Now that George W. Bush is back in the news with his attacks on the Trumpist insurrectionists, it might be worth reviving one of the great lines of his presidency. After the September 11th attack, when Bush decided to go after not just the terrorists who planned the hijackings, but all sorts of people around the world he didn’t like, he lumped them together as “evil-doers.” That may not be the most eloquent phrase, but it works well as a description of the modern pharmaceutical industry.
Some may find this description of the pharmaceutical industry abhorrent. After all, they develop life-saving drugs and vaccines, most recently the vaccines against the coronavirus which have saved millions of lives. But the industry’s storyline gives us a very incomplete picture of what it does and how.
Probably the best way to think about the pharmaceutical industry is to imagine an incredibly corrupt fire department. Most of the money that the fire department gets to buy new trucks and other equipment goes right into the pockets of the department’s commissioner and his closest friends. The department may still do its job in the sense that they rush to fires and rescue people trapped by flames, but it costs way more than it should.
The fire department may even occasionally start fires itself so that they can be heroes in putting them out and rescuing potential victims. If that sounds like an over-the-top accusation against the pharmaceutical industry, then you didn’t pay attention to the opioid scandal. Several major drug companies have paid out billions of dollars in settlements over the accusation that they deliberately misled doctors about the addictiveness of the new generation of opioids.
Note that the accusation was not that the industry mistakenly failed to recognize how addictive their drugs were. The accusation was that they knew they were highly addictive, but lied to doctors so that they could sell more prescriptions. This is not very different from deliberating starting fires to drum up business.
Now suppose that there was growing political pressure to cut back the fire department’s budget and clean up its practices. Naturally, it’s not going to just sit back and let someone take away the trough. Our corrupt fire department will do everything in its power to continue the practices that are allowing its top officials to get rich.
In the case of the corrupt fire department, we can anticipate big public relations campaigns where they highlight the fires they have extinguished and the lives they have saved. We can expect to see pictures of adorable children who were saved from burning blazes by the fire department. This of course has nothing to do with the effort to eliminate corruption, but it makes great material for advertisements on the major news shows. And, who knows, maybe these expensive ads will even influence their reporting on the first department’s corruption.
This corresponds to the pharmaceutical industry’s campaign to beat back congressional efforts to lower prescription drug prices and weaken the protection the industry now enjoys with government-granted patent monopolies. Just as the corrupt fire department actually does save kids’ lives, the pharmaceutical industry does produce drugs and vaccines that are hugely important for people’s lives and health.
But that is not the issue, the question is whether there are better ways to get these drugs and vaccines. There is good reason for thinking there is.
Direct Public Funding, an Alternative to Government-Granted Patent Monopolies
The obvious alternative to having drug companies pay for their research costs is through direct public funding of research. Direct funding can take different forms. We can have a prize system, where the government gives out prizes and then takes ownership of new drugs or vaccines. These are then placed in the public domain so that they can be sold as cheap generics.
My preferred route is a system of long-term contracts, similar to the way the Pentagon pays for the development of new planes, submarines, and weapons systems. This has the big advantage that it can require that all research be fully public all along the way. This means that research findings, as well as results from clinical trials, are posted on the web as soon as practical. This means that researchers all over the country, and in fact all over the world, can quickly benefit from each other’s successes and failures. (I outline this system in more detail in chapter 5 of Rigged [it’s free].)
To my view, this shift to direct public funding has the important result of changing the incentives of the pharmaceutical industry. Under the patent monopoly system, drug companies try to figure out how to maximize the profits they can get as a result of the monopolies the government has given them. This may mean developing drugs that offer little benefit over existing drugs, but which they think they can market effectively.
It can mean finding ways to extend their monopolies, which may be dubious from a legal perspective, but with high-priced lawyers, may buy them another year or two on their patents. And, it may mean lying about the safety and effectiveness of a drug in order to maximize the amount they can sell at patent-protected prices.
These are the incentives provided by the patent monopoly system of financing drug development. If we instead relied on direct public funding there would undoubtedly be underperforming companies and some money would end up being wasted on dead ends. But all drugs and vaccines that were developed would be cheap (they are almost always cheap to manufacture and distribute) and no one would have the incentive to lie to us about their safety and effectiveness.
We can condemn drug company executives as moral monsters for misleading the public about their drugs or for charging high prices that put them out of reach for much of the population, but they are responding to the incentive structure we created. The key issue here is changing the incentive structure so that drug companies don’t do awful things.
TRIPS and the Fugitive Slave Act
For those not familiar with US history, the Fugitive Slave Act usually refers to the 1850 bill passed by Congress, which made it easier for bounty hunters to track people who had escaped from slavery in the South into Northern states that banned slavery. These bounty hunters could bring the people who had escaped slavery back to the South. The Act imposed serious penalties on anyone who tried to assist people in escaping slavery or blocked the efforts of bounty hunters. Its provisions were considerably stronger than an earlier Fugitive Slave Act passed in 1793, making it more difficult for people escaping slavery to live freely in the North. It was an important factor in the tensions that led to the Civil War a decade later.
I would not compare TRIPS to the barbarism of a system of slavery that imprisoned tens of millions of people for centuries, but the Fugitive Slave Act provides an example of a truly barbaric law that ostensibly decent people could consider reasonable. We should understand TRIPS also as a horrific provision of an international trade deal, the Uruguay Round of General Agreement on Tariffs and Trade, that was designed to bottle up technology to reduce access in the developing world, even when the issue is access to life-saving medicines or vaccines.
The issue of bottling up technology is central to the story of the massive and unnecessary loss of life in the pandemic. The official death toll worldwide is already over 4.7 million, but we know this is a gross understatement. To take one of the hardest-hit countries, India now officially reports 445,000 deaths from the pandemic, but a study by the Center for Global Development put the number of excess deaths in India, as of July, at 3.4 million and possibly over 4 million. In Mexico, the number of excess deaths is more than 240,000 higher than the official death toll from COVID-19, and in South Africa the gap is 150,000. Clearly, the death toll is several million higher than the already horrific official number.
But the question here is how much did the drug industry’s bottling up of technology contribute to this disaster. The provisions of TRIPS require countries throughout the world to have US-type patent laws. This means that countries like South Africa, Brazil, and India (the world’s largest manufacturer of pharmaceuticals), that might have had the technical expertise to produce the COVID-19 vaccines, as well as treatments and tests, could not simply start shifting production to pandemic related items. They needed to have the authorization of manufacturers who had patent rights.
This applied to manufacturers in wealthy countries as well. For example, Teva, a huge Israeli pharmaceutical company, wanted to produce the Pfizer vaccine by converting existing facilities but was unable to come to an agreement.
The problems with increasing production of vaccines, treatments, and tests go beyond just patents. A couple of months ago, I was on a panel with an industry representative who was anxious to boast that much of the technology needed to produce the mRNA vaccines does not depend on patent monopolies, but is instead held as industrial secrets. He said that he didn’t see how companies could be forced to disclose secret information.
Of course, no company has to disclose secret information, we can just have their top engineers share the expertise they have gained while at Pfizer, AstraZeneca, or Moderna. Surely, for paychecks of millions of dollars per month, many of the most knowledgeable engineers at these companies could be persuaded to share their know-how with pharmaceutical manufacturers in the developing world. The fact that they could also be helping to save millions of lives might also make this work attractive.
The reason this technology transfer is not happening now is that all these companies have nondisclosure agreements with the employees who would have access to this knowledge. If any of them were to begin sharing information with another pharmaceutical company, they would certainly face a large lawsuit from their former employer, who may also be able to get an injunction prohibiting this engineer from providing further assistance. If an engineer were to act in violation of an injunction, they could face imprisonment. In short, the laws on nondisclosure agreements can be used by pharmaceutical companies to block the transfer of the technologies needed to effectively combat the pandemic.
Governments do not have to make nondisclosure agreements enforceable contracts, especially when so much of the underlying technology, as in the case of mRNA vaccines, was developed with public funds. Nondisclosure agreements are quite explicitly designed to limit competition. Other contracts designed to restrict competition are not enforceable by the courts. For example, if Apple were to pay Samsung $1 billion in exchange for a commitment not to charge less than $800 for its newest smartphone, no court would sanction Samsung if it violated this agreement. Since the purpose is clearly to limit competition, in direct violation of anti-trust laws, this sort of contract would be unenforceable.
In the same vein, we can think of the laws on nondisclosure agreements as efforts to limit competition, that have no place in a free market. Again, the case for this view is strongest when much of the funding for the development of technology comes from the government, as is the case with the COVID-19 vaccines and most innovations in the biomedical sector. .
The proponents of the WTO often talk about it as promoting free trade, but in fact, the TRIPS accord went 180 degrees in the opposite direction. TRIPS is about bottling up technology. A WTO that was actually designed to promote free trade and the transfer of technology would, instead of protecting patent monopolies, would be banning, or at least severely restricting, nondisclosure agreements. Don’t look for that one any time soon.
“Free trade” has always been a flexible concept that the wealthy and powerful have interpreted in ways that advance their interests at the expense of everyone else. The Opium Wars fought between China and the United Kingdom were justified on the basis of free trade. The UK was insisting that people in China had the right to buy opium, which was the one product that it could sell to China in large quantities in order to pay for all the items it wanted to buy from China.
We should think about current rules on intellectual property in the same way. They have no moral or economic rationale. (Yeah, I know we can tell stories about how they are needed for innovation, but they aren’t true.) The laws on intellectual property are designed to make a relatively small number of people very rich. In doing so, they not only make everyone else poorer, but they also cost millions or even tens of millions of lives.
Source: Center for Economic & Policy Research, 20 Sep 2021
This article is issued under a Creative Attribution 4.0 International License
Dean Baker is a U.S. economist and is a cofounder of the Center for Economic & Policy Research, Washington DC.