Russ Roberts

Richard Epstein on Property Rights and Drug Patents

EconTalk Episode with Richard Epstein
Hosted by Russ Roberts
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Richard Epstein of the University of Chicago and Stanford University's Hoover Institution talks about property rights, drug patents, the FDA, and the ideas in his latest book, Overdose: How Excessive Government Regulation Stifles Pharmaceutical Innovation from Yale University Press.

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Readings and Links related to this podcast

Podcast Readings
HIDE READINGS
  • Overdose: How Excessive Government Regulation Stifles Pharmaceutical Innovation at amazon. Yale University Press, 2006.
  • More podcasts with Richard Epstein:
  • Peltzman on Regulation Podcast with Sam Peltzman
  • Patents, by David R. Henderson, in the Concise Encyclopedia of Economics
  • Hatch-Waxman Reform and Accelerated Market Entry of Generic Drugs: Is Faster Necessarily Better? Sarah E. Eurek, Duke U., 2003.
  • Patent Laws and the War on Good Drugs Morgan Rose, Teacher's Corner on Econlib, 2001.
  • Highlights

    Time
    Podcast Highlights
    HIDE HIGHLIGHTS
    1:01Property Rights. What's the case for patents? For physical property, public vs. private property division is effective: roads are open for common use, other land is invested in when future reward is promising. Intellectual property--ideas--analogous: sensible division into public vs. private. Copyright, patents, trade secrets, trademarks. You can't patent the common-use words "Good Morning". But once you have this common domain of language, how do you then get people to make investments in new ideas? Consumer surplus.
    6:17Intellectual property and ideas differ from land, resulting in time limits for property rights. How long should limit be? Twenty years for a utility patent is U.S. standard, but for pharmaceuticals the effectiveness has been cut into by increasing length of FDA approval process. Big rewards if drug works, but big, risky, long-term investment costs. Lipitor example. 1984, Hatch-Waxman act: time extensions granted while in patent process. "The longer the process drags on, the less effective are the patents." Pfizer cholesterol example.
    10:39Patent creates incentives, but the profits themselves are not available to use to fund R&D. Patent office, claims have to be centralized. But which patents filed are private. New entry is always possible, even for close substitutes, creating competition. The competition has been estimated to leave 3/4 of the consumer surplus to the public. Eliminating drug patents would thus kill the goose that lays that golden egg.
    14:20How much incentive do we want to give pharmaceuticals to innovate? Is public itself selfish to demand 100% of rewards with nothing to pharmaceutical companies? Adam Smith. But patents do create problems in some industries. Software example: Microsoft, Apple: lots of small patents. Infringement of patent, shutting others down. How do you draft rules that work? Pharmaceuticals so far are closer to skyscrapers than to software code. Primogeniture. "Small broken things don't work well if all of them have to combine, but paradoxically, if you've got ten guys, each of whom has a viable factory, the last thing you want those guys to do is to fix prices, because at this point it becomes a monopoly."
    20:45Is there too much innovation afforded by sticking with the original 20-year goal? Third-party payments (by government, insurers) in the U.S. have increased. Doesn't that change incentives in the opposite direction, creating excessive demand? Some insurers negotiate prices and use HMO clout to lower prices for specific drugs in specific markets. Tension created in prices in part because pharmacies (drug stores) have to carry full range of drugs. Result: "No two people pay the same price." Private controls. "You can't have marginal cost pricing." There's no allocation over subsequent users of the product, so you get differential pricing. Brazil, Canada. "The longer the supply-chain, the greater the chinks in the armor." Labelling, purity, scare tactics all contribute.
    28:30What if the FDA didn't exist? Would that give drug companies incentives to dilute drugs? No. Underwriting labatories. Counterfeit drugs are less traceable when long supply chains are involved. How do you distinguish faked trademarks from contaminated or fake drugs? Who should enforce criminality questions? Generic drugs are not the same, have to shop. Which generics are close and which are weak or not so good? How do you find out? Do HMOs or doctors help sort that info out? Hot and new drugs catch attention. Blood pressure, diabetes: markets with high variation of success also have high demand. Philipson, Lakdawalla: Total drug sales go down when they become generic. Advertising correlated with brand names.
    39:29Ads for drugs, speed reading of warnings. Is FDA relatively ineffective because it over-regulates or because it under-regulates? Uncertainty: When you have to make judgments, there are two kinds of error: 1. Using something that ought not to be used (Type I error), or 2. Not using something that ought to be used (Type II error). Politicians primarily worry about Type I. Banning all drugs would prevent Type I errors! But some equilibrium or middle ground is more reasonable. Where and what are the costs of figuring out a good middle ground? Inferior treatments. V.A. hospital example. "If you can give a person an additional healthy year of life, for most people it's worth several hundred thousand dollars." Introducing a drug two years later is a huge hit. What's the right strategy for risky drugs? Strong drugs can do great things but may have side effects. Strategy is to aim for that; but if government bans it afterwards, those for whom it worked hoard it.
    48:13We're all different, but we are all ignorant. Should individuals have right to make decisions about risk and return even if they might die if they make the wrong decision? Any particular drug results in some dreadful screwups. But you have to look at the top side of the tail as well as the bottom side of the tail. Is person elderly, using alcohol, drinking grapefruit juice (which interacts with large numbers of drugs), near-sighted, taking multiple drugs and making a mistake? Best strategy for family members may be check to avoid foolish errors.
    52:41Paradox: Visible harm results in paying a political price, so on the one hand, government takes less than optimal risk. But bureaucrats are insulated from responsibility, so might they take more than optimal risk? What is the balance? Is result just big fixed cost of compliance, resulting in giant companies, with lots of restrictions? When the bootleggers and Baptists (Bruce Yandle) play out, how does it work out currently in the pharmaceutical industry? Peltzman. Political coalition for an overly zealous FDA? If you go too far trying to create a monopoly, you may not have drugs in the market. Companies know this trade-off. PDUFA (Prescription Drug User Fee Act): drug companies pay FDA user fee to speed up process. Small guys sometimes go it alone or sometimes assign patents to large company to do the clinical trials--but small guys shop around and come out pretty well of late. Trade associations. Kefauver Amendments. Folks who now are pushing for higher quality are trial lawyers. Where are the doctors on these issues? Doctors have mixed incentives. They have leeway to stretch the use of legal drugs for in-process uses that are unauthorized, and neither they nor their patients may want to disrupt that usage by fussing with the chain of politics. But in saving people by recommending these uses, they are also not allowed to warn about side effects, which would suggest that there have been studies!

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    COMMENTS (7 to date)
    alvin writes:

    Russ,

    Fascinating topic. Almost finished listening to your show with Epstein. I was going to suggest a show on patents and intellectual property. This area is too important to ignore. I think you should have a post on this stuff every week. Our economy, jobs and personal lives (prescription drugs, video games, buying/selling on-line, and personal software) depend more and more on the protection of patents.

    ChrisW writes:

    Does anyone have a citation for the Philipson Lakdawala paper mentioned at minute 34?

    Lauren writes:

    Hi, ChrisW.

    I'm not sure exactly which one it is, but a list of Lakdawalla and Philipson's papers with summaries and links to the text can be found here:

    http://works.bepress.com/darius_lakdawalla/doctype.html

    Arnie Kriegbaum writes:

    Every week I am impressed by the utter calm with which Russ and almost all his guests discuss what could be very emotive topics given that billions of dollars ride on the social and economic policies that they discuss.

    Paul Bailey writes:

    Interesting topic.

    As a note for those interested in the quality of generics, this web page outlines FDA's process, which require that a generic have Bioequivalence, "The generic version must deliver the same amount of active ingredients into a patient's bloodstream in the same amount of time as the pioneer drug."

    Regarding the drop off in use of a drug after it is off patent protection, Dr. Epstein claims that this is probably due to a decrease in advertising. He then bemoans this as a loss of patients finding useful drugs. Is there a paper that shows how advertising helps patients get diagnosed or treated for diseases that they didn't previously know they had? What are the effects of pharmaceutical advertising?

    There is also some interesting ground with respect to the patents and drugs in that targets are not patentable. Targets are things that drugs are supposed to affect and they are not patentable. Because of this we see a lot of development of so called "me too" drugs that are highly similar but have a few changes to get around the patent while maintaining efficacy. These often have highly similar but slightly different side effects. The issue is that if there were a benevolent central planner, they would spend very little money on these drugs because their highly related side effects and efficacy makes their value very low relative to the cost of development plus demonstrating safety and efficacy. New targets are far more valuable and it would be interesting to hear an informed discussion of patents not on ways of doing things but on what gets done--what would that mean? What kinds of markets and incentives in these markets would this rule change generate? Would the possibility of the privatization of these new property rights improve or diminish social surplus? The idea is way outside of contemporary legal thought because, as I understand it, patents are nullified if they regard the only way of doing something.

    Cheers,
    Paul Bailey

    Russ Roberts writes:

    Paul Bailey,

    Here is a paper on the effects of advertising on drug use after patents expire:

    http://works.bepress.com/darius_lakdawalla/30/

    Another wonderful podcast. I feel like I'm attending a graduate school lecture with two of the most intelligent people in the world. Better.

    I especially liked the way you suggested the libertarian view that the public would be better off without the FDA gatekeeper, since the incentive to do the right thing by the pharmaceutical industry would cause them to keep only safe and effective drugs on the market. His response was that they would build their own if the FDA did not exist. Too many bad guys, and too little market information in the buying community to leave it unregulated. When the sellers know far more than the buyers, you have an imperfect market that may need regulation to level the field.

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