Government Research and Drug Pricing
Two camps seem to exist regarding the idea of having the government fund or do basic research in certain arenas of inquiry.
One is the-more-the-merrier approach. That is, both government and the private sector should do fundamental research when it comes to important endeavors like seeking out new medicines. The argument here seems to be that the private sector lacks the incentives to fully engage in such experimentation, so the government needs to fill the gap.
The second view, which I subscribe to, is that such ventures should be left to private sector businesses, foundations, investors and entrepreneurs. The private sector, as history has proven, most certainly possesses the incentives to research and develop new medical treatments, as long as government does not impose obstacles.
Plus, the pursuit of new prescription drugs is a very risky endeavor, riddled with failure. Why should taxpayer dollars be placed at risk when private entities stand willing to take on such risks? Given that failure is the rule and success the rare exception, it also must be recognized that the private sector handles failure much better than government does. Government tends to throw more money at failure, while the private sector punishes failure by shifting resources to other avenues of exploration.
Along these same lines, government spending tends not to serve the consumer, but instead special interests. If researchers and their colleagues receive taxpayer money, they have a clear incentive to try to maintain and increase that support no matter what their effectiveness might be. And since politicians and bureaucrats are spending other people’s money – i.e., the taxpayers’ – they are unlikely to be as vigilant in watching how successfully that money is being utilized when compared to investors and entrepreneurs who invest their own money.
Nonetheless, government does spend money on basic research. On May 25 at the National Institutes of Health (NIH), a debate was undertaken on whether the federal government can and should force drug companies to reduce prices on medicines developed with the help of taxpayer dollars.
As The Wall Street Journal reported on May 24, this became an issue after Abbott Laboratories increased the price of one of its AIDS drugs, Norvir. The Journal noted: “Prompted by a petition from a liberal group, the NIH is considering whether to invoke a little-known 1980 law to issue a license allowing the manufacture of cheaper generic copies before Norvir’s patents expire.” The report goes on to point out that the 1980 Bayh-Dole Act “was designed to encourage companies and universities to commercialize inventions developed with government help by giving them patent rights to the products. But the law also permits the U.S. government to issue additional licenses if the patent holders somehow misuse their patents. The government has never invoked these so-called march-in rights.”
It also is worth noting that while the NIH grants totaled $3.47 million, according to the report, Abbott spent more than $300 million for clinical trials and getting the drug to market. Obviously, this is exactly what the Bayh-Dole Act was intended for, that is, to encourage companies to make the enormous investments needed to bring drugs to consumers.
At the hearing, according to the Associated Press, former Senator Birch Bayh, co-author of the legislation, noted that it was never the intention to have the government set prices. Instead, the misuse aspect was meant for instances whereby a company might hold off development in order to protect another product.
If the NIH were to interfere in this case by allowing a generic to produce Norvir, it would be a dangerous precedent. It would be a clear signal that the government is willing to engage in price controls. Property rights would be obliterated at the whim of regulators. That combination – imposing price controls and destroying property rights – would create a climate hostile to making the substantial investments and engaging in the enormous risks required to research, develop and bring to market new and improved medicines.
In particular, such a step would ensure that the dollars spent by government on such research would be wasted. Bayh raised the issue that government price setting would discourage companies from developing government-aided research. Indeed, what company would be foolish enough to take on the enormous costs of trying to bring a drug to market that was in part funded with government dollars, if the government made clear that it could revoke patent rights whenever it didn’t like the product’s price? The answer is clear: no companies would do so.
Raymond J. Keating serves as chief economist for the Small Business Survival Committee.
