Saturday, April 12, 2008

Health Costs and the Patent Puzzle

I have long been puzzled as to why countries that are primarily consumers of intellectual property choose to enforce patent and copyright laws, thus paying for things they could get for free. The most plausible explanation I can think of is that they do it because countries that are producers of intellectual property also tend to be rich and powerful, and so in a position to bribe or bully them into going along.

Drug patents present an interesting case. As best I can work it out, the reason drugs are more expensive in the U.S. than in many other places is in part ordinary price discrimination by the drug companies, in part their fear that charging the revenue maximizing price elsewhere would result in countries refusing to enforce drug patents. The difference between that case and others is that drugs provide a basis for justifying wholesale violation of patent rights that is, at least, rhetorically, much more persuasive than for other products. It's a lot easier to say "if you don't want to pay for my book, don't read it" than "if you don't want to pay for my drug, die." Hence the risk that the consuming countries will refuse to enforce patent rights is greater in that case.


Unknown said...

I think the argument for patents, especially for drug and biotechnology patents, is much much stronger than for other forms of intellectual property.

It's easy to argue that books, music, and software could be produced by hobbyists who enjoy doing it and don't need to be compensated. Or that these content producers could find ancillary revenue streams.

But who's going to invest billions of dollars in developing new life saving medication or crops when the rest of the world can use their creation for free?

Without patent enforcement, there would be no new medications or biotech. Which means billions of lives that could have been saved won't be.

Yes, this is a pragmatic argument, not an ethical one. But if your system of ethics leads to billions of people dying, you might want to rethink it.

Anonymous said...

I'm supposed to be studying this at the moment (law school). TRIPS was negotiated at the end of the Uruguay round of GATT, and was made a requirement of WTO membership, because of strong lobbying pressure by developed countries. In exchange, these countries supposedly made commitments to lower textile and agricultural subsidies.

Anonymous said...

I should add something. WTO penalties generally take the form of the injured country imposing sanctions (tariffs etc.) on the breaching country. So say the US breaches WTO agreements by favoring
local gambling companies over foreign companies. This injures Antigua by $20M. Antigua gets a judgment against the US, and is allowed to impose $20M of sanctions. But, Antigua is small and developing, so can't feasibly put in place such sanctions, at least not without injuring themselves badly.

But what Antigua can do is suspend obligations under TRIPS. Effectively, Antigua is allowed to pirate $20M worth of stuff without hurting themselves. So the mechanism gives small countries a lot of leverage over large countries that they wouldn't otherwise have.

Donald Pretari said...

What we seem to have here is a negotiated truce between the U.S consumer, drug companies, and countries that could theoretically infringe patents. Again, isn't this a kind of subsidy being paid by the U.S. consumer? It seems to me that we have quite a few cases of these subsidies that arise without any explicit agreement. Our current health care system could also be seen as a system in which people who pay taxes and health care insurance are subsidizing people who don't. In this case as well this seems to a system which simply evolved without explicit agreement. What do we call these truces, subsidies, etc.? Are they market driven? Could making these arrangements explicit makes things worse by, for example, leading drug companies to give up risky research?

Anonymous said...

Response to steve.

You can argue just as well that it's a lot easier to make enough money to cover R&D off life-saving drugs than it is to do so off books.

The debate over patents is always over damage done versus incentive created. I think the argument for patents is weakest in the medical industry as that is where they do the most damage.

Anonymous said...

You are making a classic collectivist error that you have often criticized in the past: Treating countries as unitary and rational beings rather than as a particular outcome of interest group politics.

Even if a country as a whole is clearly and overwhelmingly disadvantaged by intellectual property rights, there is always a particular group in that country that is advantaged.

Anonymous said...

Steve - I think you are missing out on the alternative models that could exist were patents not the dominant form of property when it came to biotech. For a start, I think development in medicines could be a very attractive option charitable and philanthropic giving.

In the terms of a market, however, disease and illness could be turned into commodities as liabilities in an insurance market. Health insurers would charge expensive premiums for people with high risk profiles, then invest that money in making those people less high risk (allowing them to profit from keeping people well for longer). It could even be an area for venture capitalists buying up insurance options in, for example, Parkinsons disease while investing in a breakthrough treatment for it.

That way, people at the forefront of the market can still make huge profits but the technology gets to be shared instantaneously with everyone. it is hard to say whether that would function better than the current system but we cannot predict exactly what possibilities their exist absent patents.

Grant said...


You're assuming there aren't other ways to fund biotech research. I think there are. I probably can't name them all, but I'll throw out one right now:

Prizes funded by assurance contracts and leveraged by insurance/prediction markets. Think of a publicly-funded X-prize where the donors get their money back (plus interest) if no one claims the prize.

Of course, as you've noted, the case for IP in biotech is a lot stronger than, say, software, where most patents seem to be used as bludgeons.

Andrew said...

There's a strong correlation between a country's wealth and the degree to which its government represents its people.

Anonymous said...

In practice, it seems that saying "if you don't want to pay for my book, don't read it" is much-much more easier than saying "if you don't want to pay for my drug, die.". Or, maybe, patent holders prefer the harder way.

Michael F. Martin said...

There is a paradox here, and I don't think the traditional legal realist accounts do the truth any justice. What would Ricardo, Smith, and Coase have to say?

Ricardo: Where inventing gets done is a function of which country has a cost advantage. India may have that advantage now in biotech because of the costs of the regulatory system here in the U.S. China may have that advantage now in semiconductors because it's cheaper for U.S. educated engineers to live and work in China than it is to live Silicon Valley or Austin. Ph.D.s that used to stay here in the U.S. are going back to their homes abroad in record numbers. For U.S. patriots, this is a bigger problem than our subprime mortgages over the long-haul.

Smith: A division of labor between inventing, development, marketing, and distribution is efficient. Assigning the tasks to different people within a firm makes sense. This seems so obvious to people now; but that wasn't always the case. For most of human history, if you invented something new, you had to start your own company to see it commercialized. Inventors and entrepreneurs were the same person. Now we have a division of labor.

Coase: Once a background system of legal rights is settled (i.e., at least torts & contract, but preferably property) and transactions costs are lower than the administrative costs of doing the same work in-house, firms start outsourcing R&D. Invention markets arise.

We live in this world. The question is when are we in the U.S. going to realize it, stop ragging on the patent system, and focus our efforts on fostering a healthier market?

China and India are getting really serious about enforcing patents because they've realized that they can be the net beneficiary of human-capital transfers if they can get American and European companies comfortable with doing R&D within their borders.

Anonymous said...

Nice hypothesis, but it doesn't really explain why drug prices are so high in the U.S..

There are three main reasons for high drug prices, in order of severity:

1. Immense overregulation and criminalization by the FDA (anything making "medical claims" must be aproved as "safe", i.e. there is no OTC outlet for non-approved "medical claims"). The FDA makes the IRS look like amateurs. For instance, it's far easier to avoid taxes than to just merely talk about what will cure cancer, nevermind actually sell anything "unapproved". The FDA does not and has never cared about proof or efficacy. Its only been forced to appease due to decades of hard-won legislation and legal challenges.

2. The lack of a true free market in the health care system. 98% of the system is non-private due to an amazing plethora of overregulating government agencies and programs.

3. The lack of a true free market in insurance, especially in terms of portability and pricing power (unintended consequences of WWII and HMO legislation).

Frankly, only radical reform of either the FDA (click my name if you want to peruse scientific-based FDA reform information) or the health care system is going to lower drug prices in reality. The U.S. is not New Zealand... the odds of a drunken legislator flippantly changing an existing socialist economy to free market during late night will just not work with Congress.

Of note, India does not have patent protection for the chemical makeup of drugs, but drug manufacturing processes only. Thus, 95% of U.S. drugs are produced and manufactured in India and enormously cheap clones of patent-protected drugs elsewhere are also produced there without being illegal. Sadly, this patent protection has been changing in terms of world harmonization.

And lastly, the whole basis for patents being necessary for drugs is false. There's enormous innovation and creation in the dietary supplement market that rivals pharmaceutical drugs in efficacy and certainly surpasses in safety. In other countries where the exact same supplements available here are sold as approved "medical claims", the prices are as exhorbitantly high there as drug prices are here vs the rest of the world.