1

Well, I can't see a fatal flaw in it right off the bat, but I'd like to make an addition to it--have the patent protection clock start when the drug is approved, not when the patent is approved. That gives the company a full seventeen years to recoup the R&D invested in it as opposed to the five or six that they get nowadays.

2

Under your plan, consumers end up paying (they always do). What you are proposing is basically granting a perpetual monopoly to the drug company (a patent is a temporary monopoly), along with the monopoly profits that go along with it. The people who buy the product pay for that. All your proposal does is shift the burden from taxpayers to people who buy drugs, which are two heavily overlapped sets.

3

The problem is that then the regular insurance companies end up footing the bill in addition to non-insured consumers. That will result in raised premiums and consumers will pay twice - through taxes and increased premiums.

4

I'm missing something in your example. If the company normally makes $1 million in profits, but then "loses" $2 million in 2006, their net profit in 2006 is zero, isn't it? Extending the sales for 2 more years would simply mean 2 more years of selling something for zero profit?

5

Who decides the basis for what the company lost by selling to the government?

6

IBreak have the patent protection clock start when the drug is approved, not when the patent is approved.

Do pharmaceuticals not get to use “patent pending” protection?

Jeff Under your plan, consumers end up paying (they always do).

True, but I would reword it to make the tautology more evident: the payer always pays. ; )

What you are proposing is basically granting a perpetual monopoly to the drug company (a patent is a temporary monopoly), along with the monopoly profits that go along with it.

Not necessarily. The patent (and the subsequent monopoly rights) for any specific drug could be capped at, say, five years.

All your proposal does is shift the burden from taxpayers to people who buy drugs, which are two heavily overlapped sets.

To some extent this is true. What it mainly does is provide a way for users of “lifestyle drugs” (i.e., Viagra) to subsidize life-saving medications. But the consumer (i.e., Viagra user) is not necessarily paying more, he’s just not paying less (at least not yet).

Erica The problem is that then the regular insurance companies end up footing the bill in addition to non-insured consumers. That will result in raised premiums and consumers will pay twice - through taxes and increased premiums.

Because the price of the patent-extended drugs would not rise (and could actually fall), I don’t see why it would increase the premiums on insurance.

Ogre I'm missing something in your example. If the company normally makes $1 million in profits, but then "loses" $2 million in 2006, their net profit in 2006 is zero, isn't it? Extending the sales for 2 more years would simply mean 2 more years of selling something for zero profit?

I should have put scare quotes around “lost” in #2. Saying the profit was “lost” is like when the government doesn’t include an annual increase and then counts that as a “budget cut.” The money isn’t really “lost” since the sale would probably not have been made otherwise.

Here’s another example: Med. Y is a lifesaving drug that makes a profit of $1 per pill. If the government does not buy any Med. Y, then I have made no profit. Instead, I sell the state 1 million pills at cost and in return receive a patent-extension voucher worth $1 million. The government paid nothing out of pocket, but I can extend the patent on Med. X (which profits $1 million per year) for one additional year.
If the patent expires, I lose money because generic brands will hit the market and drive down my profit. But by making the trade with the government (pills for a voucher) I get to keep making money on a more successful product.

Dennis Who decides the basis for what the company lost by selling to the government?

Good question. That’s one of the many details that would have to be worked out. I assume, though, that it wouldn’t be anymore difficult to determine than would depreciation on assets.

7

Let’s use the following example: Drug Company “A” normally makes $1 million in profit on Med. X, a drug whose patent expires in 2007. In 2006 they lose a total of $2 million in profits from medications sold to the government. The drug company would then be allowed to extend the patent on Med. X for two years in order to recoup the lost profit.

Price setting on a patent protected drug is hardly rocket science. By definition there is no clear 'market' because while the cost of making a drug is usually minimal there is no competition to set a market price. The above would probably fall apart into competiting claims where the drug company presents various econometric models indicating a lot of lost profits while the gov't presents just the opposite. In short there's no easy way to know that company A would 'normally' have made $1M in profit on Med X. What does a drug company do about a drug that treats patients who are almost entirely old? What good would the extended patent be then since just about everyone using the drug would be using it under the Medicare program?

Well, I can't see a fatal flaw in it right off the bat, but I'd like to make an addition to it--have the patent protection clock start when the drug is approved, not when the patent is approved. That gives the company a full seventeen years to recoup the R&D invested in it as opposed to the five or six that they get nowadays.

Is there any evidence that drug companies today are having trouble recouping their R&D investment? Pharma companies have not been losing money for quite a while. A win-win would be to accelerate the approval process. If a drug can be shown safe and effective in less time then it will get to market sooner benefitting both consumers and the pharma company. Unfortunately there are already a lot of very smart people who know this and I suspect if there were any obvious ways to pull that off they would be taken by now.

8

To some extent this is true. What it mainly does is provide a way for users of “lifestyle drugs” (i.e., Viagra) to subsidize life-saving medications. But the consumer (i.e., Viagra user) is not necessarily paying more, he’s just not paying less (at least not yet).

But from what you wrote it sounded like the extension would only apply if a company sold a drug cheap to a Medicare patient. So if someone was getting viagra by Medicare cheap then some 50 year old would be paying more for the 'lifestyle drug' to compensate Pfizer. But this will get really dicey really quickly. What is a 'lifestyle drug' and is there enough money in them to subsidize cheap lifesaving drugs for Medicare patients that really need them? Wouldn't it be more simple, direct and honest to simply tax people under 65 to pay for subsidies for those over 65? That is essentially what you're doing except instead of the checks going to the IRS they will go to pharma companies and instead of the tax being laid out roughly evenly among under 65 year olds (or laid out by some broad base such as income) it will be concentrated by those who need to buy cutting edge medication.

My proposal is simple. Set up some type of basic universal tax such as a use tax or add on to the income tax. The money raised by that goes into vouchers that will go to every citizen. The vouchers can only be redeemed for purchasing health insurance. Anyone can offer any type of insurance redeemable by voucher but with the condition that such insurance accept anyone with a limited variation in rates (to keep companies from screening out the sick leaving them uninsurable). If you want additional coverage you are free to use your own money to buy a better policy or to pay out-of-pocket.

There is no entitlement problem. If people want more coverage they have to vote for a higher tax. Want lower taxes they have to vote for cutting the voucher. The market will offer solutions to sticky questions such as whether or not to offer cheap 'lifestyle drugs'.

9

First a disclosure of bias: Hubby works for a major pharma company.

To add information about the patents: Pharmaceutical companies keep their compounds secret as long as possible, but once they begin studies or trials that will be published or will be carried out by outside sources, the compound is at risk and they are in need of patent protection. This is usually around ten years before there is a product ready for market, and the 17-year patent clock is ticking all that time. One delay in the clinical trial phase, such as an FDA request for more clinical trial data, can cost the company millions in profits. This forces the company to set a price that will, if all goes well, reap acceptable profits in the few years left on the patent. If that is unlikely, there is no point in developing the drug and none of us will have it at any price.

We see pharmaceutical companies making huge profits, but I think it is important to remember that the cost of research, trials, and FDA approval are so high, that only a huge company can afford to put up the money needed for that length of time or have that much money at risk. (Most patented compunds do not end up being a marketable drug.) We hear that a certain drug makes a company a billion dollars and we think it is outlandish, but when you look at the research and development costs of these companies, their profit margins are lower than many other industries.

Small pharma companies that discover a hopeful compound usually end up partnering with a major pharmaceutical company or selling the patent to them. They simply can't afford the development process. I think that solutions that make the development and approval process less expensive would introduce more competition and creativity in the industry, (by allowing smaller compamies to participate more fully), and encourage more new drug development and lower prices.

10

True Dory, (BTW I too work for a major pharma company). However when you write that pharma companies have high profits but the cost of R&D is high....remember profits are calculated after the costs of R&D, failed drugs, clinical trials and so on are deducted from revenue. I don't object to making even obscene profits but the fact is pharma companies have been enjoying what economics call 'economic profit'. This may change, there is talk that many companies are having trouble finding new drugs for their pipeline....perhaps the low hanging fruit (the billion dollar drugs you can discover for $750M or less) have been plucked already.

11

Here's a better idea. Eliminate all gov't involvement in medicine, including regulation of training, provision of services, research and production of medicines, etc. Competition would skyrocket, prices would plummet, and there would be no need for a Medicare prescription plan. No need for Medicare, for that matter. Patents could run forever, for all I care; medicine would still be cheap.

If I want to buy my medicine from or have my appendix taken out by the village idiot, I should be allowed to do so; this is America, not Communist China!

12

Errr, if patents ran forever then that would hardly square with eliminating all gov't involvement in medicine.