By Dean Baker / Center for Economic and Policy Research
California’s Governor, Gavin Newsom, announced plans last week for the state to set up its own manufacturing facility to produce low-cost insulin for California residents. This is a great idea.
Insulin is an old drug that can be produced as a cheap generic, which is the case almost everywhere else in the world. A monthly supply of insulin in Canada costs $12, in Germany $11, and in Italy $10. In the United States, it costs on average around $100, and in many cases, people are paying several hundred dollars a month for their insulin. This is a tremendous burden on people, especially when they are retired or unable to work because of their medical condition.
The reason that drug companies can get away with charging high prices for an old drug is that they have made modifications, for which they hold patent monopolies. While these modifications may be of limited value, they allow the companies to charge patent monopoly prices, if they can convince doctors to prescribe the modified versions for their patients.
Newsom’s proposal will mean that there is a large supply of low-cost generic insulin available. If patients still want to get the latest patent-protected versions (many modifications to insulin are already off-patent), they could still be looking at very high prices, but presumably most people in need of insulin will get the generic version.
Newsom is not the only one taking the lead in providing low-cost generic drugs. Mark Cuban has created a company that sells low-cost generic versions of a wide range of drugs. Part of the story here is that many people do not realize much lower cost generic versions are available of brand drugs that have gone off patent. Cuban’s company can help publicize this fact.
Another issue is that brand drug manufacturers can often intimidate generics from entering a market, even after its patents have expired. It is common for a company to hold dozens of patents for a drug. While only a small number may actually involve real innovations, the company can threaten to sue for patent violations for all the patents it holds.
There is an enormous asymmetry in this situation that hugely works to the benefit of the brand manufacturer. In addition to likely being a larger company, with deep pockets to fight legal battles, the brand company is fighting for the right to sell a drug at monopoly prices. The brand manufacturer is fighting to be able to enter a competitive market, sort of like selling pencils or paper clips. Given the enormous differences in potential payoffs for winning, many generics will simply give up on plans to enter a market if they anticipate a lengthy and expensive legal battle.
This is where someone like Newsom or Mark Cuban can play an important role. They both have deep pockets and the legal personnel to push a high stakes patent fight with major drug manufacturers. It is unlikely they will be chased out of a market, unless the drug companies have a clear case.
But, fighting the abuses in the generic market are the smaller part of the story. Roughly 80 percent of the $530 billion or so that we will spend on prescription drugs this year will be on brand drugs. This comes to more than $400 billion, roughly $3,000 per family each year. There would be enormous savings if these drugs were sold at generic prices.
Typically, the price of generics would be less than 10 percent of the patent protected price and often less than 5 percent. Drugs are almost invariably cheap to manufacture and distribute. It is patent monopolies that make them expensive.
The industry will of course point to the fact that they spend substantial amounts on the research and development of new drugs. This is true, but we don’t have to rely on the industry for this funding. We already spend more than $50 billion annually on biomedical research, primarily through the National Institutes of Health.
Most of this funding goes to more basic research, but there is no reason that we could not increase the funding and dedicate the additional money to the development and clinical testing of new drugs. In this case, since we have paid for the research upfront, the drugs developed on the government’s dime can be sold as cheap generics from the day they are approved by the FDA.
There are many reasons for preferring publicly funded open-research, rather than granting patent monopolies to compensate for spending after the fact. But, at the most basic level, it should be obvious that it does not make sense to charge patients, who are typically in poor health, thousands, tens of thousands, or even hundreds of thousands of dollars, to cover research that has already been done. This is an invitation to the nightmares that millions of families have had to endure in either paying for drugs themselves or getting an insurer to cover the cost.
It is hard to create the momentum for big changes in public policy, especially when the process involves confronting a huge powerful foe, like the pharmaceutical industry. The best route for getting to a generic drug market is to create facts on the ground, like the widespread availability of cheap insulin and other generics.
Building on this, the state of California, Mark Cuban, or some other billionaire, who cares about public health, could decide to finance the development of new drugs in specific areas. This would demonstrate that we don’t have to rely on patent monopolies to develop new drugs, and also that important new drugs can be cheap. We can argue all day about the relative effectiveness of patent-financed research as opposed to direct upfront funding, but if we have actually developed new drugs through the latter channel, there is nothing to argue over.
We can’t know if Governor Newsom’s plan to produce insulin is simply a one-off gesture designed to get publicity for an ambitious politician (not that this would be a bad thing) or whether it may be a step towards larger reform of our prescription drug system. In any case, it is a big and important step which should be applauded.
 I outline a way to channel the funding in Rigged, chapter 5 [it’s free]. It is loosely modeled on the system of military contracting, using prime contractors, by the Defense Department. A big benefit of a system of publicly funded biomedical research over military research is that there is no need for secrecy. A requirement for fully open research should make impossible many of the abuses, that characterize military contracting.