While economists take a dim view of government-granted monopolies, patents are a well-thought-out exception.
Commercial innovation usually requires an enormous amount of upfront investment. Inventors, and their investors, hope to recover those costs when their new products come to market. But if any Tom, Dick or Harry can copy the invention—without contributing to the upfront costs—the originators will likely not be able to recover those costs.
So the government makes a deal. Inventors get a legally enforceable monopoly on their products for a period of time. But after that, anyone can copy their invention.
On the whole, this has worked well for pharmaceutical products. Drug companies develop effective medicines under patent protection. When the patent expires, imitators offer generics at much lower prices. A recent study indicates that the “average price of physician-administered drugs declined by between 38 percent and 48 percent following patent expiration.” In 1960, less than 10 percent of all drugs had generic equivalents; today, 80 percent of all prescriptions are generics.
So what on earth is going on with insulin prices? We read insulin list prices are rising, and some insulin users are finding their prescriptions unaffordable. Insulin is almost 100 years old; you’d think cheap generics would have been developed decades ago.
But that misses a major point: “Insulin” is not a single entity. The insulin of today is fundamentally different from the insulin of 1923; it is safer, more effective and more convenient. Pharmaceutical companies invested lots of resources innovating insulin, and, in general, each innovation created a new patentable and protected product.
Critics call this “evergreening” and claim much of the innovation generated few benefits and served only to keep prices high. Defenders argue the innovations were well worth the effort (and prices) and note that older “patent-expired” versions of insulin are either not prescribed or are no longer produced. Could a streamlined FDA procedure for making generic “patent-expired” insulin be of help? Or are old versions simply dinosaurs?
The issue is further complicated by the fact that most insulin is not sold at list price. Rather, a complex and confidential system of negotiated prices between pharmaceutical companies and insurers allocate insulin. Insured insulin users don’t pay list prices nor do their plans.
The most vulnerable insulin users are those without insurance. Last month, Indy-based Eli Lilly and Co., the original innovator in insulin, introduced the first low-priced “generic” version of its current insulin product. Welcome news, but probably not the end of the story. Stay tuned.•
Bohanon and Curott are professors of economics at Ball State University. Send comments to firstname.lastname@example.org.