Conservatives blame the government for all of society's problems. In the case of high prescription drug prices, they are right.
Drugs are cheap to produce. The only reason that some prescription drugs sell for hundreds or even thousands of dollars a year is that the government grants drug companies patent monopolies for new drugs, under which competitors may not produce the same drug for 20 years. As a result, pharmaceutical companies can charge as much as they want for lifesaving drugs without worrying that prices will be undercut by competitors.
Without patent protection, most prescription drugs would sell for less than a quarter of their price, and in many cases much less.
During his State of the Union address, President Bush noted that some AIDS drugs, which had been selling for more than $10,000 for a year's supply, can now be purchased for $300 a year. This price decline was not because of innovation, as the president implied. Rather, it was because a generic producer has been manufacturing the drugs in India, where the patent monopoly does not apply.
Of course, patent protection serves a purpose, as the drug industry is quick to point out. The monopoly profits provide firms with the money and incentive to finance the research for new drugs.
This is true, but it is only part of the story.
The industry claims to spend about $27 billion a year on research, but this accounts for only about half of total research spending. The other half comes from universities, charities and direct government support through the National Institutes of Health (NIH).
Many of the key medical breakthroughs of recent decades -- including the polio vaccine and treatments for AIDS -- have been the result of research supported by the government or the nonprofit sector, not drug company research.
Further, much of the industry research is wasted. A large portion of the industry's spending is used to develop "copycat" drugs. These are drugs that do not provide a qualitatively different treatment than existing drugs but rather allow companies to evade competitors' patents. According to the Food and Drug Administration, more than 70% of the drugs approved in the last decade fell into this category.
Copycat drugs can provide an element of competition, which lowers prices. But if the government didn't provide patent monopolies in the first place, there would be little point to researching these drugs.
Patent monopolies also lead to many other problems. They help create a "gray market" of less-expensive drugs from Canada, Mexico or the Internet. And they give firms an incentive to keep research findings secret from other companies until all the potentially important patents have been obtained, thereby delaying the introduction of new drugs.
For these reasons and others, patents are not the best way to support drug research. Yet simple economics make the case against patents even more compelling. For every dollar that the industry claims to spend on research, it collects $3 to $4 in extra revenue as a result of its patents, a study by our center found. This money supports extensive sales and marketing efforts or adds to corporate profits.
The inefficiency of patent-supported drug research may have been acceptable in the past, but with soaring drug prices, it is no longer affordable. The problem is felt most intensely by senior citizens over 65, with an average couple now spending almost $5,000 a year on prescription drugs. This figure is projected to rise to more than $12,000 in a decade.
Though President Bush and congressional Democrats have proposed Medicare prescription drug benefits that will pay part of this expense, any serious program would be a substantial cost to the government. There is a simple alternative.
The government could increase its spending on research enough to make up for the work now being supported by the patent system at a cost of between $5 billion and $28 billion, depending on a host of factors. The additional public funding would be almost fully covered by lower drug costs in Medicaid and other government programs. And the research could be done by the same researchers who already work at universities, foundations, the NIH or drug companies. The only difference would be that the research would be paid for through contracts, with all the results made public. This way, any drug company would be free to produce any drug it chose, just as with generic drugs now.
The savings from this change would be enormous. By 2013, the private sector could be saving more than $200 billion a year in drug spending, according to our center's study.
Competition can produce enormous benefits for society; we need more of it in the pharmaceutical industry.