Patently Stupid Rules Keep Drug Prices High

SACRAMENTO — The issue of patents — the intellectual property rights granted to inventors that give them exclusive control over their invention — has long divided supporters of the free-market system. It’s always a contentious topic in libertarian circles, something that will generate more anger and name-calling at a libertarian event than discussions about, say, legalizing prostitution, the personal ownership of nuclear weapons, or the constitutionality of driver’s licenses. I exaggerate, but not by much.

As Libertarianism.org explains, “We tend either to favor or oppose it strongly, depending on whether we see it as a necessary and proper guardian of legitimate individual rights, or a precarious and inherently unjust form of coercive monopolism.” Advocates for the former position argue that without such rights individuals would not be able to profit from their mental efforts and investments, whereas the latter believe them to be a government-imposed restriction on labor — and something that in the long run restricts the process of innovation.

These are great debates to have over a cocktail, but there’s little chance that our nation will up-end the entire system of intellectual property. However, it is long overdue for policy makers to look at improving the way patents that currently are granted and defended. Obviously, pharmaceutical companies aren’t going to invest billions of dollars into ground-breaking research if someone else can come along and sell the pills at a lower cost without having to recoup the research costs.

By contrast, even diehard patent supporters acknowledge the nefarious efforts of so-called patent trolls, who, as the Electronic Frontier Foundation defines, are “companies that don’t focus on making products or selling services” but instead “collect patents, then use them to threaten or sue other companies and individuals.” Furthermore, those above-mentioned drug makers often engage in dubious practices that slow the entry into the market of generic drugs, which leaves lifesaving medicines out of reach for millions of Americans.

As my R Street Institute colleague Wayne Brough discussed in a research report last year.

Many pharmaceutical companies employ strategic behaviors that extend rents well beyond the 20 years granted by the patent. Companies deploy tactics such as evergreening, patent thickets and product hopping to create artificial barriers to potential competitors seeking to enter the market with alternative products, resulting in delayed and higher prices for consumers.

Evergreening is when patent holders file secondary patents that change tangential aspects of the product, such as packaging, dosing, or treatment methods, as a means mainly to extend the length of their monopoly protections. Patent thickets refer to a web of patents covering essentially the same product, which complicates the entry of others into the market.

Finally, product hopping is when a manufacturer develops reformulated versions of the drug (e.g., a chewable rather than a tablet) or combines two separate drugs into a single drug. Per recent research, that single type of patent gaming imposed a $4.7 billion cost on the U.S. health care system based only on its impact on five particular drugs. It’s easy to understand why given that the current system empowers deep-pocketed patent holders to sue upstart competitors. It provides a chilling effect on competition and innovation in the drug market.

U.S. policymakers have been considering a wide range of ideas to deal with soaring pharmaceutical costs. Most of these ideas are bad ones, as they involve price controls and other efforts that give the government more power over private industry. Even some of the most reasonable proposed reforms, such as empowering Medicare to negotiate prices with drug manufacturers, avoid tackling the deeper problem. Instead of expanding federal control, Congress should look at making a variety of tweaks to the patent system in order to promote more competition.

What should be done? Part of the problem stems from the bureaucratic nature of the patent-approval system, as such decisions are made by the U.S. Patent and Trademark Office. It’s a typically slow-moving bureaucracy. I’ve long since given up expecting such agencies to ever become more efficient. For instance, the New York Times editorial board suggests providing the overburdened agency with additional resources and longer time frames for patent examiners.

Count me as skeptical, but the Times did offer one useful solution: improving the process for challenging dubious patents via the Patent Trial and Appeal Board: “Bad patents have steep costs. They gum up the wheels of innovation by making it harder for would-be inventors to proceed with their work.… And they leave honest inventors vulnerable to patent trolls.” But it can take years and steep legal costs to challenge them.

Specific reforms are complex, but it’s worth considering a process that, per the Times, makes “it easier to challenge bad patents before they are granted.” Reforms should also look at ways to make it easier to weed out bad patents that should not have been granted in the first place.

It will be a long process to reforming the system, but here’s a good opportunity for some bipartisan attention. At the very least, this issue ought to garner more consideration the next time pharmaceutical-pricing concerns push Congress in a price-control direction. None of this requires deep philosophical debates about the value of patents. We’ll leave those for libertarian confabs. The rest of us should look at ways of fixing the current system, as we try to reduce prices for drugs and other necessities by enhancing free-market competition.