Describe how free-market features could be introduced to help alleviate the social problem through free market operations of supply and demand.
ethical issues in economics.
– Topic: Pharmaceutical Drug pricing
In this assignment, you will write a research paper about social problems where the free
markets are not allowed to function, which includes the market for a particular illegal good or service, a regulated market, etc.
Markets are mechanisms for coordinating the set of connections of production operations that are distributed throughout the whole economic system. Thus, the market is the predominant and determining link between producers of goods and services and consumers. Accordingly, markets, as an exchange of goods and services that takes place as a result of buyers and sellers interactions, are generally considered the most efficient allocator of resources in the market economy.
However, free markets are unable to solve many social problems, and they make others worse. One such social problem is illegal drugs. Another example is environmental issues such as pollution. For one example of a social problem where supply and demand is not allowed to function freely, conduct basic research on markets for human organs. There are black markets (underground economies) for human organs in some countries. But a trade in human organs, based on supply and demand, raises enormous and troubling ethical issues and shows that free markets are clearly limited in their ability to provide answers to social problems.
Directions:
Your research should be about social problems where the free markets are not allowed to function, which includes the market for a particular illegal good or service, a regulated market, etc.
Select a social problem where free markets are not allowed to function, and conduct research on the social problem.
Describe how free-market features could be introduced to help alleviate the social problem through free market operations of supply and demand.
Discuss the risks of introducing market mechanisms of supply and demand in situations where ethical issues are present.
Explain the roles of the government in maintaining ethical business practices.
Criteria
-Your assignment should have a cover sheet with the following information: Title of the paper, Your Name, Course Number and Section Number, and Date.
-It must be a minimum of five pages long (excluding title page, references, etc.).
-Be sure to include the criteria located in the rubric below within your paper.
-It must be APA formatted with citations to your sources and your last page should list all references used. For assistance on APA format, visit the various writing resources, accessed under the Academic Tools area in the left navigation pane.
-You must use a variety of three objective, high quality, and current sources. Peer-reviewed articles, articles published in journals, textbooks, and library resources found in the Library are examples of high-quality resources.
-Note that Wikipedia, Investopedia, etc. are not considered as reliable resources for this research.
-I pulled references to use below, if you need additional please let me know.
Requirements: 5 pages
38 05 | 2018USPatients firstIt’s long been a bone of contention for American patients that drug prices in the US are higher than they are elsewhere in the world. Whereas schemes such as the Pharmaceutical Price Regulation Scheme (PPRS) in the UK enshrine price negotiations into the healthcare system, this is simply not the case in the US. The free market free-for-all means drug companies can charge whatever they can get away with, giving the impression that the US subsidises the rest of the world. One of Trump’s sweeping campaign statements was that he would negotiate prices for seniors via Medicare, the government health insurance programme for over 65s and the disabled. In early May 2018, his ‘American Patients First’ blueprint was announced but, despite Trump’s overblown claim at the announcement that it was the ‘most sweeping action in history to lower the price of prescription drugs’, the idea of any such negotiations was notably absent from the proposals. ‘When it comes to the cost of prescription drugs, our healthcare system faces four major challenges: high list prices; seniors and government programs overpaying for drugs due to lack of the latest negotiation tools; out-of-pocket costs for consumers; and foreign governments free-riding off American investment in innovation,’ claimed Health and Human Services (HHS) secretary Alex Azar. ‘These problems have often been discussed, but gone unaddressed. Under President Trump, that has now changed. This blueprint is a historic plan for bringing down the high price of drugs and reducing out-of-pocket costs for the American consumer’.Suggestions included removing the pharmacist gag rule that stops them telling patients whether paying cash rather than using their insurance would be cheaper, and even making pharma com-panies include prices in their direct-to-consumer advertising. Yet the list of 50 proposals didn’t include anything that would obviously lead to a rapid and effective lowering of prices for patients.Rather than government intervention in pric-ing, there was talk of allowing private prescription drug plans under the auspices of Medicare Part D – the part that covers self-administered prescrip-tion drugs – to negotiate prices, as is already the case for Part B, which covers drugs given to outpatients. It might also stop PBMs (pharmacy benefit managers) who negotiate discounted prices for insurers keeping rebate payments from pharma companies. They could be forced to share these with patients. Unsurprisingly, the government spin put a more positive light on it. ‘President Trump made it clear how important tougher negotiation is,’ Azar said. ‘We are delivering on President Trump’s promise to do smart bidding and tough negotiation in Medicare. We are going to bring negotiation to where it doesn’t exist, in Part B, and making negotiation more effective than it is today, in Part D.’ Despite the absence of any form of price regulation, trade association PhRMA was not entirely happy. ‘While some of these proposals could help make medicines more affordable for patients, others would disrupt coverage and limit patients’ access to innovative treatments,’ said its president and CEO Stephen Ubl. ‘The proposed changes to Medicare Part D could undermine the existing structure of the program that has successfully held down costs and provided seniors with access to comprehensive prescription drug coverage. We also must avoid changes to Medicare Part B that could raise costs for seniors.’According to Peter Pitts of the Center for Medicine in the Public Interest, a tangled web of special interests keeps the price of drugs artificially high. The next policy conversation, Pitts says, is whether lower patient co-pays will mean higher premiums. ‘One man’s rebate is another man’s kickback,’ he claims. ‘The large and growing gap between the drugs’ list prices and the actual, secret prices PBMs [pharmacy benefits managers] pay is bad for competition.’ He believes the proposed rule for passing along a portion of the rebate would improve price transparency. Drugs administered in doctors’ offices, clinics and hospitals fall under Medicare’s Part B, for which the federal government currently pays providers a 6% premium on the average price. This, Pitts says, incentivises manufacturers to raise prices, and providers to choose the most expensive medicines. Pitts concludes that it’s important not to pay much – if any – attention to whatever hyperbole Trump uses. ‘Implementation of the initiatives will be done by HHS, FDA and the Center for Medicare and Medicaid Services,’ he says. ‘The good news is that experts are at the wheel, and they’re focusing on free market solutions. The ideas require an ecosystem approach – nobody said it was going to be easy.’Proposed changes to lower the cost of prescription drugs could take some time to filter through to patientsWhen it comes to the cost of prescription drugs, our healthcare system faces four major challenges: high list prices; overpayment; out-of-pocket costs and foreign free-riding Sarah Houltonis a freelance journalist focused on US life sciences037 GV – reviews – comment.indd 3806/06/2018 11:28 DOI:10.1002/cind.825_11.x
CopyrightofChemistry&IndustryisthepropertyofWiley-Blackwellanditscontentmaynotbecopiedoremailedtomultiplesitesorpostedtoalistservwithoutthecopyrightholder’sexpresswrittenpermission.However,usersmayprint,download,oremailarticlesforindividualuse.
A Free Market Solution toPrescription Drug CrisesDean BakerBoth at home and abroad, the rapidly rising cost of newdrugs is one of the most important issues the countrywill face in coming decades. How can we reduce prices?Remove the patents that protect monopolies, argues thiseconomist. The patent process is inefficient, he says, andthere are other, more direct ways to support research.IN RECENT YEARS, prescription drugs have become an enormouspolitical issue both nationally and internationally. In a na-tional context, Congress has struggled to produce a Medi-care prescription drug benefit that will make drugs affordableto senior citizens. Projections from the Congressional BudgetOffice show that prescription drug expenditures will exceed $300billion annually by 2013, an average of more than $6,000 for eachperson over age sixty-five. While few seniors will be able to af-ford this expense, the current budget environment limits the ex-tent to which the government will be able to alleviate the burden.Internationally, there is an ongoing battle over the World TradeOrganization (WTO) rules governing the Trade-Related Intel-lectual Property Rights (TRIPS) agreement. These rules couldDEAN BAKER is the codirector of the Center for Economic and Policy Research in Washington,DC. This article draws extensively from a longer paper, Dean Baker and Noriko Chatani, “Promot-ing Good Ideas on Drugs: The Relative Efficiency of Patent and Publicly Supported Research”(Washington, DC: Center for Economic and Policy Research, 2002) (www.cepr.net/promoting_good_ideas_on_drugs.htm). Full references can be found in this paper.Challenge, vol. 46, no. 5, September/October 2003, pp. 76-89.© 2003 M.E. Sharpe, Inc. All rights reserved.76 Challenge/September-October 2003 ISSN 0577-5132/2003 $9.50+ 0.00.
Free Market Solution to Preseription Drug Crisesforce developing nations to pay patent-protected prices for manyessential medicines, making them unaffordable to hundreds ofmillions of people in developing nations. Recent trade negotia-tions have centered on which categories of medicines and whichgroups of countries may be excluded from the strict patent rulesthat the rich countries seek to impose.Both these issues are incredibly important to the lives and well-being of tens or hundreds of millions of people. Yet the solutionto both may be remarkably simple—let drugs be sold in a freemarket, without a government-imposed monopoly (i.e., patentprotection). In the absence of patent protection, drug priceswould fall by an average of 70 to 80 percent, and in some casesconsiderably more. With few exceptions, drugs are cheap to pro-duce. The reason they are expensive to consumers is that thegovernment provides patent holders with a monopoly underwhich drug companies can charge whatever price they choose,without any threat of competition. If drug patents did not exist,then drug prices would not be an issue.Of course, there is a rationale for drug patents. The pharma-ceutical industry claims that it supports nearly $30 billion in bio-medical research each year. Patent monopolies allow it to recoupthese research costs. If the industry could not count on a periodof patent protection, then it would not be profitable for the in-dustry to undertake this research, and it would stop developingnew drugs.However, patents are not the only way in which to supportbiomedical research. At present, nearly as much research is sup-ported outside the patent system, either directly by the govern-ment through the National Institutes of Health (NIH), or byuniversities, foundations, and other not-for-profit institutions.The appropriate question for economists and society is whetherpatents are the best way to finance biomedical research. A cur-sory examination of the evidence suggests that they are not.Cballenge/Seplewber-Oclobnr 2003 77
BakerThe Inefficiencies of the Drug Patent SystemEconomic theory suggests that drug patents, as an interfer-ence in a free market, will lead to a variety of inefficiencies.Patent protection for drugs leads to market distortions andwaste in the same way as trade restrictions such as tariffs orquotas. It leads to both static losses that result from havingdrug prices exceed the marginal cost of production and dy-namic losses attributable to rent-seeking behavior by drugcompanies.However, the magnitude of these distortions is considerablylarger in the case of drug patents than is generally true withtrade barriers. While tariffs or quotas rarely raise the price ofgoods by more than 20-30 percent, drug patents typically raisethe price of drugs by 300-400 percent above the competitivemarket price. As a result, the waste and inefficiency associatedwith patent protection is far greater than would be the case withmost forms of trade protection.This waste takes a variety of different forms, implying bothstatic and dynamic losses to the economy and society:1. deadweight loss due to the fact that many people whowould be willing to pay the competitive market price fordrugs are unwilling or unable to pay the patent-protectedprice2. the research and development of copycat drugs—in aworld with patent protection, copycat drugs can reduceprices by providing competition. However, in the absenceof patent protection, most of this research would serve littlepurpose, since there would be little benefit from develop-ing second and third drugs when a first one has alreadybeen shown to be effective3. advertising and sales promotion—patent rents providefirms with a large incentive to try to persuade doctors and78 Cballenge/September-Oetober 2003
Free Market Solution to Preseription Drug Crisespatients to use their drugs. According to PhRMA—the drugindustry’s trade association—pharmaceutical companiesemploy nearly twice as many people in sales and market-ing as in research and development4. restricting the dissemination of research findings or falsi-fying research results—the industry has strong financialincentives to prevent the disclosure of its research find-ings until it has filed for all the patents that could proveprofitable. This slows scientific progress. There is also evi-dence that the industry has on occasion attempted to keepsecret research findings that suggest its products are inef-fective or possibly harmful5. legal costs associated with filing and protecting patents—the industry employs large numbers of lawyers to secureand enforce its patents. These costs can also include sidepayments to generic producers to keep competition out ofthe market6. political lobbying for the protection and extension of patentmonopolies—the pharmaceutical industry typically ranksnear the top in campaign contributions. It has also begunfinancing “grassroots” lobbying efforts by people afflictedwith specific diseases and their friends and relatives7. the production of gray market drugs, which may not meetsafety standards—the existence of large patent markupsprovides a strong incentive for the production of unau-thorized versions of drugs (sometimes abroad), just as isthe case with illegal drugs like marijuana or cocaine8. the misdirection of research toward areas likely to lead topatentable products. Drug companies will not pursue po-tentially fruitful areas of research into cures or preventionof diseases, such as diet, exercise, or even the use of drugswhose patents have expired, since they will have no meansof profiting from the findings.Cballenge/September-Oetober 2003 79
BakerStatic Deadweight LossesThe United States will spend close to $180 billion in 2003 onpatent-protected prescription drugs. Conservatively, the cost ofthese drugs would fall by 70 percent in the absence of patentprotection.^ This price reduction would imply a saving to con-sumers of $126 billion a year—nearly $1,000 per household.However, if consumers could buy drugs at their competitivemarket price, they would also buy more—or better—drugs. Thisincrease in demand associated with a lower price is the purestatic efficiency gain (as opposed to income transfer) associatedw^ith the elimination of patent protection.Even if the demand for drugs is extremely inelastic (unrespon-sive to price changes), the efficiency gain from the eliminationof patent protection would still be large. An elasticity of 25 per-cent (a 10 percent decline in price leads to a 2.5 percent increasein demand) would imply an efficiency gain of more than $20billion a year. This is two orders of magnitude larger than theefficiency gains typically estimated from NAFTA (North Ameri-can Free Trade Agreement) or comparable trade agreements.Copycat ResearchA large portion of the research undertaken by pharmaceuticalcompanies is not designed to develop breakthrough drugs totreat diseases for which no cures exist. Rather, the vast majorityof research spending goes to developing copycat drugs that servelargely the same purpose as existing drugs. In a world with patentprotection, these copycat drugs serve a useful purpose. Theyprovide an element of competition that would not otherwiseexist, thereby lowering the price of the original breakthroughdrug. However, if patent protection did not exist, there wouldbe little point to devoting scarce research dollars to developingdrugs to treat diseases for which effective cures already exist.80 Cballenge/September-October 2003
Free Market Solution to Preseription Drug Crises(Copycat drugs are not completely without value—people reactin different ways to drugs. For some patients, a copycat drugmay prove considerably more effective than the original break-through drug.)According to the Food and Drug Administration (FDA), ap-proximately 75 percent of drugs approved over the last fifteenyears have fallen into this copycat category. The FDA determinedthat these drugs did not represent qualitative improvements overexisting drugs. According to a study commissioned by PhRMA,it costs nearly as much for the pharmaceutical companies to de-velop copycat drugs as to develop breakthrough drugs. Thisstudy estimated that the research and development costs forcopycat drugs were on average 90 percent of the cost of break-through drugs. This implies that nearly 70 percent of theindustry’s research spending went to the development of copy-cat drugs rather than breakthrough drugs. Much of this researchwould not be conducted without the distorted incentives cre-ated by patent monopolies. To put this slightly differently, if theindustry spends $28 billion a year on research, less than $9 bil-lion of this money goes to developing breakthrough drugs. Inother words, drug patents force consumers to pay $125 billion ayear more than if drugs were available at the competitive mar-ket price, in order to support $9 billion a year in research intobreakthrough drugs.Advertising and Sales PromotionThe monopoly rents that the industry earns by being able to selldrugs at prices far above the marginal cost of production pro-vide enormous incentives for aggressive sales promotion. As aresult, the pharmaceutical industry devotes a large portion ofits revenue to promote the sale of its drugs. This spending takesthe form of ads on television and in other media, which are tar-Challenge/Scptembcr-October 2003 8.1
Bakergeted at consumers, and also the direct promotion efforts of anarmy of “detailers,” salespeople who directly promote new drugswith physicians.In addition to being largely a waste of resources from an eco-nomic standpoint (these promotion efforts do little to educatepeople about the relative effectiveness of different drugs), thesepromotion efforts can lead to inferior medical care. In the case ofpromotions directed at consumers, very few patients will be in aposition to seriously evaluate the merits of a drug they see ad-vertised on television or in a magazine. The industry’s hope isthat the patient will request that his or her physician prescribethe drug. Since the physicians may have no direct stake in thematter (and may themselves be ignorant of the merits of the drugin question), they may opt to prescribe the drug simply to keepa patient happy. In many cases, this is likely to mean that thepatient is getting a drug that is less appropriate for his or herspecific illness or condition.In the case of the promotional efforts of detailers, there havebeen many instances in which drug companies were found tohave promoted their drugs for uses for which they did not haveFDA approval. While the FDA tries to police sales efforts in or-der to prevent drugs from being marketed for unapproved uses,it cannot possibly monitor all the communications that take placebetween drug company sales agents and physicians. The mo-nopoly profits provided by drug patents virtually guarantee thatthis sort of improper marketing will take place. In some cases,the consequences for patients’ health will be serious.Restrictions on the Dissemination of Research or the Falsificationof FindingsWhen the industry funds biomedical research, it almost alwaysinsists on controlling the disclosure of research findings. This82 Chatlenge/September-October 2003
Free Market Solution to Preseription Drug Criseshas led to numerous instances in which researchers were pre-vented from sharing important results in a timely manner withother scientists. Drug companies will typically want to ensurethat they have applied for all the potentially profitable patentsrelated to a line of research before they allow the results to bepublished in scientific journals.Even worse than delays in publication is the possibility thatpublished results may be biased or even falsified in order to sup-port the sales of a company’s drugs. A recent paper found thatdrug studies were far more likely to find that a drug was effec-tive when the research was supported by the company produc-ing the drug than when the research was supported by anindependent body. Medical journals have struggled w^ith theproblems posed by unethical researchers for years. Predictably,the profits allowed by patent monopolies have a tendency tocorrupt the quality of biomedical research.Legal Costs Associated with Patent Filings and EnforcementThe process of filing for a patent is time-consuming and expen-sive. Patents can often involve hundreds, or even thousands, ofpages of technical writing, making the process of filing for apatent costly for both the party filing and the patent agency re-quired to monitor the process. (This cost can be an especiallyserious problem for developing nations, which generally havefew people with the technical and legal training to review patentapplications.) From an economic standpoint, this process islargely a waste.Also, patents often lead to legal cases contesting the reach of apatent. It is a standard practice for producers of brand drugs tosue generic producers for patent infringement w^hen they try toplace generics on the market after a patent has expired. Suchsuits can involve substantial legal costs.Challenge/September-October 2003 83
BakerPolitical LobbyingAs would be expected, the pharmaceutical industry spends gen-erously on buying the political power needed to protect and ex-tend its patent monopolies. It regularly ranks among the topindustries for political contributions. It also sponsors numerousgrassroots groups that lobby around specific diseases. Typically,the industry will finance campaigns designed to force insurersor the government to pay for a specific treatment that may be ofquestionable medical value.Gray Market DrugsWhen drugs are sold at prices far above their cost of production,it is virtually inevitable that a black or gray market will developwhere unauthorized versions of drugs are sold at much lowerprices. To some extent, this gray market has involved purchasesfrom other countries. When such purchases involve buying drugsfrom Canada or other industrialized countries, the main down-side will be the wasted trip or postage. However, when the pur-chases involve drugs from developing nations with less rigorousquality control, or counterfeit drugs of questionable quality, therecould be serious health consequences for patients.Neglect of Research That Is Not Likely to Lead to PatentableProductsAs a society, we have no reason to prefer research that is likelyto reduce the risk of cancer through drugs to research that couldreduce the risk of cancer through diet or changing the environ-ment. However, the drug industry has a clear preference for theformer sort of research, because they do not get paid for the lat-ter. In principle, our biomedical research spending should beparceled out in accordance with where it is likely to produce the84 Chatlenge/September-October 2003
Free Market Solution to Prescription Drug Crisesgreatest improvements in public health. Insofar as research pri-orities are being driven by the pursuit of patent dependent prof-its, there will be a substantial bias in the direction of researchspending. This bias could lead to a far less than optimal use ofresearch dollars.The Altemative to Patent-Supported ResearchThe complaints against the inefficiencies of the patent systemwould be moot if there were not alternative methods of sup-porting biomedical research. Fortunately, there are longstandingand well-tested alternatives to patent-supported research. Basi-cally, instead of paying for the research at the back end, throughgovernment-imposed patent monopolies, the research can bepaid for at the front end, through direct fiinding. The federalgovernment already spends more than $25 billion a year on bio-medical research through the National Institutes of Health. Uni-versities, foundations, and private charities spend about $5billion more. This research has an impressive track record, lead-ing to numerous medical breakthroughs, including the devel-opment of the polio vaccine, penicillin, and many of the mostimportant cancer and AIDS drugs.At present, this funding is quite deliberately focused on basicresearch. By design, NIH and nonprofit institutions generallydo not take drugs through the clinical testing process neededfor FDA approval. However, there is no reason to believe thatthey are inherently unable to do this task. Unless brilliant scien-tists suddenly become incompetent when they change their taskfrom overseeing basic research to overseeing clinical testing, thereis no reason to believe that the actual development and testingof drugs cannot be funded in the same way as basic research.I have conservatively estimated that it would take approxi-mately $25 billion a year in federal funds to replace the researchChallenge/September-October 2003 85
Bakercurrently being supported by patent protection. This is slightlymore than half of the annual cost of the proposed Medicare pre-scription drug benefit. By using this money to directly financeprescription drug research, and placing all the findings in thepublic domain—allowing new drugs to be produced as gener-ics—the savings to seniors would be more than twice as large asthe benefits provided by the proposed Medicare drug benefits.Of course, the benefits from publicly fundedresearch would not go only to senior citizens inthe United States.Of course, the benefits from publicly funded research wouldnot go only to senior citizens in the United States. Everyonewould be able to purchase drugs at their competitive marketprice. This would include people in developing nations, whowould no longer have to worry about efforts to extend patentprotection under TRIPS. If the patents for the best new drugswere placed in the public domain, there would be little reasonfor concern if drug companies want to maintain patent protec-tion for older inferior drugs.The Mechanics of Publicly Supported ResearchThe exact mechanics of a system of publicly supported researchcan be worked out through a process of trial and error. However,there are some basic principles that seem evident. First, it wouldbe desirable to maintain competition between different sponsors.This could mean having a variety of centers that sponsor researchrather than a single body. Representative Dennis Kucinich hasproposed a bill that would establish ten competing centers, eachwith a budget of approximately $2 billion a year. After a ten-year86 Chatlenge/September-October 2003
Free Market Solution to Preseription Drug Crisesperiod, an independent commission would review the accom-plishments of each center and rank them. The bottom two cen-ters would be eliminated and replaced with new centers.As is the current practice at NIH, the centers should look tocontract out much of their work to universities, research insti-tutes, and even the research divisions of pharmaceutical com-panies. While the centers would be responsible for the overallThere is no reason that a publicly supportedsystem should provide any less incentive toresearchers than a patent-supported system; it issimply a different mechanism.progress of research under their sponsorship, it will probablyprove more efficient to contract out most research instead ofundertaking it directly.There should be complete openness for all research sponsoredby these centers and timely publication of all research findings.The centers should file for patents for findings and place thepatents in the public domain under a “copyleft” principle.^ Anypatent can be freely used by other researchers and in other prod-ucts, as long as the producers do not attempt to use patent protec-tion themselves to exclude competitive products. This provisionwould prevent drug companies from using patent protection toprofit from publicly supported research. As long as pharmaceuti-cal companies sell their drugs as generic products in a competi-tive market, there would be no problem. However, if they wantto claim patent protection for a particular drug, then they willbe forced to negotiate with the center(s) that hold the relevantpatents and pay for this privilege.The Kucinich bill also proposes to set aside a substantial poolof money to reward researchers who accomplish importantChallenge/September-October 2003 87
Bakerbreakthroughs or pursue especially innovative lines of research.This would in effect create prizes—some running into the mil-lions of dollars—to provide an additional incentive to research-ers. There is no reason that a publicly supported system shouldprovide any less incentive to researchers than a patent-supportedsystem; it is simply a different mechanism.While there are many more details involved in establishing afull system of publicly supported research, these principlesshould provide guidance. The main point is that this idea reallyinvolves an expansion of an existing system of publicly sup-ported research. It is not a great leap into the unknown.There is one final point worth making in this context. Pricecontrols are often viewed as a less interventionist alternative topublicly supported research. Whatever the merits of price con-trols, it is a mistake to imagine that such a system is less inter-ventionist than a system of publicly funded research. Drugcompanies determine their research priorities by their expectedprofits. A system of government price controls determines theprofitability of different types of drugs. In this way, if the gov-ernment is setting prices, it is determining the flow of researchdollars—although not bothering to think about it in a coherentmanner. Of course, the controlled price for various drugs willitself be a topic of huge political debate, creating enormous op-portunities for corruption and abuse. In addition, by keepingprices above marginal cost (albeit at somewhat lower levels), asystem of price controls will leave in place the distortions intrin-sic to patent protection.ConclusionIt is remarkable that the patent system for supporting drug re-search has survived into the twenty-first century. It is even moreremarkable that the inadequacies of this relic from the feudal88 Challenge/September-Octoher 2003
Free Market Solution to Prescription Drug Crisessystem have gone largely unexamined by the economics profes-sion, even as the resulting distortions create ever larger publicpolicy problems. Many of the problems posed by patent-sup-ported drug research are seemingly intractable in the currentcontext—most obviously, the cost either to seniors or to the gov-ernment of paying for their prescription drug needs will be animmense burden if the patent system is left in place. Similarly,efforts to impose U.S.-style patent laws on developing nationswill make many life-saving drugs unaffordable to hundreds ofmillions of people. However, in a world in which companiescompete to sell drugs in a competitive market, these problemscould be dealt with far more easily.The inefficiencies associated with a patent system are so enor-mous that it is virtually impossible to envision a scenario in w^hichpublicly supported biomedical research would not be more effi-cient. Given the importance of this issue, and the evidence ofthe failings of the current system, it is essential that economistsand policy analysts begin to seriously examine alternatives topatent support for biomedical research.Notes1. Baker and Chatani derive this estimate. In countries where drugs are stillprotected by patents but subject to price controls, such as Canada and Australia,drugs sell for approximately half their price in the United States. When drugs losepatent protection and are subject to generic competition, their price often declinesby 80 percent or more, as recently happened with the allergy medication Claritin(Dean Baker and Noriko Chatani, “Promoting Good Ideas on Drugs: The RelativeEfficiency of Patent and Publicly Supported Research” [Washington, DC: Centerfor Economic and Policy Research, 2002] [www.cepr.net/promoting_good_ideas_on_drugs.htm]).2. “Copyleft” is a concept developed by the free software movement. It allowssoftware to be reproduced and distributed without charge, except when it is used inprograms where the designers restrict the distribution through copyright protection.To order reprints, call 1-800-352-2210; outside the United States, call 717-632-3535.Cballenge/September-October 2003 89
Free Market, Better Medicine
The solution to our drug pricing problem involves less government, more transparency.
By Opinion contributor Feb. 15, 2018, at 3:31 p.m
https://www.usnews.com/opinion/articles/2018-02-15/rely-on-the-free-market-to-address-drug-prices-and-foster-innovation
Two things happened after the FDA approved a novel new treatment for hereditary blindness in December, neither of which was surprising. First the company that makes the drug announced they would charge nearly a million dollars for it. Next, the uproar began. No one asked what the costs research and regulation were, but it didn’t matter: No matter what, the price was going to be too high.
Drug prices have become so contentious, it’s practically impossible to announce the price of a new drug without facing widespread public outcry. Ultimately, I think this is a good thing: It means that the American people are engaged in one of the major public policy debates of our time. More and more people are coming to realize that the system is broken and are demanding a change.
While I am glad to see this kind of citizen engagement, I am disheartened by how many people think that the way to make drugs more affordable is to increase government control of the economy. Nothing could be further from the truth. The fact is we do need to fix the way we pay for prescription drugs. But the solution to our drug pricing problem involves less government, not more – and much more transparency.
The problem with drug prices – especially for the coming wave of innovative cures and personalized, precision medicines – is not that they start out expensive, but that they stay expensive for years after they have been on the market. The main culprit here is the regulatory environment that limits the creation of a free, functioning and competitive market for prescription drugs. To illustrate this point, consider how differently things work when other high tech products come to market with a high list price.
When the first iPod was released in 2001, it cost $399 and could hold 1,000 songs. Over the next three years, as more alternatives came to market, Apple felt the competition and created an iPod that held four times as many songs as the original and cost $170 less. These days, when 77 percent of Americans own a smartphone, the idea of a $400 dollar iPod seems ridiculous. Competition spurred innovation, which drove down prices. That is what free markets do when unencumbered.
Of course, prescriptions drugs are different than iPods, and having access to portable music is much less important than having access to affordable medicine. As a patient and a physician, a father and a grandfather, I am personally interested in solving our drug pricing problem. But this kind of concern is no reason to treat drugs differently, in an economic sense, than any other product on the market.
Right now, the federal government prevents competition by impeding how many new drugs get approved, and how they are paid for when they come to market. Fortunately, there are ways to produce safe, effective and affordable drugs while decreasing government regulation.
First, we need to increase the number of generic drugs available, and be able to know their prices offered before we buy. This is called price transparency – and economical markets need price transparency. In 2016, patients paid an average of $5.54 out of pocket for generic drugs and $28.31 for branded equivalents. In addition to providing a cheap alternative for patients, generic competition is crucial to lowering prices. After multiple generics are approved, prices fall by 80 percent across the board, saving money for everyone. Fortunately, under Commissioner Scott Gottlieb, the FDA is taking steps to streamline generic drug approvals, putting us on a path to a more robust generic drug market. In fact, we have already seen the results of the efforts as the FDA approved a record number of generic drugs in 2017.
Additionally, we need to ensure that the list prices of these drugs are displayed front and center for the consumer to see at the point of sale. This kind of price transparency is crucial for the functioning of an open market, and will help encourage patients to opt for cheaper alternatives whenever they can.
Once we increase the number of new drugs on the market, we need to find new ways of paying for them. This is especially important for those new drugs that come with high price tags. I have a personal interest in ensuring that we solve the payment issues for these personalized medicines. I have stage-four prostate cancer, which is close to remission, and my doctors have already engineered a personalized medicine to give me next. This is truly a new frontier in medicine – using our own cells to cure cancer – but I am awaiting the sticker shock associated with it. This is why our real concern should be developing ways to pay for precision medicine that won’t bankrupt patients.
One way, which is much talked about, is to pay for medicine based on outcomes instead of by dose or injection, which federal regulations now inhibit. If we rolled back these regulations and instead let market forces allocate the costs down and the competition up, we will see costs brought down without jeopardizing safety or efficacy. Rather than raging against a high initial price, we should accept that precision drugs will cost a lot initially, but also that they should be priced based on outcomes. With market forces restored, the initial list price won’t matter, as prices fall and everyone can afford precision medicine.
The actions we take to address drug prices over the next 10 years will affect how we develop, approve and pay for medicine for a generation. Rather than doubling down on government regulation, we should rely on the free market, which is the best way to allocate these scarce resources, increase competition, lower prices and continue to foster medical innovation for years to come.
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