Category Archives: Health Economics

Drug companies claim the U.S. patent system encourages development of new drugs and that the high prices are a necessary corollary. (see this) Others have questions regarding the monopolistic practices legalized by the system. This FDA Backgrounder, and this chapter from Against Intellectual Monopoly by Michele Boldrin and David K. Levine offer more background information.

Wikipedia defines a patent as a “set of exclusive rights granted by a state to a person for a fixed period of time in exchange for the regulated, public disclosure of certain details of a device, method, process or composition of matter (substance) (known as an invention) which is new, inventive, and useful or industrially applicable.” The right to produce the product protected by the patent is subject to further regulation by various regulators.

The regulator of drug patents in the United States is the FDA. Over the years the rules governing drug patents have evolved. Some milestones include:

1938 Federal Food, Drug, and Cosmetic Act : For the first time it was required that a drug be shown safe.

1962 Kefauver-Harris Drug amendment: Required that the drug be proved effective before marketing.

1980 Dole-Bayh– Prior to this products developed under federal grants were in the public sphere. To encourage commercial development of these advances individuals and institutions were allowed to patent these developments and even license or sell the patent to private companies.

Products developed to a major extent with public funds, such as imatinib (Gleevac) and bevacizumab (Avastin), are taken private and the public then gets to pay whatever the drug company or developer wishes for the technology. The result of Dole-Bayh has been medical progress at a tremendous cost. Basic research has suffered as workers are continually looking for something to take private-akin to hitting the lottery. We’re talking tens to hundreds of millions of dollars in fees to the individuals and the sponsoring university of such research. This has literally changed the landscape of medical research and not all for the better. See this article for the rationale and the unintended consequences.

In part because of Dole-Bayh, prescription prices in the past 25 years have increased astronomically. The price of newly patented oncology medications has increased to 50-100 times the level of the seventies, 15-20 times that of the 80’s. Between 1990 and 2001 the average price of all types of prescriptions tripled. Not surprisingly drug profits, after paying all costs of development including research and drug promotion, are at the unprecedented level of 18-20 % of revenue. Some think Dole-Bayh as currently applied is a giveaway to the industry. They further maintain that the law has provisions calling for reasonable pricing of government financed inventions. It’s never been enforced.

1984 Hatch-Waxman act–extended the length of patents up to 5 years (normal patent length is 20 years) to make up for the time the drug took to be approved by the FDA. It also provides for accelerated approval of generic drugs by not requiring generic companies to repeat the original research that proved them safe and effective.

Drugs that are clearly effective and safe are FDA approved and marketed promptly and do not qualify for additional patent time sanctioned by Hatch-Waxman. On the other hand many of the drugs needing additional time for approval and wanting patent extensions have marginal efficacy and/or questions regarding toxicity. That’s what delayed their approval. Ironically, the terms of Hatch-Waxman will extend patents most for drugs that may deserve it least.

The law is gamed by patent holders through legal loop holes and payments to generic manufacturers that actually delay the marketing of competing generics. It’s been a boon to lawyers. A company with a patented drug for example has been able to delay a generic by 30 months simply by raising an objection to marketing it-this was done multiple times in some instances. In addition it allowed hundreds of millions of dollars in payments between the patent holder and generic companies to delay the release of generics. There has been some attempt to control this. The Greater Access to Affordable Pharmaceuticals law passed the Senate in 2002 and was reconsidered in 2003. The FDA revised the rules of Hatch Waxman to address this issue, but the affect of these changes remains unclear. This article from the July 1 2006 Times and this from the July 3, Washington Post indicate that the pharmaceutical industry continues to game the system.

Among the criticisms of patents is the notion that patents create monopolies which almost always result in inefficiencies, stifle competition (by definition), cause higher prices, lower quality and shortages.

It’s clear that our system of care has problems with inefficiency and pricing from the patent monopoly. We have the most costly health care system in the world but have mediocre results. Prices of pharmaceuticals have reached unprecedented levels. Medicynic has previously noted pricing of new cancer drugs/year exceeds the median and average incomes in the U.S. and more. The issues of lower quality and shortages apply because of aggressive marketing of mediocre patented drugs and because people lack access because of price–a pernicious form of health care rationing.

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AARP is not the most reliable unbiased source, given it’s Medicare D insurance business. But it notes:

“manufacturer prices for widely used brand name prescription drugs jumped by nearly nine percent (Medicynical emphasis) in 2008, marking the largest average annual increase in six years and far exceeding the general inflation rate of just 3.8 percent.”

Big Pharma just can’t resist.

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The Columbia Journalism Review has an interview with Medicare expert Marilyn Moon, vice president of the American Institutes for Research, and a former trustee of the Medicare system:

“No one has really solved the cost containment problem in this country, but Medicare has done as well as any other effort. Rising costs are not a Medicare problem but a health system problem. We have not been willing to make sure we are getting value for the dollars we spend. We have not been spending money wisely. Until everyone-providers, patients, and others who have a stake in manufacturing drugs, devices, new treatments-becomes realistic in what the system will bear, we are not going to see any reduction in the growth of health care spending.”

Medicynical Note: What will get their attention? Patent reform? The threat of a single provider system? Increased regulation of insurers? More out of pocket expenses (HSA’s)? What’s clear is something needs to be done. LBJ had an approach: “Son, it’s really simple. You grab ’em firmly by the balls. Their hearts and minds will follow.”

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