[Ip-health] Bernie Sanders Advocates a Free Market in AIDS Drugs

Dean Baker Dean.Baker1 at verizon.net
Wed May 9 02:05:02 PDT 2012


Drugs are cheap. Patent monopolies are expensive. These are simple facts 
that everyone should know but for some reason few do.

The point here is simple; the vast majority of drugs are cheap to 
produce. Chain drug stores sell hundreds of generic drugs for $5-$7 per 
prescription. They can do this profitably because few drugs require 
expensive chemicals or manufacturing processes.

However, many brand drugs sell for hundreds or even thousands of dollars 
per prescription. This is due to the fact that drug companies have 
patent monopolies on these drugs. The government will arrest anyone who 
produces these drugs without the permission of the patent holder. Since 
drugs can be essential for people's health and/or life, if they can find 
a way to pay any price demanded by the drug companies, they will.

The higher prices due to patent monopolies are the reason that many 
people have difficulty paying for drugs. If all drugs were sold in a 
free market as generics, paying for drugs would not be a serious issue 
except for the very poor.

Of course, patent protection is the way in which drug companies finance 
their research. It costs a lot of money to research new drugs and then 
test them to establish their safety and effectiveness and bring them 
through the Food and Drug Administration's approval process.

However, there are more efficient mechanisms than patent monopolies to 
finance drug research. Vermont Senator Bernie Sanders is proposing one 
such mechanism, a prize system, be adopted to support research on AIDS 

This system, which has been proposed by Nobel Prize winning economist 
Joseph Stiglitz, among others, would set up a $3 billion-a-year prize 
fund to buy out existing and future patents for AIDS drugs. The fund 
would compensate drug companies and researchers for their work. The 
patent would then be placed in the public domain so the drug could be 
sold in the free market as a generic. AIDS patients would no longer have 
to struggle to find ways to pay for their drugs; they would be sold at 
prices comparable to other generic drugs.

This may sound like some big socialist give away, but only to people who 
have difficulty understanding economics. Under our current system, the 
government is giving something of enormous value to the drug companies: 
a patent monopoly. It will instead be buying out this monopoly and 
allowing drugs to be sold in a free market. As any economist can tell 
you, eliminating the monopoly and allowing a free market should lead to 
enormous savings.

In the case of AIDS drugs, much of the savings would accrue directly to 
the government, since the government pays for the bulk of AIDS treatment 
through Medicaid and other programs. The savings to the government from 
getting AIDS drugs at free market prices is likely to vastly exceed the 
money spent on the prize fund.

We will be able to put a more precise dollar amount on these savings if 
the Congressional Budget Office (CBO) can be persuaded to score Senator 
Sanders Bill (S.1138 
There will be a hearing on this bill later in the month, which will 
include testimony from Professor Stiglitz, among others.

It is worth noting that a prize fund is not the only alternative to 
patent-supported research. The government already spends $30 billion a 
year supporting biomedical research through the National Institutes of 
Health (NIH). This research wins praise from across the political 
spectrum for its high quality and cost effectiveness.

While most NIH funding is devoted to basic research, there is no reason 
that this funding could not be expanded to cover the cost of developing 
and testing new drugs. The research could even be contracted out to 
existing drug companies or new ones who want to compete for funding.

The advantage of this system over a prize system is that all of the 
research findings would be immediately placed in the public domain. A 
patent prize system would encourage secrecy as companies try to prevent 
competitors from benefitting from their work. This secrecy has led to 
enormous waste and duplication in the research process.

By contrast, if the government were funding the research upfront 
it could make full disclosure of all research findings a condition of 
accepting the funding. Not only would any patents resulting from the 
research be placed in the public domain, but all the research that was 
relevant to drug's development would also be in the public domain.

We can argue over the relative merits of different alternatives to the 
system of patent-supported research in prescription drugs; however it is 
essential that we start this discussion. Currently we spend close to 
$300 billion a year for drugs that would cost around $30 billion in a 
free market. The $270 billion difference is approximately five times as 
large as what is at stake with extending the Bush tax cuts for the wealthy.

This is where the real money is and we should be talking about it. The 
hearing on Sanders bill is a good start. CBO's scoring of the bill would 
be an excellent follow-up.


Dean Baker (baker at cepr.net)
Center for Economic and Policy Research 1611 Connecticut Ave., NW
Washington, DC 20009
202-293-5380 (ext 114)
202-332-5218 (H)

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