Corruption in the Pharmaceutical Industry: Why Is Anyone Surprised?

The New York Times has run many excellent articles over the years describing various forms of corruption in the pharmaceutical industry. (The latest describes the battle over monitoring the prescribing practices of individual physicians.) The one thing missing from these articles is any economic analysis.

Every person who has suffered through an introductory economics class has heard the story about how government intervention in the market leads to corruption. Economists always rant above how trade protection or various forms of government regulation inevitably lead to gaming of the system and rent-seeking behavior. If we expect to see such corruption when a tariff or quota raises clothes prices by 15-20 percent, why wouldn't we expect to see such corruption when drug patents raise prices by 200 percent or more?

Calling government protection a "patent" or defining it as an "intellectual property right" does not change the economic model one iota. The sort of incentive for corruption from protection is the same, except the magnitudes are many times larger. For this reason, the predictable result of the government granted monopoly known as a drug patent is that drug firms will lie about their test results, conceal evidence of harmful effects, use illicit political influence to get drugs approved by the FDA and purchased by government agencies like Medicaid, make payoffs to doctors for prescribing their drugs, make payoffs to generic manufacturers to prevent competition, etc.

The Times has performed a valuable service in documenting many instances of these abuses over the years. However, the media needs to expose the underlying problem in the incentives created by the patent system so that we can have a serious debate over the best mechanism for financing prescription drug research.

--Dean Baker

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