Medicine and Intellectual Property

Economic theory suggests that patents are actually a poor incentive for creating new medicines! When would patents create good incentives and when would a prize be better? Yglesias :

Pursuant to this Kevin Drum story pharma horror story about a hundred-fold increase in the retail price of a drug that’s useful for averting premature births, it’s always worth pointing out that reforming how we incentive pharmaceutical research is some of the lowest-hanging fruit out there.

Even if we completely leave aside policy options that involve sticking it to the big drug companies, for any expected corporate revenue stream from a judge it would be welfare-enhancing for the federal government to pay a lump sum up front to have the drug released into the public domain rather than paying piecewise. In other words, if a company thinks it can maximize profits by charging $100,000 a pop for a pill that it expects to sell 10 of per year for 20 years, that comes out to $20 million in total revenue. But there are lots of people who might be helped by the pill who aren’t going to be able to afford it at that price. If you just buy the patent for $20 million (less than that with appropriate discounting) then total spending is the same but more people will get treated. In other words, we should be funding this research with prizes, not patents, as Joe Stiglitz lays out here. Bernie Sanders is the congressional champion of this idea, but it also garners support from libertarians like Alex Tabarrok. The Obama administration Office of Management and Budget is also doing some good things on this.