Intellectual Property Laws in the Pharmaceutical Industry: Facilitating Monopolies or Catalyzing Innovation

“Wherever the Art of Medicine is Loved, there is also a love of Humanity.” -Hippocrates

Typical notions of healthcare and medicine are intrinsically linked to benevolence. After all, the modern Hippocratic Oath states that, “I will prevent disease whenever I can.” It seems strange then that the total nominal spending on medicine in the U.S. exceeds $450 billion annually while the global pharmaceutical market is predicted to reach an annual value of $1.12 trillion by 2022. This paradoxical relationship between medicine and profit-maximizing firms begs some interesting economic questions, specifically how the drive to maximize profits impact the consumer’s well-being. In other words, are pharmaceutical firms motivated by profit or by the patient’s interests?

The pharmaceutical industry is one of the most heavily regulated industries in the U.S. both for the consumer and producer’s sake. On the supply-side, intellectual property laws, specifically patents protect brand-name drugs for 20 years after the drugs initial release to the public. This not only allows the firm to make up for the heavy costs of producing the drug but also provides an incentive for firms to create new, innovative drugs, as they are guaranteed to drive the supply for 20 years.

These patents allow pharmaceutical firms to create monopolies over drugs, some of which are live saving. This monopolization of a commodity places substantial market power in the hands of these firms, often times at the expense of the consumer. Take a recent example from Ontario, Canada. Toni Vernon, 59 was rushed to the emergency room with flu-like symptoms. Within 20 minutes of her arrival, doctors put her on dialysis, eventually diagnosing her with a rare, genetic condition known as atypical Hemolytic Uremic Syndrome (aHUS). If not treated, her organs would fail and death would be certain. She had two options: stay on dialysis for the rest of her life or take Soliris, the sole drug used to treat the condition. As aHUS is such a rare condition, Soliris is designated as an orphan drug and thus is priced far above market value, which in this case was $500,000 per patient, per year. Without competition to reduce pricing, Soliris isn’t priced at the market value but instead at a rate that aligns with its medical importance. Thus, we can see that intellectual property laws may encourage innovation, particularly for orphan drugs but also increase rent-seeking behavior amongst firms. This adversely impacts the consumer with one study from the Center for Economic Policy Research indicating that:

Cumulative costs associated with the increased morbidity and mortality associated with these drugs [Vioxx, Avandia, Bextra, OxyContin, and Zyprexa] was $382.4 billion over the 14-year period from 1994–2008. This comes to just over $27 billion a year, an amount that is comparable to what the pharmaceutical industry claims to have been spending on research at the time.

In order to combat the issues associated with drug monopolization and price gouging, many state and federal level healthcare institutions have implemented a series of price controls to ensure that consumers are not priced out of the market. Critics of price controls contend that they deincentivize innovation, leading to fewer cures for chronic diseases. While this may theoretically be true, the impact that it has on healthcare outcomes is questionable at best with one study performed by AARP indicating that prices of brand-name drugs in the U.S. rose at 8 times the inflation rate in 2013 while European brand-name drug rose at the inflation rate, noting that Europe has far stricter price controls then does the U.S. but with far better healthcare outcomes.

Current price control systems in the U.S. focus on increasing the bargaining power of healthcare institutions in order to drive down prices. The one draw back of this system is that they rarely cover a large patient base or do not reduce prices enough relative to the U.S.’s OECD counterparts. The main programs that exist currently include:
Medicaid Drug Rebate Program: The Medicaid Drug Rebate Program is part of Section 1927 of the Social Security Act. Over 600 pharmaceutical firms partake in the program that requires firms to give rebates on drugs at the following levels:
Innovator Drugs: 23.1%
Blood Clotting: 17.1%
Pediatric Drugs: 17.1%
Veteran’s Health Administration Drug Rebate Program: The Veterans Health Administration and Department of Defense require a 24% discount of the average price of drugs or lowest price paid by federal buyers. Similar to Medicaid, discounts increase if prices rise higher than the rate of inflation.
340B Drug Pricing Program: Pharmaceutical firms are required to offer discounts on outpatient drugs to hospitals and medical facilities that treat a certain number of low-income patients on an annual basis. This program works through Medicaid, meaning that the market share is substantially higher than individual insurance firms bargaining alone.

Though price controls are an effective tooling in the aforementioned instances, the net control that pharmaceutical firms have over the market still allows them to price above market levels. In response to price controls, many pharmaceutical firms have made the argument that it is not profit-maximization that leads to price gouging but is rather resultant of excessive FDA controls that lead to prolonged clinical trials and thus increased marginal costs of drug production. This high barrier to entry creates fewer firms, producing a natural monopoly. The Trump Administration is fighting this natural monopoly by taking steps to facilitate the development of generics, ensuring that consumers are not priced out of the market. Though this is an important first step to fight the monopolization of drugs, it doesn’t address the issue of brand-name drugs that are priced above market value.

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