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Thursday, September 24, 2015

'Rational Drug Pricing'

Should we rationally expect rational drug pricing?:

Rational Drug Pricing, by Jeff Sachs: Drug pricing has taken center stage in U.S. politics, and it's high time that it should. ...
Drug pricing is not like the pricing of apples and oranges, clothing, or furniture that well and good should be left to the marketplace. There are two major reasons. First, the main cost of drug production is not the cost of manufacturing the tablet but the cost of producing the knowledge embedded in the tablet. Second, there is often a life-and-death stake in access to the drug, so society should take steps to ensure that the drug is affordable and accessible.
To ensure that financial resources flow to scientists to produce the knowledge embedded in the tablet, the government does two things. First, the government pays directly for a substantial part of the research and development (R&D). ... Second, the government grants patent rights for drug discovery. ...
It's a basic insight of economics that patent rights are a "second-best" solution to drug pricing, not an optimal solution. A patent creates an artificial monopoly to incentivize R&D. Yet it also reduces access to the product, perhaps with unacceptable and immoral life-and-death consequences. Rational drug pricing would get the best of the patent system but ensure that it is compatible with access to the life-saving drugs.
Unfortunately, the current rules of the game in the U.S. pharmaceutical sector do not compensate for the weaknesses of patents. They amplify them. ... What should be done? Here are three key principles.
First, private R&D should certainly be protected by patents but only enough to elicit the needed R&D, not to produce outlandish profits. ...
Second, when the U.S. government pays for much of the R&D, it should share in the property rights. This should be a no-brainer, but in fact the NIH simply gives away most or all the intellectual property that it has financed, so the taxpayer pays part of the R&D bills but the returns are fully captured by private companies.
Third, when companies ... make profits from their U.S.-based research and U.S.-based production and sales, they should certainly pay U.S. taxes on their profits. The fact that the IRS lets them hide their profits in overseas tax havens is scandalous and without any logical justification whatsoever.

    Posted by on Thursday, September 24, 2015 at 10:42 AM in Economics, Health Care, Market Failure, Regulation | Permalink  Comments (43)


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