Patent buyouts would accelerate pharmaceutical innovation and reduce high market pricing

There is little doubt, and much evidence, that innovators respond to expected future profit. People are drawn to problems for which the rewards are great. We have seen this in our own work; one of us is a health care economist who studies innovation and the other a consultant who advises innovators in the health sector. There is little doubt, and much evidence, that innovators respond to expected future profit. People are drawn to problems for which the rewards are great. We have seen this in our own work; one of us is a health care economist who studies innovation and the other a consultant who advises innovators in the health sector. The current dispute over drug price negotiations is a good time to consider alternatives to the patent system that may better align the incentives for innovation with the needs of patients and society. One such alternative, patent buyouts, has been proposed by Michael Kremer, University of Chicago economist and Nobel laureate. Kremer’s — articulated more than two decades ago — was inspired by the example of the patent for daguerreotype photography, which the French government purchased in 1839 and placed without charge in the public domain. As a result, this early form of photography was rapidly adopted worldwide. Kremer’s plan envisions offering innovators the option of selling their patent rights to the U.S. government at prices equivalent to their estimated private value as determined at auction. The government would then make the innovations available to the public without requiring a licensing fee. Patent buyouts eliminate many of the distortions that arise from today’s pricing model because the value of the innovation would not need to be recouped through market sales at monopoly prices in a fixed time frame. Under the buyout system, almost all new drugs would be sold and priced like generics. The social gains would thus be greatest for new drugs that would otherwise win a high price in the current system — typically branded drugs with few competitors. Life-cycle management would be a thing of the past. Indeed, this system, as with daguerreotype photography, might accelerate innovation by stimulating follow-up applications of the original discovery. A patent buyout scheme is no panacea and presents many practical challenges. Auctions would have to be carefully structured to determine the correct price and, in some cases like antibiotics, additional subsidies might still be required to support adequate innovation. The government could misuse its purchasing power and force the sale of patents at confiscatory prices. Financing the purchase of patent rights will also require careful thought. These practical challenges, not to mention the political challenges of reforming the patent system through an act of Congress, are daunting. However, it took nearly 40 years to authorize Medicare coverage of outpatient prescription drugs and an additional 20 years before CMS began to negotiate drug prices. Great change is often impossible until, suddenly, it is not. With the advent of this new era of drug price negotiation, now is the time to think about the changes needed to keep the engines of innovation in health care running far into the future.