Should the government buy out drug patents?

Question

Expensive drugs are expensive because they are patented. Drug companies seek "monopoly profits" while the patents on their drugs are in force. When patents expire, other companies can enter the market with cheap generics. So ... is a possible solution to high drug prices to have government just BUY patents from drug companies, then license the patent out to all comers for free? (And I mean buy at a fair price, not confiscate or cancel patents).

Answer 1

While your idea seems very attractive, it has a significant problem: what is the fair value for a patent? You can come up with complex formulae that estimate everything from direct costs to opportunity costs, and your solution would still be inferior to what the market system tells you. That is why your idea will never work. And what do you resolve is fair? Paying just R&D costs may not be enough to compensate the risk put into the project.

While you may get lucky and find the exact price-point for the sale, most likely will be you en up paying the wrong price for patents. You would end up either overpaying the drug companies and incurring in real economic costs for society, or you would end up underpaying (most likely scenario) and reduce the incentives for anybody to innovate (VERY costly to the welfare in the long-term).

Unfortunately, the market solution is the most efficient. If you are truly worried about the welfare of the poor that cannot pay the medicine, you can try to give a subsidy (which is obviously a market-inefficient solution since it will deviate resources to an artificially attractive industry) or a lump-sum payment of cash (the assumption here is that poor care about curing their sickness, you have to be ready that some people will use the money for something else).

Answer 2

No, you're not entirely correct. No the government shouldn't "buy them out". The reason the drugs are expensive is because the health care system has become it's own micro-economy that is full of Super Inflation. The patents aren't the problem. Without the patents, there wouldn't be any such drugs because there would be no economic incentive to invent them in the first place.

Answer 3

If the company does not want to deal on unit price and the asking price is cheaper than some estimated unit price for the life of the drug.i.e. purchase price < unit price x total expected purchase quantity. Gov't gets the break.