Saving a Few Hundred Billion Dollars a Year on Prescription Drugs in America

Cost savings of a few thousand dollars per household that are eminently possible — if Big Pharma can be defeated or at least constrained much more. The main basic problem is the patent monopolies that allow pharmaceutical companies to charge exorbitant prices, and a main solution is to use direct public funding as a more efficient process at producing innovation.

Broadly speaking, a prescription drug in the United States goes through three main stages of development: On the front end, researchers make a scientific breakthrough in their labs, discovering the building blocks of a new drug. Then it goes through the second stage, which includes the often-costly process of clinical research and trials. Last, once the FDA has reviewed and approved it, the drug goes on the mass market, sold at drugstores and doctor’s offices.

The United States is already involved in the earliest stages of drug development. It’s the top funder of basic science research in this country through the National Institutes of Health, which has an annual budget of $37 billion, more than what the federal government pays for Head Start and Pell Grants combined. Most agree that this is money well spent: Every one of the 210 new drugs approved between 2006 and 2010 trace their origins back to government funding.

The government is also involved in the third stage, as a top purchaser of medicines. Through Medicare, Medicaid, the Department of Veterans Affairs, and other programs, the federal government pays for $300 billion worth of prescription drugs each year.

Where the system runs into trouble is in the middle of the process, when the government hands over a glittering prize: the multi-decade patents that give private companies a monopoly on life-essential products. Through a mechanism established by the Bayh-Dole Act of 1980, private companies are allowed to claim patents on promising compounds discovered with government funding–and that means exclusive rights to manufacture and sell the resulting drug for a period of 20 years and often longer.

This isn’t just an outdated model; it’s also deeply inefficient. Companies can price medicines at hundreds of times what it costs to make them (it’s how a hepatitis C medicine could cost $1,000 for each pill that is manufactured for a few dollars), and with the government providing a guaranteed market for the drugs, companies like Gilead and Pfizer have had years where their reported profit margins exceeded a staggering 40 percent. All of the Big Pharma companies average between 15 and 20 percent profit each year. Most Fortune 500 companies are happy to claim half of that. There is “absolutely no reason why the taxpayer should be forced to subsidize a private monopoly and have to pay twice: first for the research and development and then through monopoly prices,” Senator Russell Long insisted when Bayh-Dole was passed in 1980.

[…]

If the United States were to move towards a NASA system, the federal government would have to find up to $75 billion in its budget to replace what private industry spends on R&D. But that’s not an insurmountable obstacle. There should be plenty of money available. Baker and other economists calculate that a NASA for drug development, which would eliminate patents and the price markups for prescription drugs that come with them, would save Americans hundreds of billions of dollars every year thanks to drugs being generic-level cheap from day one. The savings to government spending alone would be more than enough to pay for every penny of the $75 billion that the private pharma industry claims it spends on R&D–and replace it with research that is more widely shared and targeted more at public health than at quarterly profits. In this alternate universe, scientists and labs could switch their focus away from developing yet another iteration of an erectile dysfunction drug towards tackling challenges like tuberculosis.

 

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