In the Market for Affordable Medicines

Patents and pandemics.  At first, these two things might not seem too related.  Beyond patenting useful things for a pandemic – personal protective equipment, medicines, etc. – what do they have to do with one another?  Well, it turns out that the COVID-19 pandemic has put the spotlight on how to make patented medicines affordable.

Let me back up and explain.  Drug companies want patents for their drugs because it gives them a de facto monopoly.  After all, no other company can make and sell that patented drug until the patent expires (usually 20 years from the date the patent application was filed, although this gets complicated with  FDA regulations, because a company still needs FDA approval to sell).  Because the drug company has an effective monopoly, it can charge really high prices for its drug – at least barring any regulations that limit prices.  We’ve seen this happen over and over again, and the prices of essential medicines are only continuing to go up.

After the patent expires, the drug company can no longer prevent others from making and selling that drug.  So other drug companies start making and selling equivalent versions of the drug. These are known as generics.  Suddenly people have competing drug options to choose from.  Generic drug companies want more sales, so they price their drugs cheaper than other companies to compete for sales.  This pattern of patents expiring, generics entering the market, and prices dropping has happened again and again.  Competition leads to lower prices – but this is only possible once patents have expired.

The High Cost of Free Markets

Generic competition helps make medicines affordable after a patent has expired, but what can make medicines affordable before the patent expires?  A pharmaceutical corporation might have a de facto monopoly for 12 or 13 years.  That’s a long time for patients to have only expensive treatments available.  After all, even if there are multiple patented drugs within the same class of drugs, they can all be priced very high as long as there is still life on the patent(s).

Photo by BP Miller on Unsplash. Licensed under the applicable terms of the Creative Commons.

This is where the COVID-19 pandemic comes in.  Given the vast scale of the pandemic, many drug companies have been working on vaccines.  And now, even though these vaccines are being patented, many of the vaccine manufacturers are promising to price the vaccine affordably (at least in the U.S., and during the pandemic).   The U.S. has already approved three vaccines for emergency use, with more expected to enter the market soon.

The Visible Hand Pushing Prices Down

Free market economics tells us that these COVID-19 vaccines should be priced very high.  Demand is high, as billions of people want to be vaccinated, but supply is extremely low.  Yet drug companies are pricing vaccines more affordably. Why is that?

For one thing, public pressure is compelling drug companies to price COVID-19 vaccines lower than they normally would be.  The pandemic has killed hundreds of thousands of Americans and severely dented the economy.  Collecting high profits from this pandemic would not be a good look for drug companies and could provoke the U.S. government to take more direct action to lower prices, such as granting compulsory licenses.

On top of that, companies’ usual excuse for high drug prices isn’t present during COVID.  Drug companies usually say that research and development (R&D) costs keep prices high.  For years, drug companies have been saying that patents are essential to their business models because the monopolies that come with patents help to recoup expensive R&D costs not only for marketed drugs, but also the many they investigate that are not commercially viable.  But it seems like governments have funded most, if not all, of the COVID vaccine R&D costs, so there might not be a legitimate reason for high-priced COVID vaccines.

The distribution chain of medicines is really complex in the U.S..  There’s usually not a single entity buying a medicine.  Instead, many different private insurance providers and government health insurance programs are independently vying to negotiate drug prices.  COVID is a unique case for the U.S., because now a single entity – the U.S. federal government – is purchasing vaccines for everyone.  This could play a role in the lower costs too. When there’s only one buyer with massive buying power, that can help lower prices. 

From Free Markets to Affordable Markets

What can we learn from this pandemic about making medicines affordable in the future?  Thinking just about COVID vaccines, prices may or may not stay affordable in the U.S.  Manufacturers made their pricing commitments for the duration of the pandemic (and some companies defining the end of the pandemic as soon as this summer), but what about after?  Researchers are already suggesting that COVID is likely to stay with us for years, with some suggesting that COVID vaccines could become a yearly thing, like the flu shot.

One takeaway from this pandemic is about the power – and limits – of public pressure.  Many have made a strong moral argument for drug companies to price vaccines affordably, and it seems to be working.  But it has taken a huge amount of effort to build this pressure just around COVID vaccines.  It doesn’t seem sustainable to do this for the hundreds of other essential and expensive medicines people need.

It’s a hard problem.  The free market isn’t going to fix this, mostly because not all medicines are in a free market. Patented medicines are insulated from competition.  And the U.S. can’t unilaterally get rid of patents.  Due to international treaties and subsequent free trade agreements, there are policies the U.S. can’t change, like decreasing the length of patents below 20 years from filing.

The U.S. needs to better prioritize protecting public health and should intervene in the market.  The U.S. already has several powers through U.S. law – powers allowed by international treaties – that could help fix the patent premium in the market.  In addition, beyond patent laws, the US could reverse a perverse Medicare rule barring the government from negotiating drug prices.  This has been repeatedly proposed, but never enacted.  We need to take this opportunity to learn what works and what doesn’t so we can make medicines affordable for all.

Keep a look out for my next post where I’ll talk about some of the powers the U.S. has to make medicines affordable!

Scott Hulver
Assistant Blogger
Loyola University Chicago School of Law, JD 2022