High drug prices are a major problem in the United States. In the Washington Post today, Aaron Kesselheim and I have an op-ed about what President Trump could do – immediately – to lower drug prices, if he had any intention of following through on all of those campaign promises and tweets. (We also explain why his nomination of Alex Azar to head HHS is a clear sign that he will do none of this.)
Here I wanted to say more about the stakes of the drug pricing problem, and about one option we describe – a little known patent “eminent domain” power that could be a powerful tool to lower drug prices.
First, the problem: Drug prices in the US have risen sharply in recent years, and 2017 is predicted to be no exception. More than one in four Americans report that they have a hard time affording their medicines. Many skip doses as a result. Insurers are rationing medicines to keep costs down, requiring people with life-threatening illnesses like hepatitis C to show that they have irreversible liver damage before they can access a cure. The problem is biggest for those with the least leverage over their insurers. Prisoners are one example. When new hepatitis C cures were introduced a few years ago, they revolutionized care in many places – but not in prisons. Only 1% of prisoners with hep C received these new medicines last year. Some prisons are treating fewer people than they did before the new drugs were released.
It turns out, though, that existing law gives the federal government a powerful tool to intervene. If we had a President who wanted to get serious about making deals to bring drug prices down, in other words, he or she could.
The lion’s share of the drug pricing problem can be traced to drug company monopolies. Patents (twenty-year rights given by the government to inventors, which allow them to block competitors from producing covered products like drugs) allow their holders to set prices at whatever they think the market will bear. Where there are few alternatives, those prices can be astonishing. The first drug introduced for a genetic disease called spinal muscular atrophy (SMA) was launched last year at a price of $750,000 for the first year of treatment, and $375,000 each additional year.
While drugs are expensive to develop, there is growing evidence that companies set prices not in response to R&D costs, but simply to maximize market returns. Medicines markets, unfortunately, have many features that make monopolies particular pernicious. Medicines are essential goods that patients need to live. (There are reasons that we do not allow fire fighters to show up at your door and ask you how much you are willing to pay to have the fire put out). The market is also so complex that it has been easy for drug companies to hide the effects of their high prices and to cast blame elsewhere – such as on insurers who make medicines difficult to access, or on middlemen who negotiate prices for insurers and who take their own cut.
So, what can be done? Regulation is one way to deal with monopoly problems. Long ago, progressive legal scholars and legal realists did important work to develop the theories of public utility and anti-trust that permitted regulation of early monopolies like railroads. Today, there have been some important early attempts – mostly at the state level – to start to curb excessive drug prices, and to force companies to be more transparent about their prices and costs.
One of the key building blocks of LPE scholarship, though, is the recognition that law intervenes not just to reshape but also to make markets. Some of the most powerful interventions into markets today may, therefore, operate not as a regulatory overlay on the “free market,” but instead intervene in the legal regimes that establish markets in the first place.
As legal scholars and lawyers know, the building blocks of the economy – laws about contract, property, corporations, and credit, for example – all have doctrines embedded within them that operate as a kind of proto-regulation. Patent law, it turns out, is no different.
If you go looking – as I and some students did, when trying to figure out how to bring the prices of new hepatitis C cures down – you find that throughout the history of patent law, the federal government has enjoyed sovereign immunity to patent infringement claims. Early in the history of the US, there was simply no court in which a patent holder could assert an infringement claim against the federal government. That changed around World War I, when the government codified a limited waiver to its immunity, and allowed patent holders to come to court seeking royalties. Today, that law is codified at 28 U.S.C. § 1498. It provides that the sole remedy for infringement of a patent that is used “by or for” the federal government is “reasonable” compensation. No injunctions are available. And it is used by the federal government all of the time – lead-free bullets, night vision goggles, and passport scanning are just a few areas where this power has been used in recent years.
This right of the federal government has been almost forgotten by scholars and policymakers today. I have never seen it featured in a casebook. It is so well interred, in fact, that even sophisticated advocates in this field frequently assert it has never been deployed for medicines. I was one of them, even after many months of research on the topic.
I eventually discovered – first through a conversation with someone who had worked for the government at the time – that federal procurement officers in the 1960s and 1970s relied on this power many times to buy generic medicines from abroad. In one prominent example involving a Pfizer drug, the result was a 72% price reduction. Procurement law in fact required agents to ignore patent status. The government paid small royalties to the patent holding companies, on the order of a few percent. Pharma companies fought back, and tried to get Congress to limit the immunity to areas of national security concern. Congress refused. The law remains to this day, and is regularly used in areas beyond healthcare.
I describe more in this long law review article, this short Health Affairs article, and this older op-ed. The strategy raises interesting innovation policy questions, which we address in the longer piece. Briefly, we show that government patent use is analogous to eminent domain. It can be, and should be, used to prevent what economists call “hold up” problems, like those that produce prices far greater than what R&D costs (even risk adjusted) could justify.
When defending against pharma’s lobbying in 1965, the lead procurement officer for the federal government called government patent use “one of the valuable powers which the Government has to assure fair prices” and to combat “exorbitant pricing.”
There’s much to say about why this may have been forgotten. More importantly, now is the time to remember.