Replace Pharmaceutical Patents Now!
- Presenter:
Mon June 5, 2006 9:30-10:45 Room Alumni Lounge
Pharmaceutical patent protection places Americans on the horns of an untenable dilemma. On one hand, monopoly protection limits the treatment options for individuals without prescription drug coverage and causes American consumers - many of whom are sick and not working - to pay too much for their medications. On the other hand, providing insurance for prescription drugs brings into play the monopolist’s response which is to raise the drug’s price in proportion to the inverse of the plan co-pay. A 20% co-pay, for example, creates an overwhelming incentive that leads the supplier to raise price to 5 times the initial level and reap the profit windfall. The firm adjusts its price-output pair from the (5p 0, q0) point only if profits are thereby raised further.
In this paper we discuss a socially preferable alternative to the patent system as a mechanism protecting intellectual property rights. Three important issues must be addressed. 1) How can we deal effectively with the above-mentioned monopoly pricing response to a prescription drug co-pay? 2) What is the best way to reward innovators to insure that the benefits of innovation are spread quickly and widely (at marginal cost prices)? 3) How do we go about calculating the reward for innovation?
The only way out of the unacceptable quandary is to sever the link between monopoly power created by the patent system and drug distribution. In fact, patent protection for new inventions is an anachronistic holdover compromise solution from an earlier era. Modern theory and tools imply an entirely different approach. This paper reviews historical policies toward research and development in light of the intervention principles of public finance. It concludes that an intertemporal bounty satisfying certain conditions is more efficient than current law and also dominates other structures including patent buyouts, except for a full-economy Ramsey pricing solution. Since Ramsey pricing is unlikely ever to be seen in practice, the investigation of efficient replacements for pharmaceutical patenting is timely and significant. The investigation identifies a mechanism for marginal cost drug pricing consistent with inducement to innovation as strong as provided by patents, consistent with increased social efficiency and practical implementation. The latter is argued from positive consideration of the fact that a similar system is successfully in place and has been used for many years in another sector of high innovation, the music industry.
The present research raises the possibility of change in the pharmaceutical drug industry as part of the larger movement in the United States to find a more desirable social ethic that can drive and sustain our health care system.
