesse Lieberman long before now. There is no doubt that the only reason Lieberman did this was to fuck the liberals. Hard. It’s obviously become his life’s purpose.
We’ll know details soon. Right now it sounds like everyone is still confused, so there’s no need to get too excited or angry or anything else. Rockefeller’s attitude bodes well. And I saw Bernie Sanders on Maddow and he seemed quite jolly, although he reiterated his pledge to not vote for any bill that didn’t have a public option. So, we’ll see.
THUMBS UP: Ezra Klein writes:
The national non-profits are not exactly like, but not that far from, the compromised public plan in the House version of the bill. They won’t be publicly run, but with the OPM regulating them tightly and carefully choosing which offerings are accepted into the market, the impact might not be that different in practice. They have the advantages of offering a single product nationally and being freed from the profit motive, both of which were key to the theory of the weaker public option. Indeed, they’re like publicly-regulated utilities more than private plans. These look a lot like the semi-private insurers that function well in Germany, Sweden and the Netherlands, among others.
Meanwhile, the Medicare buy-in lets people in the broader insurance market see what national bargaining power can do for individual premiums. Right now, Medicare’s rates are largely hidden, as no one pays the full premiums, and so no one can really compare it to private offerings. But if the premiums become visible, and Medicare’s superior bargaining power is capable of offering rates 20 to 30 percent lower than its private competitors can muster, we’ll see how long it is before representatives begin getting calls from 50-year-olds who’d like the opportunity to exchange money in return for insurance as good as what 55-year-olds can get.
My personal take:
Call me cynical, but the idea of placing perhaps the single most corrupt and immoral industry on the planet — the health insurance industry — in charge of administering non-profit plans is like hiring Pol Pot as bus driver at a private, elite, prep school. And if the Blue Dogs go along with this and sign on, then I’ll have to assume that the health insurance industry has found a way to work around it (i.e. there will be something in the bill that will allow them to base non-profit — probably subsidized — premiums on costs which the industry will be allowed to arbitrarily inflate).
The question that should be getting asked is this: If there are to be non-profit plans on a government exchange (for those who can’t afford health insurance) then wouldn’t Medicare be the most logical choice for administering them, since they are already administering non-profit plans? Since Medicare’s administrative expenses tend to be lower than the health insurance industry’s, it would be cheaper to allow Medicare to administer the plans. It makes no sense to put the corrupt and inefficient health insurance industry in charge of this function, which leads me to believe there’s some kind of fix in the works.
At some point, this cancerous industry wedged between patient and doctor will have to be surgically removed, and the longer it takes for our representatives to confront this reality, the more pain I fear is ahead of us.
THUMBS DOWN: Ed Schultz of MSNBC’s “The Ed Show” is adamantly against this new compromise.
Ed’s guests both give THUMBS DOWN: Editor of The Nation Katrina Vanden Heuvel and former Cigna VP Wendell Potter. See the clip here:
THUMBS UP: Rep. Alan Grayson seems to like the compromise:
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