Congressional Testimony: Intellectual Property and the Price of Prescription Drugs: Balancing Innovation and Competition

Abstract

There is debate among scholars as to whether patent law provides more benefit than harm. Some studies of the patent system purport to show that patents do not increase invention that much and therefore the monopoly effects of patents cause more harm than the benefit from the additional invention that patents incentivize. But even studies casting doubt on patent law’s efficacy generally tend to find that in the area of pharmaceuticals,1 patent law has a large, positive effect on social welfare by providing incentive for significant levels of drug development that otherwise simply would not occur. While some patent protection is beneficial, too much protection can be socially harmful. The optimal level of patent protection is enough protection to incentivize a substantially beneficial level of new drug development, but not so much as to allow monopoly pricing of new drugs once the initial investment (including adequate returns to investors for the risks and costs incurred) has been adequately recouped. Every year of patent protection beyond what is necessary to adequately incentivize drug production results in higher prices to insurers, employers, patients, and hospitals.

The deadweight loss to society from monopoly prices on drugs beyond the time needed for adequate incentive is not only costly, but it means some patients simply will not have access to certain drugs, and will suffer the adverse health consequences that could have been treated. It is thus critically important to find the right amount of patent protection (in terms of breadth and duration) that encourages adequate drug development but does not provide inefficiently long monopolies. There are several avenues of legal reform that could assist in protecting this balance, including the pending CREATES Act, the practices known as “pay for delay” and “evergreening,” and the subject of “patent thickets.”