When considering proposals to weaken patent monopolies, drug development seems like the main type of innovation that would be hurt.
Most of drug development cost seems to be verification of safety and effectiveness, which doesn’t look like the kind of novelty-creation patents are designed to help, but that doesn’t mean it’s easy to implement an alternative.
It turns out we have an example of a company making monopoly-style profits from an unpatented drug (Questcor Pharmaceuticals, Acthar).
Questcor bought Acthar for $100,000, suggesting the seller expected it would hardly make any money. Sometime later Acthar was designated an orphan drug, and Questcor raised the price from $1,650 to 28,000 per vial, without causing competitors to sell it. It now gets profits of roughly $300 million per year off of it.
So something must be restraining competition, probably something connected to the orphan drug laws, suggesting that if protections for patents in general were weakened, it would only take small changes in existing rules to maintain existing incentives for drug development.
Book review: Reasonable Rx: Solving the Drug Price Crisis by Stan Finkelstein and Peter Temin.
This book provides a mediocre analysis of what is wrong with drug prices, and presents a solution that is probably a nontrivial improvement on the status quo, but isn’t the most thoughtful solution I’ve seen.
The most important complaint of the book boils down to the fact that knowledge about drug safety and effectiveness is a public good, and the current method of rewarding drug companies for producing that knowledge is mediocre (although the book presents it less clearly than that and seems as interested in blaming drug companies’ lack of altruism as it is in analyzing the incentives).
For example, it is sometimes possible to identify biomarkers which indicate that a drug will be ineffective in a patient, but that would often reduce sales of the drug.
They complain that the current focus on producing a few very profitable drugs is an obstacle to creating personalized treatments. But they do little more than imply that drug companies are misjudging the available opportunities, without presenting any clear evidence that the authors’ have better judgment about what’s feasible.
Their proposed changes to the drug industry involve separating drug development and drug marketing/manufacturing into two different sets of companies, and using a combination of subsidies and contractual price controls (negotiated by a government sponsored nonprofit) to lower the prices of drugs.
They didn’t convince me that splitting drug companies will produce any significant benefits, although I also don’t see it producing harm.
The subsidies and price controls are likely to help mitigate some of the problems created by the patent system. Their attempts to show that this solution is better than Kremer’s patent buyout proposal suggest they don’t understand how much harm patent monopolies cause. Their subsidy mechanism isn’t clearly tied to benefits (unlike proposals for prizes based on Quality Adjusted Life Years). They claim drug prize proposals set arbitrary values for drugs and that their auction system produces a less arbitrary market price, but the subsidy part of their part of their system is at least as arbitrary, and their market based prices reflect the value of an arbitrary patent duration.
Their claim that Medicare savings will pay for their subsidies seems deceptive. When estimating the Medicare savings, they appear to rely on an assumption that prices of existing drugs will drop by a large amount. Yet when estimating the subsidy costs, they appear to count only the costs of subsidizing newly introduced drugs.
They are too quick to complain about drug companies medicalizing conditions that are mere inconveniences. E.g. they say Flomax does nothing more important than reduce sleep disturbances. This ignores the evidence that sleep disturbances cause significant health problems.
The chapter “Are Drug Companies Risky?” is pointless because it only evaluates the most successful companies (i.e. those whose gambles have already paid off).
Book Review: Entrepreneurial Economics: Bright Ideas from the Dismal Science, edited by Alexander Tabarrok
This collection of papers has a bunch of very good ideas.
The patent buyouts chapter shows how most patents could be put into the public domain (fixing some problems associated with monopoly) while also increasing the incentives for innovation (at least in areas such as drugs where the patent system works moderately well). Two minor weaknesses in the paper: it ought to explain why this is a better use of money than funding research directly (I expect this could be done by analyzing the incentives and track record of small startup drug companies versus nonprofit/government researchers). The joint randomization for substitutes works well if there’s unlimited money to buy patents, but if a patentholder can make joint patents too expensive to buy by falsely claiming that its patent is a substitute, then it’s hard to analyze whether problems result (although I’m fairly sure they could be dealt with).
The chapter on decision markets (aka idea futures) provides some hints on how many of the problems with democracy could be fixed. Hopefully this will encourage readers to seek out his more thorough argument.
The time-consistent health insurance proposal describes a good free-market alternative solution to many of the problems that government-run insurance proposals claim to address.
The chapter on gene insurance would address additional problems with people born with genes that scare insurers, but only if it were possible to require buying this insurance prior before an infants genes get tested for defects. But it’s unclear how such a requirement can be enforced – it seems possible that a mother will often be able to get a fetus tested secretly before the government realizes it’s time for the child to get insured.
The section on organ shortages provides some interesting arguments that the medical establishment profits from the shortage of organs created by laws against the sale of organs.
The chapter on securities regulation is too longwinded but contains good evidence that competition between securities regulators will help investors.
Book Review: Innovation and Its Discontents : How Our Broken Patent System is Endangering Innovation and Progress, and What to Do About It by Adam B. Jaffe, Josh Lerner
This book presents a clear, concise and convincing argument that subtle changes in U.S. laws starting in 1982 have broken a patent system that was working reasonably well until then. It will be more effective at convincing the average person than most other attempts have been, both because of its style and because it shows that the changes which broke the system shouldn’t have been expected to help anyone other than patent lawyers. Their analysis will be useful in helping to avoid the takeover of other agencies by special interests.
Their description of how the system should be fixed is less impressive. Their summary of proposed changes strangely fails to include undoing the change in appeals court jurisdiction which they suggest was a primary cause of the problems. Their argument in favor of patenting software, business practices, etc. is more radical than they seem to realize, as it appears to imply that patents should also be extended to mathematical theorems, yet they act as if the burden of proof should be on their critics.
It is hard to believe their proposals go far enough. One suggestion I have is that, in return for higher salaries, patent examiners should be unable to work as patent lawyers for a year or two after leaving their job. This would reduce the number of examiners who can expect to be rewarded for patents that create disputes.
Their confidence that a traditional patent system is better than no patents is unconvincing (but they do a good job of explaining why it is hard to know what the best system is). They support their position by a few examples such as Xerox, whose copier wouldn’t have been invented as it was without patent protection. But it’s much harder than they imply to determine that a copier wouldn’t have been invented some other way a few years later.