It is a bedrock principle of capitalism that as competition erodes profits on established products, enterprises will invest in innovation to earn higher profits from new products. US law governing prescription pharmaceutical markets abandons that principle and gives every new drug a long-term monopoly that prohibits competition. It also discourages competition between medicines based on comparative price or effectiveness. High prices and slow innovation cycles are the inevitable result and will remain so unless Congress makes fundamental changes in existing law.
According to the Pharmaceutical Manufacturers Association, it takes at least 10 years to develop a new drug. It is no surprise that the typical monopoly period on an existing drug is also 10-12 years. Why rush to bring a new product to market when a monopoly makes it possible to raise the price of the old one with impunity?
Patents covering products other than drugs rarely provide the ability to charge any price. They are normally limited to a specific innovation and do not prevent competition from similar products. There are always many computers, TVs, and smartphones to choose between. Patent litigation also takes years to complete and the vast majority of cases are ultimately settled because the pace of new innovations is often faster than the time it takes to acquire or enforce a patent on an existing innovation. The iPhone supplanted the Blackberry is far less than the 20-year life of Blackberry’s patents.
In contrast, Federal law prohibits the Food and Drug Administration (FDA) from approving a copy of a new drug for a period of seven to 12 years even if there are no patents. The FDA is also prohibited from approving a generic drug anytime a claim of patent infringement is alleged – a policy that has encouraged many frivolous patent claims just to delay competition. Drug patients also get extensions of up to five years and then an additional six-month extension for conducting studies of the new drug’s suitability for use in children. Collectively, all of these special monopolies prevent competition and keep prices high.
Market Distortion
Competition between the many medicines that are usually available to treat the same medical condition could help bring down the price of a new drug that has insignificant value over an old one. A rational consumer would not pay $10 for a medication when their affliction could be relieved for 10 cents. Unfortunately, once a medication is prescribed by a physician, only that medication or an approved generic copy can be legally dispensed even if a lower-cost alternative medicine exists.
In a 1979 study recommending that States enact generic drug substitution laws as a means of lowering prescription drug costs, the Federal Trade Commission stated “the forces of competition do not work well in a market where the consumer who pays does not choose and the physician who chooses does not pay.” The situation is worse today because most patients have drug insurance that pays.
The pharmaceutical industry exploits this market distortion to avoid price …