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The wonderful world of free market drugs

Dean Baker

I write about the possibility of producing drugs without patent monopolies frequently for several reasons. First, drugs can be essential for people’s health or even life. It should not be a struggle for people to pay for them. Second, there is a huge amount of money at stake, way more than in almost any other realm of public policy. Third, it is such a great example where government intervention, in the form of patents and related monopolies, creates the problem. This is not a situation where we need the government to correct an inequity that is created by the market, but rather we need the government to stop intervening in a way that creates tremendous inequities and inefficiencies.

I find that people (and I mean people engaged in public policy work, not random people grabbed off the bus) have a hard time even understanding what the market for prescription drugs looks like in the absence of patent and related monopolies,[1] so I thought I would devote a blogpost to describing my view of such a world.

The first and most basic point is that in nearly all cases drugs would be cheap. Drugs are very rarely expensive to manufacture. They are expensive for patients because drug companies

have patent or related monopolies and they use these monopolies to charge very high prices to the people who need their drugs. If there were dozens of competing manufacturers producing the same drug, they would be no better position-ed to get away with charging incredibly high prices than a supermarket could get away with charging incredibly high prices for food (we need food to survive too). They would be welcome to try, but almost everyone would simply turn to a competitor, likely driving them out of business.

We know that drugs are cheap in the absence of patent monopolies for two reasons. First, because generic prices in the United States are much less than brand prices. In addition, many of the high-priced drugs sold with patent protection in the United States are sold as generics elsewhere in the world, in some cases for less than one percent of the price in the U.S.

According to data from the Association for Accessible Medicines, the trade group for the generic industry, brand drugs accounted for 74% of spending even though they were only 11% of the prescriptions sold. By contrast, generic drugs accounted for just 26% of spend- ing even though they made up 89% of sales. This implies that the average generic prescription costs just 3.6% of the price of an average brand prescript-ion, or $29.70 per prescription in 2017. This figure would mean that we could save 96.4% of the money spent on brand drugs if we immediately got rid of protections and allowed them to be sold as generics.

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Comments from Patrick Newman:

Yes, drugs are cheap to manufacture and the active ingredient(s) are usually a small proportion of the physical entity. Is it reason-able for the drug companies to claim the large sums that have to be incurred are at the development and testing stage which like any product of a complicated process must be recouped in the sales price?

Generics are usually of ‘mature’ drugs in use long after the initial launch. Another question is how long should a drug company be given the right of monopoly before the production and sales become a ‘free for all’? One solution would be state control/supervision of the drug industry!

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