Pharmaceutical Pricing When Success Has Many Parents

Abstract

Count Caleazzo Ciano, the Italian diplomat and son-in-law of Mussolini, was the first to observe that “success has a hundred fathers.” Anyone who has worked hard on a team project and then seen others claim more credit than they deserved will understand what Count Ciano meant. When pharmaceutical companies bring new drugs to market, they invariably take credit for the discoveries and routinely charge thousands, tens of thousands, hundreds of thousands, or even millions of dollars for them. But in most instances, pharmaceutical companies are not solely responsible for the research and development that results in new drugs. The initial (basic) research is typically conducted at public institutions, and is paid for with public funds from the National Institutes of Health (“NIH”) or other public sources.

Many people seem to believe that pharmaceutical companies are overclaiming – meaning that the public is “paying twice” for drugs – once when tax dollars pay for research and a second time when patients buy the drugs and use them. How involved is the federal government in developing new drugs – and in what ways? How often are patients actually paying twice for their pharmaceuticals – and what does paying twice actually mean? Is paying twice a problem and, if it is, what should we do about it? To answer these questions, one must work through complicated factual, legal, and philosophical puzzles. In this article, we lay out some basic facts and highlight these difficulties.

In Part II we document the prevalence of the “paying twice” critique in the debate over pharmaceutical pricing. Part III presents case studies of two drug regimens (Sovaldi and PrEP), which help illustrate the diverse ways in which the government is involved in pharmaceutical R&D. Part III also reviews the empirical evidence on the role of government funding in the development of new drugs and medical devices. Part IV provides a theoretical framework for analyzing the dynamics when two or more parties contribute to the creation of a valuable asset and discusses the possibility of using prizes instead of patents to incentivize drug development – thereby protecting consumers from high drug prices and deadweight losses.

Keywords: paying twice, Bayh-Dole, drug pricing, R&D

JEL Classification: K20, K23, K32