Commentary

High Prices for Medication Are a Blessing for the Sick

This article was published in Investor’s Business Daily, Sept. 9, 2002.

Pharmaceuticals cost too much. That seems to be the consensus of most Americans. It is certainly the view of many congressmen.

The Senate has passed the McCain-Schumer bill, reducing the protection of pharmaceutical patents. Contended Sen. Edward Kennedy, D-Mass.: “Today’s action puts us one step closer to the goal of lowering the cost of prescription drugs for all Americans.” The issue now moves to the House, setting up a dangerous election-year fight. It’s easy to believe that drugs cost too much. At least it is if you aren’t the member of my church who just died of stomach cancer; my next-door neighbor and running partner who has been diagnosed with multiple sclerosis; my friend who endured experimental chemotherapy to fight breast cancer; and my journalistic colleague killed by liver cancer last year.

Should Cost More

For all of them, drugs don’t cost nearly enough, since a higher cost would bring forth more and better means of fighting cancer, multiple sclerosis and other diseases. Yet legislators seem dedicated to restricting the availability of such pharmaceuticals.

That’s not their intent, of course. But that would be the inevitable result of their proposals.

The benefits of pharmaceuticals are all around us. A new drug, enfuvirtide, or T-20, appears to help AIDS patients for whom other medicines are ineffective. Genentech has produced a new product, 2C4, that combats several cancers, including breast and prostate.

More than 800 medications are under development for elder diseases — Alzheimer’s, osteoarthritis, prostate disease and more. Another 200 for children’s conditions are in process.

These drugs are being developed only because pharmaceutical companies can acquire patents and then sell their drugs at a profit. Typically, only one of 5,000 to 10,000 compounds ends up as a marketable drug, and of those only 30% make money. Those few must pay for everything — research and development, dry holes, overhead, lawsuits.

One can argue about how long patents should run. But drug makers face a special problem: It takes years after a patent has been filed to clear the Food and Drug Administration’s regulatory process. Once the patent expires, other companies can compete.

Boon For Consumers

The 1984 Hatch-Waxman Act expedited growth of the generics industry, which now accounts for half of the market, by lifting some of the limitations that continue to apply to every other industry. That competition has been a boon for consumers.

One still can argue that tinkering would improve the rules. Maybe so. But not if the only consideration is cost. Falling into this trap is a group of companies that has formed Business for Affordable Medicine. (Governors and labor unions also belong, but the primary front men are businessmen.) No one can blame these firms for wanting to cut their health care costs. But they are trying to manipulate patent rules at their peril.

Merrill Matthews, a visiting scholar at the Institute for Policy Innovation (and an IBD Brain Trust writer), notes that BAM member Motorola came in No. 19 in the number of patents granted in 2001 with 778. Kodak was 20th with 719. In contrast, the top pharmaceutical concern, Bayer, had only 362 patents.

Nor do BAM members like generic products. For instance, General Motors strongly opposes what it terms “imitation parts” because they could wear out sooner and “cause major safety problems.”

GM also opposes reimportation, another panacea promoted by some pharmaceutical critics who say drugs cost less in Canada, so Americans should buy them there.

GM’s manager of dealer pricing explains, “We can’t have the same pricing as in the U.S. without losing (market) share.” He threatened to penalize Canadian dealers who sell to brokers servicing U.S. consumers.

For all of the wrangling over drug patents, only 6% of generic products generate infringement actions, many of which are settled out of court. True, these are more likely to involve more remunerative drugs.

But then, in such cases patent holders have an increased interest in protecting themselves from infringement. Especially since any infringement would further abridge the time in which they can recoup their R&D expenses.

Promoting Competition

What makes the drug debate so disturbing is that only the U.S. has successfully fostered vigorous research and generics industries. Both are necessary. Patents encourage development of new products. Generics allow competition.

Patents also encourage competition through the development of newer, better drugs to earn a profit.

According to Columbia University’s Frank Lichtenberg, while new drugs cost more, they reduce other health care expenses, such as those from hospitalization. He figured that $18 devoted to medicine cuts other costs by $71.

Maybe Congress could do better. But it could easily do worse. Whatever it does, it should not do so just to save money. Otherwise, more of my friends arelikely to die prematurely and unnecessarily.

Doug Bandow is a senior fellow at the Cato Institute.