Patent Buyout Plan for
Prescription Drugs

There were roughly three billion prescriptions filled in 2002 (source - The 2002 Guide to Prescription Medicines by J. Rybacki ) and surely some multiple of that of over the counter drugs like aspirin, cold syrup, antacids, etc. This is number that can only increase in coming years as our population ages and evermore alleviators and cures are discovered and brought to market.

A significant portion of those drugs are priced well beyond the cost of production. This happens primarily because of two related factors:
  1. The manufacturer has significant, even excessive, development costs. ("The cost to bring a new product to market more than doubled in real terms to over $200 million between the 1970's and 1980's .... Total time for development of a new drug, from earliest discovery to market approval now averages twelve years." PETER WILLIAMS, B. SC. - Senior Manager at Harvard Medical School's Office of Technology Licensing & Industry-Sponsored Research. Click here for full paper.)

    Those costs have to be recovered.

  2. There is no competition in the marketplace for drugs under patent. Patent life for a drug is currently 20 years, not counting any extensions that may be awarded because of delayed introduction while going through the FDA approval process.

    Patented drugs are not priced according to production costs, but according to what the drug company thinks the traffic will bear, certainly high enough to recover development costs as quickly as possible. Further, it's a reasonable assumption (and circumstances seem to bear out) the drug company doesn't bring prices down significantly after those development costs are recovered.

    Clear evidence of that is the marked decrease in price as a patent expires (often well in excess of 50%-75% or even more) and other companies manufacture it. More evidence is when a drug is deemed safe enough to be sold over the counter with no doctor's prescription required, which widens the market and consequently lowers the price, though nowhere near as much as when a patent expires and competing formulations enter the market.

Government Purchase of Patents.

  • A proposal floating around internet circles proposes the Government buy out the patents from the drug companies. (The original author of the proposal is unknown.) The patents would then be put into the public domain for ANY drug company to utilize. This would rapidly bring the consumer drug costs down to production levels and wring out any excess profits in the drug (an inevitable result of protected patent pricing).

    Proposal Financing

  • The buyout proposal does not address financing of the purchases (presumably it would be out of general taxes, which would be a tough sell in Congress). I propose the drug patent purchases be financed with a surcharge of $1 on ALL prescriptions (even those out of patent,), and $.01 on ALL dosages. For example a 30 day presciption of a medicine required twice a day dose would have a total surcharge of $1.60.

    Additional revenues for the program could be raised with a minimal surcharge of $.10 on over the counter drugs as well, i.e. aspirin, cough syrups, antacids, etc. A dime isn't really very much to add to a product that typically costs $4 to $5.

    What this would do is spread the cost of of the buyout proposal across virtually the entire population and would less than minimally impact everyone, even the most ill and the neediest.

    If Dr. Rybacki's estimate (3 BILLION prescriptions a year) is anywhere near correct, the money available for patent buyouts would easily be somewhere between 5 and 10 billion dollars a year, and possibly double that, or more, with a $.10 surcharge on over the counter drugs.

    At the low end of the estimate, the government could purchase 25 drug patents a year (assuming a purchase price of $200M each - according to Peter Williams above). Surely all the patented drugs, or even a significant fraction, wouldn't cost that much or even anywhere near that, as few actually cost $200M to bring to market and many will have been on the market for some time, having already amortized their development costs considerably.

    Possibly, rather than paying cash upfront for a patent, the patent purchase could be leveraged by financing it over the patent life left with notes secured by the surcharge income stream. This would allow for the purchase of maybe hundreds of drugs, rather than dozens, in the early years of the program, reducing consumer costs over a broader spectrum of consumers much faster.

  • The Government could license companies to manufacture the purchased patent drug at some reasonable licensing fee, maybe $1 per prescription, to bring down the outright patent purchase price. I personally don't think it's a reasonable thing to do. The people will have already paid a surcharge and this just increases it, though not significantly.

Advantages of the proposal are:

  • Rapidly accelerates the introduction of price competition to the drug marketplace. Competing companies will be quick to jump into the market if there are profits to be made and they have minimal introduction costs (someone else will have done the upfront expensive developmental research).

  • Brings cost of medicine down for ALL purchasers, especially government programs like Medicare, Medicaid, Veterans Administration and large bulk purchasers like health insurance companies, HMO's, etc.

    This will in turn, reduce premium costs to the insured and to taxpayers overall who pick up prescription costs through Medicare, etc..

  • Will dramatically expand the overall availability of medical care as lower income and uninsured segments of the population will have more affordable access to needed drugs.

    Asthma, for example, is a serious problem in many of the inner cities. It's not unusual for patented asthma drugs to run $200 a month or even more. Very few of uninsured moderate, much less lower, income folks can afford that kind of outlay. If the drugs were available for closer to the cost of production, say $20 or $50 or even $100, as they would if there were open competition in the marketplace, they would be available to a lot more people.

    More affordable drugs would reduce Emergency Room visits and hospitalizations for conditions that worsen because people can't afford the preventive therapies many prescribed drugs offer. Now they necessarily wait until their situation becomes grave enough to necessitate hospitalization, at a much greater expense to:

    1. themselves (they lose work time);

    2. their employers (lost productivity);

    3. the government (because it picks up part of the tab);

    4. health insurance companies (because they have to pick up a part of the cost the govt doesn't);

    5. worst of all those uninsured who pay out of pocket (because actual hospital costs are inflated to cover costs of treating the indigent patients not picked up by insurance companies or the government).

  • Minimally infringes on the free enterprise and capitalism systems which encourage new medicines and research by private companies. (An intangible side benefit for the drug companies would remove that stigma of "heartless profiteering" because of the unseemly and uncomfortable public perception they are excessively "profiting" from the misfortunes of people.)

  • Allows, even encourages, the search for otherwise "non profitable" medicines that treat rare or unusual ("low market potential") diseases. This will be a natural offshoot of such a program as drug companies will have a reasonable expectation of recovering development costs.

Disadvantages of program are:

  • Drug companies will likely see it as limiting their future potential from (excessively) profiting from vastly lucrative products (like Viagra or Minoxydil or AZT for example).

    (This fear could be offset by a sharing mechanism in the surcharge. The developing company could receive a percentage of the surcharge on every sale of the particular drug they developed. That way, they would still be profiting every time the drug was purchased, regardless of whom actually manufactured it.)

  • Large Drug Companies will be concerned their advantage of size in the marketplace will be diminished if smaller companies can make generic derivations of their previously proprietary drugs.

  • Does increase the consumer cost, albeit insignificantly, for those drugs out of patent protection.

  • Research and development cost exploitation. Inflation of these costs is likely for reimbursement purposes.

  • Quite possibly, even likely, there will have to be coercing legislation mandating drug companies to sell their patents into the public domain. This will not be a popular cause in some quarters of the political spectrum.

    If the program is administered objectively and the drug companies are reasonably compensated, there can be no rational resistance. In this case the public good clearly outweighs any narrow private interest, not unlike the power of public domain for a highway right of way for example.


  • Surcharge collection should be at retail Point of Sale, i.e. drugstores. If introduced earlier in the distribution or manufacturing chain, the surcharge cost is likely to be artificially inflated as many/most operations use an added percentage of their costs as a markup. For example, if a company uses a 25% markup (a low figure) and the surcharge is a dollar, then the surcharge will "invisibly" swell to $1.25 at that stage.

    As there are usually at least 4 links in the chain (Manufacturing - Distribution - Dealer - Retailer), one can see the effect on end user costs. If the manufacturer paid the surcharge and each link used a 25% markup, the initial $1 cost would swell to nearly $2.50 to the consumer with only $1 of it going to the purchase program.

    Virtually all drug outlets (drug stores - supermarkets - even convenience stores in the case of OTC drugs, outlet and "wholesale to the consumer" stores, bulk purchasers of drugs like government programs, mail in prescription plans, etc.) are computerized, and placing the surcharge collection burden on these outlets will be effectively painless. All it takes is a relatively minor change in their computer programs to keep track of surcharged sales.

  • An agency will have to be set up to administer the program and it logically should be in, but not of, the US Department of Health and Human Services.

    This will not be a trivial undertaking (even on a government scale) and the agency will have to have some reasonable autonomy to make decisions on which drug patents to purchase first (hopefully in time all drugs will come under the program), and how much to pay for each patent.

    Each application will have to be scrutinized as to the "purchase price" to ensure the development costs haven't been artificially inflated by the drug company.

    (Personally I don't see this as a problem, as long as the costs are not wildly inflated. I don't care if the patent purchase price is two or three or even ten times the true development cost, if it will bring down that $200 a month asthma treatment to $60 instead of $50 (for example) because of inflated purchase costs, for example.)

  • An oversight panel should be established to direct the agency. As members, I would suggest maybe three representives from each of the following:

    1. The National Institutes of Health.
    2. The Center for Disease Control.
    3. The Surgeon General's office.
    4. The drug companies (appointed by Congress from a list proposed by industry).
    5. Consumer advocates (appointed by Congress).
    6. Business school professors (appointed by Congress). To offer opinions on proposed acquisition costs - in case of "wildly inflated" drug development estimates.

    That should be a broad enough spectrum to blunt any bias towards any one interest of the affected parties.

End of Patent Drug Buyout Plan

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