The recent outcry over prices of EpiPens reinforces what we already know: Monopolies, particularly those that produce vital items, can do harm, even evil.
But people have long recognized that there can be such a thing as a “necessary evil.” Sometimes the good that can result from some arrangement greatly outweighs the harm.
In general, that is the case with patents. They provide to develop useful things. And they afford their owners monopoly power — the ability to charge higher prices than possible with competition, sometimes sharply higher ones. Balancing those two forces is one of the hardest tasks government faces.
One problem with our patent system is that patent rights are binary. Either an invention has a valid patent or it doesn’t, but there is little variation between those extremes. Patent protection gets turned on in an administrative process and then gets turned off automatically, after a period of time set by law regardless of other circumstances.
We basically treat a new device, such as a real-time yield sensor for a combine, the same as we do a new drug that treats a dreaded disease. The circumstances vary greatly even for different mechanical devices, and these in turn face very different situations than do drugs or medical devices.
Consider some of these:
▪ Drugs and medical devices are more likely to involve life-and-death trade-offs or those affecting quality of human life than are many common physical devices used by households or businesses. An automatic epinephrine injector isn’t all that complicated, but it can save a child from death. This is different from a new waste gate control for a turbocharger that increases performance of an engine by a percent or two. Yes, there are some new drugs, such as blood pressure or allergy control meds, that are only marginally better in clinical trials than existing ones. But in general, the stakes are higher when dealing with human health than with mechanical innovations.
▪ More than in any other sector, the decision to use a given drug or device is split between multiple players. There is the actual human user, the physician who prescribes or recommends it, the insurance company that decides which ones go on its formulary and often the hospital or clinic that is trying to manage costs. This is very different from an engine manufacturer deciding which turbocharger or aluminum piston design it wants to use in a new model or a consumer choosing which format she prefers for a new car’s sound system.
▪ Demand for drugs and devices thus is what economists term “highly inelastic.” That means the quantity of any one of these that people buy is not highly influenced by price. Raise the price, and people don’t cut back; lower it, and people don’t buy more. People may be angered by increases in the price of an injector that protects their allergic child, but few are just going to risk it because of a $400 price increase. And few cancer patients will be content with an older, cheaper chemo medicine over some new wonder drug that increases their survival odds by even a few percentage points, but at much higher cost. Nor will they ask for extra treatment sessions just because the co-pay is lower for an older drug.
▪ Consumers and others who must make decisions on using or prescribing drugs have very imperfect information about the relative efficacy of alternative drugs and devices on which to base their choices. Farmers talk to each other and can judge which differential GPS system works best; earth-moving machine manufacturers know the “mean time between failures” for different designs of hydraulic motors. But the average consumer really doesn’t know which anti-depressant or cholesterol med will work best and have the fewest side effects. Not even doctors or drug companies know all of the interactions with other meds or all the effects of long-term use.
▪ There is more uncertainty about how long a drug or device patent will confer a financial edge to its holder. Yes, the term of a patent itself is fixed by law. But the U.S. Patent Office and patent holders do not control the actions of other companies. If someone else develops a superior drug or pacemaker, it doesn’t really matter how many years are left on the patent of one you already produce that is now outclassed by someone else. Companies know what other firms in the industry are doing, but there still is much uncertainty about when a preferred competing product will come on the market.
▪ There are other regulations besides patents that determine the ability to sell any particular drug. Manufacturing facilities must be certified by the FDA. FDA approval is required for a particular firm to manufacture any particular generic that no longer has patent protection. And there are games patent holders play with combining formulations or changing from tablets to gel caps that can extend patent rights.
▪ A well-known brand name can establish barriers to entry by other manufacturers even when patents run out, at least temporarily. For a time, at least, the fame of Valium or Prozac or EpiPen gives some degree of monopoly power.
For all these reasons, formulating administrable and efficient intellectual property rules in the area of human health is always a knotty problem. A legislative body like Congress is bad at weighing details. A regulator like the FDA has inherent conflicts of interest. Some independent body, like the Federal Reserve Board, that could be given broad authority to set rules and procedures under broad guidelines established in legislation, is one possible reform. But there are many devils in the details of any approach.
St. Paul economist and writer Edward Lotterman can be reached at email@example.com.