The always-excellent Boston Review has a great article on the economics of healthcare by Dean Baker. It's essentially about the balance between protecting the profits of pharmaceutical companies by granting patents which allow them to price well in excess of marginal cost and improving the health of the US and global population by cutting the price of innovative medicines. Baker argues, and I strongly agree, that this balance is currently wrong. Medicine prices are set too high by big pharma, both in their home markets and especially developing country markets.

Of course, some patent protection is needed. And of course this is an increasing returns business so price needs to exceed marginal cost to a degree to cover the initial fixed costs. But for me there are two ways in which the pharma companies are over-protected and make unwarranted monopoly profits, leading to avoidable ill-health and deaths. One is that the burden of regulation is set much higher than it needs to be – the complexity and expense of compliance could be reduced, but in practice the big pharma companies use their resources and expertise to use the regulatory system as a barrier to entry. The second is that world trade rules – and the corporations – are wrong to presume that an innovation should appropriate the same degree of consumer surplus in every new market. In particular, expanding into global and poorer markets, they should not price remotely as high as they do in their own markets, nor necessarily have the same patent protection.

Just as in many other areas of IP at present – copyright too – the balance between producers and consumers has been tipped too far in favour of producers. Copyright and patent laws should be strong and should be firmly enforced, but they will be unenforcable if they are widely perceived to be unfair to the public. And they are. The content industries in general are struggling with the consequences of their failure to come to terms with the impact of new technologies and the ease of copying. Medicines are much, much harder to copy, so the pharma companies are in a more profitable position still. That governments collude with them in protecting their lucrative monopolies at the expense of public health is a scandal. I can't resist a long quote from the article – but do read it. And I hope Deb Chasman of the Boston Review will select this article for one of the book series I described elsewhere on this blog.

The final words to Dean Baker:

Perhaps the most pernicious form of drug–industry rent–seeking
occurs when companies conceal research findings that reflect poorly on
their drugs. The industry maintains control of its research and only
shares results that it considers appropriate to make public. (The Food
and Drug Administration is prohibited from revealing the results of any
studies the industry makes available to it, but evidence is
occasionally leaked by researchers concerned about the public’s
health.) A regular flow of news stories report concealed research
findings suggesting that certain drugs could be harmful, or not as
effective as claimed. The Washington Post, for example,
recently reported that the schizophrenia drug Seroquel may be less
effective than claimed. Studies revealing the potentially harmful
effects of the arthritis drug Vioxx were famously suppressed. Given the
enormous profits at stake, the withholding of relevant evidence from
drug research is entirely predictable.

While few economists would dispute that patent monopolies in
pharmaceuticals and medical technology provide incentives for wasteful
activities, they defend patents as the price we must pay for financing
drug research and development. But patents are simply one option for
financing research, not essential at all. We could expand the public
funding going to NIH or other public institutions and extend their
charge beyond basic research to include developing and testing drugs
and medical equipment. Or the government could contract out the
research and development process to private firms and pay for the work
up front so that all patentable results fall in the public domain. Or
the government could construct a prize mechanism under which it buys up
patents after the fact for a premium keyed to the patent’s usefulness.