Prizes for Drugs

I wasn't really as blown away by John Edwards health care as some others I know (it was good, though) but this here is a real game-changer:

Edwards' plan would remove long-term patents for companies that develop breakthrough drugs and then reap large profits because of the monopolies those patents provide, according to a statement by Edwards obtained Wednesday evening.

Edwards said offering cash incentives instead would allow multiple companies to produce those drugs and drive down prices.

That's an idea that makes me feel warm and fuzzy inside. Obviously, the details matter, but competent people can work out appropriate details -- what Edwards is giving us here is the political leadership necessary to start putting details on the table. Realistically, this goes in the "unlikely to happen" file anyway, so they details sort of don't matter (sort of), but fortunately there are a whole variety of ways a president sensitive to the perversity of the current intellectual property status of pharmaceuticals could make things better.

Comments

"Leadership" or pie-in-the-sky promises in an attempt to boost a flagging campaign? You decide.

Posted by blah | June 14, 2007 1:46 PM

but competent people can work out appropriate details -- what Edwards is giving us here is the political leadership necessary to start putting details on the table.

Seems to me more than any of the other candidates, Edwards is not only talking the right talk, but talking with the right level of detail -- enough to make it seem like he has a plan, but not enough to give people ammunition to use against him. Too many Dems. listen to the pundits say "we need details" and either realize that details provide ammunition to opponants or just give details when what the pundits say the Dems. need to give (and for once the pundits, as modified, are correct) are details(TM).

Edwards seems to have details(TM) down pat. He seems to be playing on issues that'll resonate. He might even be able to overcome the GOP anti-trial-lawyer spin (the agenda of which is a whole 'nother topic).

The problem lies in the "competant people" part. A Pres. can't do it all alone -- s/he needs to, more than anything, be a good manager and finder of people. And Edwards has proven himself to be a bad manager/HR person. First he ran away, tail between his legs, when not fully vetted hires were savaged (when he shoulda just shown some gonads and refused to be bullied regarding people who are good bloggers -- a similar thing happened with some of Clinton's nominees and Clinton's mismanagement of the situation marked him as a target for GOP bullies ... which targetting he never could shake). Then there is the whole Mudcat thing.

If competent people are to work out the details and not turn this into a clustercheney that discredits Edwards' very good ideas (the competancy dodge is an IOKIYAR thing), Edwards needs to become a better manager so that he can find, hire and properly keep on track these (currently hypothetical) competent people. Until he does that, no matter how smooth of a talker he is and no matter how astute he is ideas or even policy-wise, he'll be a bad President and, not only that, will discredit the very causes he's pushing (and what good causes they are). If Edwards can prove himself to be a manager, I'll vote for him in the primary ... otherwise, I dunno ... at the very least, if he gets the nomination, he'll need a good manager as his VP choice.

Posted by DAS | June 14, 2007 1:58 PM

Edwards is starting to look less mainstream and more wacked than I ever thought he would. First there was the "There ain't no war on terra" and now there's "let's ruin the incentive for innovatin" song and dance.
Does he have any idea how many of the breakthrough drugs and treatments are invented in the US? Ever wonder why??

Good luck to Edwards. I don't think he will make the cut.

Posted by Fred Jones | June 14, 2007 2:03 PM

"Leadership" or pie-in-the-sky promises in an attempt to boost a flagging campaign? You decide.

Masterful. Chris Matthews himself couldn't have done it better. Instead of discussing ideas, let's talk about the horse-race implications and speculate about Edwards' political motives. That's far more interesting and, of course, good for the body politic as well. Analyzing actual ideas is so boring.

Posted by Steve | June 14, 2007 2:07 PM

I'm skeptical of Edwards at this point too, but for very different reasons. He's just made the very powerful pharm companies into his implacable enemies. The longer the campaign goes on, the more his operation looks Not Ready for Prime Time: the Marcotte and now Saunders' messes, the complete inability to push back on the haircut nonsense, and now this.

Posted by beckya57 | June 14, 2007 2:08 PM

Are these comments being submitted from Mars or something? First we have the terminally idiotic "Fred Jones," who thinks that cash doesn't count as an incentive, and that government subsidies are what make our country great and you're a leftist idiot if you want to replace them with something else.

Then we have beckya57, who thinks that pissing off the pharmaceutical industry is obviously stupid politics. Oh no, the Republicans have made the "very powerful labor unions" into their "implacable enemies!" I guess they must be really, really stupid politicians too!

Posted by Steve | June 14, 2007 2:13 PM

He's just made the very powerful pharm companies into his implacable enemies.

And you seem to be calling this a bad thing. We want to be the enemies of the pharm companies - they're bad for America. I have no idea how the other Edwards missteps fit with this.

Taking on the pharm companies head on is an explicit part of his campaign, not a sidelight mistake amplified by the media.

Posted by DivGuy | June 14, 2007 2:14 PM

Does he have any idea how many of the breakthrough drugs and treatments are invented in the US? Ever wonder why?? - Fred Jones

I'm vaguely in the business, so I know a thing or two.

Let's look at an example, AZT. Invented in the US. It is making big pharma a lot of money (and they've been very keen to protect this intellectual property). Was it invented by big pharma? No. It was invented by an academic with U.S. government funds. Was it shown to be useful against HIV by big pharma? No. That was a feller at NIH what did that.

What did big pharma do? Buy the rights to it way back when to use as a medicine for treating feline retroviruses or some such, that's what.

Same is true with Taxol (although big pharma's indirectly paid for my current university to have new chem building out of that one), etc.

So why again are these things being invented in the US? Is it due to the profit motive? Or is it due to government funded research?

Posted by DAS, (Possibly Mad) Scientist | June 14, 2007 2:27 PM

"We want to be the enemies of the pharm companies - they're bad for America."

Wow, you really need to get a life dude. Why would you want to be the enemy of anyone? Pharma companies may be a lot of things, but bad for America?

Posted by JBJB | June 14, 2007 2:29 PM

THe temporary monopoly produced by the patent is a 'prize'. One can sell one's patent the say after one gets one, it's a negotiable thing, though the eventual owner of the pantent realizes it's value, the 'prize' on the 'installment plan' rather that all up front. The huge advantage a patent system has though is that it lets the market set the size of the prize, which will generally be better than letting a govt official do it, since unless one is JK Galbraith, and no one is since he's dead, everyone believes markets do that imperfectly but better than a govt pricing board.

I haven't read Edwards health care plan but if this is the level at which Edwards grasps the world he lives in, I don't think it can all that good.

Posted by j mct | June 14, 2007 2:32 PM

Matt's right, this is one of those potential game changers. Both patent and copy right laws are tilted so far to the license holders that they are stifling innovation and exacting monopoly rents. Edwards approach is also a much more market based approach than price controls or sending buses of seniors to Canada.

No doubt this would be a tough reform to actually pass. But that doesn't mean a Presidential candidate, or President, shouldn't be talking about it. He's running for President, not Senate Majority Leader.

Posted by AJ | June 14, 2007 2:35 PM

Then we have beckya57, who thinks that pissing off the pharmaceutical industry is obviously stupid politics. Oh no, the Republicans have made the "very powerful labor unions" into their "implacable enemies!" I guess they must be really, really stupid politicians too! - Steve

This is one of the reasons why I say Edwards is being a good politician. So many Dems. are too afraid of making enemies they end up being mealy-mouthed pseudo-centrists with no real friends and a reputation for being effete wimps. Sometimes, as you point out, making enemies is good politics -- which, as you point out, the GOP has long realized (people will vote for you if the right "special interest groups" hate you -- people are spitful that way, alas). If Edwards gets this, he's exactly the kind of politician the Dems. need.

As I said, my main concern with Edwards is his management ability or lack thereof. And I'm not sure if he'll be able to overcome the hatred of trial lawyers (stoked previously and for other reasons by the GOP before people even knew who Edwards was) who smile too much. :) But Edwards rhetoric-wise is almost as spot on as Boxer (who is the master: she is almost a moonbat yet she has supporters even among the reddest of the red in the red-state parts of Cali, which has, in spite of its liberal reputation, some pretty GOoPer quarters) -- and he does seem to know how to play the political game more than most Dem. Pres. candidates in recent memory (the other exception being, of course, Bill Clinton ... Obama may be an exception but it's hard to know what's Obama being good and what's the media having some sort of crush on him ... but it's clear that whatever Bill Clinton had and Edwards has, it ain't because of the media aiding and abetting them with one of their crushes ...).

Posted by DAS | June 14, 2007 2:37 PM

The huge advantage a patent system has though is that it lets the market set the size of the prize - j mct

Ever heard of an economic concept called elasticity?

If one has a monopoly on a product -- and this product is absolutely needed (it's demand is inelastic ... so that no matter how high the seller sets the price, it'll be purchased) -- the price can be infinitely high.

Now if you have competition, then the seller might be undercut (although the sellers can always collude -- as happens with "competition" in utilities -- and also high costs to get into a business can help keep the oligopoly small and capable of collusion), but without that, what's to stop a seller from setting the price of drug X to $100,000/pill if that is the price that gives the company the most profit (income = cost per pill * number of pills purchased, nu?)? This clearly doesn't serve everybody well, but it's what can and does happen with a monopoly ...

It's as if they don't teach people about the gilded age in history classes anymore (c.f. that famous Santayana quote) ...

Posted by DAS | June 14, 2007 2:44 PM

A couple of questions come to mind when reading this article:

“He also was expected to detail a plan requiring health insurance companies to justify their rates by requiring them to spend at least 85 percent of the premiums they collect on patient care. He said New York, Minnesota, New Jersey, Florida already impose similar requirements.

"Three out of 10 health care dollars go to administrative costs. How much of this is spent on insurers giving families the run-around and figuring out how to deny claims?" Edwards said in the statement.”

I wonder how this compares with a typical gov’t agency or a large corporation. Organizations require administration. The larger the organization, the larger the admin spend as a percentage of budget. Is it even realistic for an organization the size of a major insurer to reduce admin spending to 15%?

Edwards said offering cash incentives instead would allow multiple companies to produce those drugs and drive down prices.

Who determines the level of incentive? A committee of select health care experts? Is the incentive specific to need? Would the gov’t, or select committee, determine what the next innovation should be and then target the incentive accordingly?

Posted by DM | June 14, 2007 2:45 PM

The current patent market for pharmaceuticals provides great incentives for producing drugs that manage conditions, rather than curing or preventing diseases. I'd much rather our pharmaceutical industry put its resources into developing a vaccine or cure for malaria than another erection-enhancing pill.

Posted by dob | June 14, 2007 2:49 PM

"Three out of 10 health care dollars go to administrative costs. How much of this is spent on insurers giving families the run-around and figuring out how to deny claims?" Edwards said in the statement.”

That's what I've always wondered. I've had several insurance claims denied and the effort involved in straightening out what was covered and what wouldn't be covered and who would eat what cost probably cost the insurance company more money than they saved by having me pay the bills.

*

As to how big Pharma is our enemy. Remember back after 9/11 everybody was asking "why do they hate us?" The answer given "they hate us for our freedoms" was only partially right. What "they" hate us for is that we, via the World Bank's/IMF's selective lending practices and the loony laws of the WTO et al., deny them the same benefits we take for granted here (cheap utilities) as well as benefits we ought to have (cheaper drugs) -- and intellectual property is a big part of that. Read, e.g., the story of AZT or Taxol and you'll understand why Big Pharma might be part of why they hate us and why Big Pharma might be somewhat of an "enemy".

Posted by DAS | June 14, 2007 2:51 PM

DAS:

Everything, or most of what you said, there is no perfectly inelastic demand curve, is right but besides the point. When the check is cut for the 'prize' doesn't the would be patent holder benefit and society lose. Isn't the more inelastic the demand curve for said drug a measure of it's desirablility, i.e. shouldn't one set the prize level for an extremely desirable drug much higher than for another version of Viagra? All that's besides the point.

As far as managing conditions rather than curing them, I think that's a result of biology rather than economics. How much money would an Alzheimer's vaccine make while it was still on patent? Buckets and buckets.

Posted by j mct | June 14, 2007 2:59 PM

Fred, you're one of very few people who I've seen argue that the Republicans lost in the 2006 elections because they weren't right-wing enough. Your use of the word "mainstream" is either backwards or totally random.

Posted by Cyrus | June 14, 2007 3:14 PM

I'm not sure what you're getting at j mct. Consider the case of AZT. Before they (GSK? I forget who for sure) were able to strong arm other suppliers out of making the drug, it had an effective free market price of $2 a dose or something like that. The name brand cost far, far more.

If the free market were maintained, with some surcharge added to all AZT sold to provide the Big Pharma company involved a "reward" for the creation of the drug (which in this case ought to be rather small as the company involved invested little capital in developing the drug -- most of the capital and labor involved came from the government or academia), the drug would sell maybe for $3 or something like that -- not what the monopoly enables the company making AZT to sell it for.

Seems to me that the would be patent holder could still get their fair share without society loosing if a check were cut ... while the current system causes big time losses.

Actually, a patent is supposed to function exactly as Edwards intends with his reward scheme. Perhaps what is needed is not a new scheme but just reform of the patent system so it functions as it should -- further limiting the length of time meds are on patent, requiring companies demonstrate significant involvement in development before they get issued a patent, requiring companies to allow competition when society no longer benefits from a patent, etc.

E.g. in the case of AZT, even if the patent involved were legitimate, the monopoly it grants should be suspended on the basis that the monopoly has already sufficiently rewarded innovation so as to provide motivation for future innovation and now merely prevents people from being able to afford a much needed drug. Again, details would be needed to work out how to balance this sort of decision ...

But at this point, it's too soon to actually write a policy in stone. What's important is for Edwards to show that he's thinking concretely enough to develop good policies. It's the difference between details, no details at all and details(TM). Edwards is, like so few other Dem politicians have been able to do, giving policy suggestions with details(TM). This is what Dems. need in a candidate.

Anyway, as to your last point -- the obvious counter example is anti-biotic development.

Posted by DAS | June 14, 2007 3:17 PM

The larger the organization, the larger the admin spend as a percentage of budget.

This seems to invert the very concept of "economies of scale." I recall from the figures I've seen that Medicare is shockingly efficient in relative terms, but obviously the stereotype of a bloated government bureaucracy is difficult to overcome with mere facts.

The huge advantage a patent system has though is that it lets the market set the size of the prize, which will generally be better than letting a govt official do it, since unless one is JK Galbraith, and no one is since he's dead, everyone believes markets do that imperfectly but better than a govt pricing board.

Well, and the huge disadvantage is that people may not be able to afford the drugs they need because of the government-granted monopoly. Maybe we can have it both ways by thinking outside the box.

It's entirely possible, it seems to me, for the size of the "prize" to be determined not by a government pricing board, but how the drug actually performs in the real world.

Let's say, for example, your company invents miracle drug X. We'll give you a patent to exclusively produce X for, say, one year (I'm just making up numbers here). After the year is up, your patent expires and anyone can make and sell the drug, but we'll still give you a cash prize on top of the monopoly profits you've already realized in the opening year. We can either peg that prize to the level of sales during the one year you've already sold it, or we can pay you an ongoing prize based upon the level of sales in the open market from here going forward. Obviously, you're going to have to apply multipliers and such to make an actual calculation, but either of these methods qualifies as a market-based reform rather than government price-setting.

If this isn't clear I can break it down a little further. It seems entirely plausible and not at all communist to my way of thinking.

Posted by Steve | June 14, 2007 3:21 PM

If you knew just what you wanted to innovate, and just what counted as an innovation, maybe Edwards' plan would make sense. But the main idea of the patent system is to keep the government out of the business of making these decisions, even at the cost of all the inefficiencies that result from government grants of monopolies. I'm open to hearing more about the details---the idea might make sense for a few big targets like an HIV vaccine, or for orphan drugs---but as far as Matt or other commenters have gone in describing it, it just sounds dopey.

Posted by Andy McLennan | June 14, 2007 3:23 PM

But the main idea of the patent system is to keep the government out of the business of making these decisions, even at the cost of all the inefficiencies that result from government grants of monopolies.

Er, no, the main idea of the patent system is to promote the advancement of useful arts and sciences.

Posted by dob | June 14, 2007 3:33 PM

Of course, this whole discussion is somewhat dopey, though not for the reasons Andy McLennan might say it is ...

It's somewhat dopey because, in the grand scheme of things, other than a few specific industrial innovators -- and even most industrial innovators made innovations in manufacturing techniques and such rather than new material or chemical items (the exceptions I can think of are Edison, Bell Labs and Xeroz PARC, although the latter two from what I understand had, for various reasons of already existing monopolies, a mentality likely more akin to a government research institute than a corporate entitity hoping to profit from IP) -- most innovations, as I've pointed out before on similar threads, come out of government, etc.

From whence comes the internet? Who developed AZT? Etc.

We can get even more general about intellectual property too. How were Bach and Mozart compensated? Did Michaelangelo make money selling copywrited images, which money he made from creating intellectual property?

The fact is that an amazing amount of innovation actually comes from governments, churches, etc., paying 1000 monkeys to type at 1000 keyboards (play at 1000 pianos, mix 1000 chemicals, etc -- I should know, as a post-doc, I'm one of those monkeys) until one makes a masterpiece.

It is precisely because we don't know what'll be an innovation (and what we want to innovate), pace A. McLennan, that the patent system does not make sense. People seeking the potential for a big pay-off in terms of a monopoly from getting a patent, given the nature of R&D, are more or less being lottery players anyway, so what's a prize vs. a patent? Because of the way innovation works (ultimately, it's about quantity, not quality -- the quality comes as a statistical outlier from having so much quantity), ultimately most of it comes from those with enough resources to hire 1000 monkeys.

To some degree entrepreneurial innovation, etc., is a myth. The real innovators, those who would be rewarded with patents, are oftentimes those with enough resources to innovate and hence don't really need (or in the case of government, can't really profit anyway by definition) the patents as motivation.

Posted by DAS | June 14, 2007 3:38 PM

Maybe we should all calm down and read Ezra. This is a replacement for the patent system, but a supplement to it for drugs that the market doesn't support research for, like malaria.

Posted by AJ | June 14, 2007 3:52 PM

Oops. Link Here

Posted by AJ | June 14, 2007 3:56 PM

How about just allowing the U.S. government to negotiate the price of drugs with big pharma, the way other governments do? I mean, why hasn't the government been doing this all along? Oh, now I remember.

Posted by kafka | June 14, 2007 4:15 PM

"I recall from the figures I've seen that Medicare is shockingly efficient in relative terms, but obviously the stereotype of a bloated government bureaucracy is difficult to overcome with mere facts."

I’ve seem arguments from some, Tyler Cowen most recently indicating this is due to the fact that some typical admin functions are handle by other agencies.

Posted by DM | June 14, 2007 4:16 PM

"If one has a monopoly on a product -- and this product is absolutely needed (it's demand is inelastic ... so that no matter how high the seller sets the price, it'll be purchased) -- the price can be infinitely high."

Not many drugs have an infinitely high price.

"If the free market were maintained, with some surcharge added to all AZT sold to provide the Big Pharma company involved a "reward" for the creation of the drug (which in this case ought to be rather small as the company involved invested little capital in developing the drug -- most of the capital and labor involved came from the government or academia), the drug would sell maybe for $3 or something like that -- not what the monopoly enables the company making AZT to sell it for."

The average dose of AZT according to my google searching is around $3.33 though in some cases I found it as low as $2.75. So your example seems to suggest that the market is working since it is hitting the same prices you thought that it would without a monopoly.

Posted by Sebastian Holsclaw | June 14, 2007 4:17 PM

I might be remembering the prices wrong, we might be comparing different "units" ... plus I think when the AZT thing managed to almost come in the open as a scandal, people with money invested in big Pharma (e.g. Bill Gates) started, through charitable foundations, subsidizing the cost of AZT (that way the monopoly could be maintained so the precident of breaking up such monopolies would not be set) -- and these figures might reflect the subsidized cost?

Posted by DAS | June 14, 2007 4:29 PM

I just want to thank DAS for his comments here. Good stuff and very thorough. It's distressing how badly informed so many people are (on ALL sides of the political spectrum) on IP law and economic monopolies.

Bravo. your comment at 3:38 is one of my nominees for comment of the year.

Posted by Jason | June 14, 2007 4:34 PM

Not many drugs have an infinitely high price.

But for a lot of very poor people (and people inthe third world whom Big Pharma is denying drugs via TRIPS) they might as well.

Is AZT still on patent, Sebastian? I'm thinking that the previous discussion was of AZT when it was on patent, but I'm pretty sure it's off patent now, hence the low prices.

Posted by Neil the Ethical Werewolf | June 14, 2007 4:34 PM

Just went to wikipedia and checked. The AZT patent expired in 2005, hence the current low prices.

Posted by Neil the Ethical Werewolf | June 14, 2007 4:38 PM

your comment at 3:38 is one of my nominees for comment of the year. - Jason

My brother's name is Jason. It'd be funny if you were he.

Anyway, as I said -- I'm one of the monkeys (as is my brother): I should know ;)

Posted by DAS | June 14, 2007 4:46 PM

Jason ... of course, you are not my brother -- we have different last names ;)

But Jason is a cool name, nu? As is David (my name) ... ;)

Posted by DAS | June 14, 2007 4:49 PM

I'm all for working out ways to drive down the costs associated with drugs, especially solutions that involve direct financial assistance to patients needing drug therapy. However, sticking it to "evil" pharmaceutical companies by taking away their patents will lower the price of drugs at the cost of arresting development of new drugs. The reason drugs are expensive is that it costs a lot of time and money - ten years and $800 million on average - to bring a drug to market. That involves a huge risk, and the reward of that risky investment is a patent that will allow the developer to make profits sufficient to pay for the cost of development. Most drugs don't even make it to market. Drugs that get to Phase III clinical trials and then shut down cost pharmaceutical companies hundreds of millions of dollars. So the only way I can conceive of taking away patents for drugs and still having a pharmaceutical industry capable of developing new medicines for yet-unconquered diseases like cancer and heart disease - as well as numerous genetic diseases - is for the government to subsidize the cost of research. This is already done in the case of so-called orphan drugs. Perhaps it is time to expand this potentially life-saving public/private partnership?

Posted by Chuck | June 14, 2007 5:04 PM

Re: I've had several insurance claims denied and the effort involved in straightening out what was covered and what wouldn't be covered and who would eat what cost probably cost the insurance company more money than they saved by having me pay the bills.

Think about this for a second: how did this cost the insurance company money? Yes, they paid for postage for the various mailings back and forth (and for envelopes and paper and ink). But those costs are pretty minimal. The people you dealt with are already employed by them and already on the clock or drawing a salary (they didn't have to hire anyone new to deal with your dispute). So for the price of a few stamps and envelopes they could try to save several hundred dollars (at least) in pay-outs. Not a bad gamble on their part, I think.

Posted by JonF | June 14, 2007 5:12 PM

"This is a replacement for the patent system, but a supplement to it for drugs that the market doesn't support research for, like malaria."

Then they really need to describe it differently. (Though the habit of reporters of describing what people have said, instead of quoting them, makes it hard to be sure who's at fault for the phrasing.)

"Edwards' plan would remove long-term patents for companies that develop breakthrough drugs and then reap large profits because of the monopolies those patents provide, according to a statement by Edwards obtained Wednesday evening."

Doesn't sound like a "supplement" to me.

Posted by Brett Bellmore | June 14, 2007 5:22 PM

Though the habit of reporters of describing what people have said, instead of quoting them, makes it hard to be sure who's at fault for the phrasing. - Brett Bellmore

And they seem to make the choice as to whom and when to quote vs. whom and when to paraphrase in way that accomplishes two things:

(1) by often quoting (with a sneer) the GOP spin (and identifying it as such) whilst paraphrasing what Dems. say (in a manner that makes it seem as if the Dem. views are those of the reporters) -- they maintain their own self-image as liberals and further the "liberal media" meme

(2) OTOH, because it's the GOP side that's precisely (if not accurately -- which lack of accuracy furthers the liberal media meme even as it whitewashes the GOP) represented in terms of the expertly crafted spin constructed to represent it whereas our side is misrepresented, the net result is a report that makes the GOP side out to be correct

Of course, this is anecdotal. Has anybody done a study as to who gets quoted and who gets paraphrased and by how much? I know a very conservative friend of mine also notices this phenomenon and takes this as a sign of liberal media bias although he sees how this may hurt Dems. more than help (be wary who your friends are, eh?). But I wonder -- how much do both the perception of the media as liberal and the paradoxical conservative de facto bias come from the same phenomenon of selective quoting vs. paraphrasing depending on the source?

Posted by DAS | June 14, 2007 5:37 PM

I wouldn't take Ezra's "just talked to someone in the Edwards camp" as gospel. In fact, I wouldn't take it as anything but rumor.

Posted by lemuel pitkin | June 14, 2007 5:39 PM

The people you dealt with are already employed by them and already on the clock or drawing a salary (they didn't have to hire anyone new to deal with your dispute). - JonF

That's how they are thinking: they have the people hired, so there is no cost to being persnickity and then dealing with any disputes as they happen. But if they didn't have to deal with all these disputes and decisions, they could, like any company with more people than work, restructure and lay-off people, nu?

There is a real cost for some of these things. My mom quoted me some figure (which I've forgotten) the phone company drilled into all their employees when she was a clerk there (30 some-odd years ago when it was "the" phone company) as to the cost of having a dispute vs. making sure the customer was well served in the first place. While increased (even back in those days a large organization like the phone company was fairly well on its way to computerization) computerization has lowered the costs of these matters, they still aren't trivial in terms of cost, presumably: not if you take into account that if there were fewer disputes, e.g., some departments could allow themselves to decrease in size significantly by attrition without rehiring, if they had less work they had to do.

Posted by DAS | June 14, 2007 5:43 PM

"Think about this for a second: how did this cost the insurance company money? Yes, they paid for postage for the various mailings back and forth (and for envelopes and paper and ink). But those costs are pretty minimal. The people you dealt with are already employed by them and already on the clock or drawing a salary (they didn't have to hire anyone new to deal with your dispute). So for the price of a few stamps and envelopes they could try to save several hundred dollars (at least) in pay-outs. Not a bad gamble on their part, I think."

When you buy a product, you are paying back the company for the cost of producing that product, which includes wages, which are paid on the basis of labor (often measured in time). If that time is spent on something useless, you are paying money to the company for wasting their employees' time. Paper also costs a lot when you consider the high volume of paper moving around major insurance companies (think of all of the problems you have with printers at work that lead to a lot of wasted paper).

In the late 19th/early 20th century, European continental free traders advocated the end of patents because they violated market principles by creating artificial monopolies. Somehow Edwards questions this and he somehow doesn't understand the free market? When his plan is "offering cash incentives instead would allow multiple companies to produce those drugs and drive down prices," he is trying to get closer to the free market than the current system. You can claim A here doesn't lead to B, but neither does the current system. Any system the fetishizes producers while scorning consumers is not a free market.

Posted by Reality Man | June 14, 2007 6:21 PM

I really fail to see how the government offering companies money for inventions the government approves of gets you closer to a free market, rather than a command economy. Patents have their drawbacks, especially the way the system is being gamed today, but they do at least make the "prize" a function of market demand, rather than bureaucratic demand, for an innovation. And thus enable innovations the government doesn't particularly want.

That said, I'm all in favor of a prize system for things the government wants, but for which there's no appreciable market demand.

Posted by Brett Bellmore | June 14, 2007 6:30 PM

That said, I'm all in favor of a prize system for things the government wants, but for which there's no appreciable market demand.

According to what Ezra's heard, that's the primary focus of the prizes in the Edwards plan: "it creates a separate and parallel track, a pilot program of sorts, wherein a committee would identify diseases and conditions that would benefit from alternative incentives for innovation, and offer prize money as the reward."

Diseases that primarily afflict the poor fall into this category. Since poor people (and especially the poor in other countries) don't have the money to generate proper market incentives for research, non-market solutions to their problems are necessary.

Posted by Neil the Ethical Werewolf | June 14, 2007 6:39 PM

"According to what Ezra's heard, that's the primary focus of the prizes in the Edwards plan:"

You'll note that I said that, if that's the focus, then they did a really bad job of explaining it in that news report.

I'm always open to the possiblity that the media have done a terrible job of explaining somebody's position. That's why I wish they'd do more quoting, and less explaining. They're really bad at explaining, probably because they don't put a lot of importance on understanding whatever they're explaining.

Why do they do it, anyway? I suspect it's the same primal urge that makes a dog mark his territory: They don't feel it's their story if too may of the words are somebody else's.

"Diseases that primarily afflict the poor fall into this category."

In developed countries, at least, diseases which primarily afflict the poor are almost always diseases for which the most cost effective 'treatment' is prevention... prevention being why the well off don't get them. But, yeah, I can see real utility in a prize for treatments for diseases prevailent in the poorer countries, like malaria.

Posted by Brett Bellmore | June 14, 2007 8:43 PM

Re: But if they didn't have to deal with all these disputes and decisions, they could, like any company with more people than work, restructure and lay-off people, nu?

Well maybe they could get rid of a lawyer on retainer if they weren't worried about disgruntled suscribers talking them to court. But they'll still need the customner service people and claim adjudicators. Medicare and Medicaid have those people too (and both programs also deny claims just like private insurers do). I've explained this repeatedly on multiple forums every time this topic comes up: there are no big savings to be had in health insurance employment, because most of the employees would be just as necessary under a public system (especially with universal coverage!). At most we'd get rid of a lot of redundant executives and marketing people, but not the folks who do the grunt work. Public healthcare programs, both here and abroad, do not find their savings by laying off workers; they find them by paying providers less, generally a whole lot less, for exhibit A of which, see Medicaid reimbursement rates.

Posted by JonF | June 14, 2007 9:16 PM

So if demand is inelastic, then the patent should be either denied or short-lived, due to its abusability...which raises the incentive for pharmaceutical companies to focus on maintaing conditions, which are often elastic in nature.

However, if patent length and inelasticity of demand dovetailed, then the onus would be on pharmaceutical companies to produce medications of import, which is desirable.

Therefore, cash incentives could be a viable alternative, as market forces and life-saving innovation are at loggerheads if intellectual property rights are fiddled with.

Posted by EpicureanQuaker | June 14, 2007 11:09 PM

[i]"The people you dealt with are already employed by them and already on the clock or drawing a salary (they didn't have to hire anyone new to deal with your dispute). So for the price of a few stamps and envelopes they could try to save several hundred dollars (at least) in pay-outs. Not a bad gamble on their part, I think."[/i]

Uhhh...you do realize all those people weaving the web of bureaucracy being dealt with are paid, right? To solely perform that action? All day?

Posted by EpicureanQuaker | June 14, 2007 11:21 PM

"Patents have their drawbacks, especially the way the system is being gamed today, but they do at least make the "prize" a function of market demand, rather than bureaucratic demand, for an innovation."

Except the point of the Edwards plan is to prevent an obstruction of market mechanisms - government-granted monopolies - by creating the incentives for innovation while also allowing for multiple firms to compete, thus driving down prices a la the free market. Isn't the market's Darwinian competition supposed to lead to innovation according to capitalist theory?

Posted by Reality Man | June 15, 2007 2:23 AM

It's amazing how quickly "libertarians" turn anti-market when the market interference helps rich people. All means of giving innovation rewards above competitive market levels are based on government interference.

As was pointed out above, there is no reason invention prizes cannot be pegged to market demand for a product. And this could be a good measure of actual competitive market demand, not demand for an item that is priced at an artificially high level due to government policing and restrictions on the market. Patent rewards are pegged not to market demand, but to the monopoly profit maximizing price/quantity combination, they create an artificial incentive to invent drugs that will require many uses by rich people, instead of small number of uses by poorer groups.

And in any case, the argument that government can't tell what drugs are valuable is silly. "Ummm, cure for cancer...who would think we need *that*?" Medical drugs are probably the area where it is easiest to tell what would be useful to have.

Posted by mq | June 15, 2007 2:33 AM

"As was pointed out above, there is no reason invention prizes cannot be pegged to market demand for a product."

Yeah, that's what a patent system does. Under a patent system companies pursue a product because they think the market would have a demand for it. Patents, under a properly run patent system, have a worth directly related to market demand. They just let the inventor or his assignee capture all that demand for a limited period.

A prize system, by contrast, can, at best, peg the prize to somebody's idea of what the market demand for an innovation ought to be. With massive political interference, you may be sure. Not many prizes for new birth control drugs under a Republican administration, I bet. Or new firearms innovations under a Democratic one.

As has been pointed out, the whole purpose of the prize system is to produce innovation in areas where there ISN'T market demand. So let's stop pretending it's an attempt to make the system more market oriented.

Posted by Brett Bellmore | June 15, 2007 9:35 AM

...sticking it to "evil" pharmaceutical companies by taking away their patents will lower the price of drugs at the cost of arresting development of new drugs.

This commenter gets it right.
I am always amazed at the amount of energy spent trying to unravel simple economic laws. Jawboning works somewhat in politics, but not with human nature.

Posted by Fred Jones | June 15, 2007 9:58 AM

As has been pointed out, the whole purpose of the prize system is to produce innovation in areas where there ISN'T market demand. So let's stop pretending it's an attempt to make the system more market oriented.

No, the opposite in fact was pointed out.

There IS market demand, but there is not enough profit incentive for the larger manufacturers, and there is structural hinderances that keep would-be smaller producers from acting on that market demand.

Posted by Thunderlips | June 15, 2007 2:29 PM