Outside the Beltway

Government to Steal Drugs?

James Joyner · Thursday, February 24, 2005 · 3 comments

Barbara T. Dreyfuss has a disturbing piece in today’s American Prospect.

Unless the drug industry starts to negotiate significantly lower prices, it may find itself battling debt-strapped states for control over the manufacture of drugs. States already take land and other property in order to benefit the public by building things such as roads and schools. Now some legislators and officials are saying they should be able to take away a drug company̢۪s intellectual property, its patent. They want to give these patents, which allow a company to manufacture a product, to competitors that agree to sell the drugs to the states at much lower prices.

Patents are the key to huge drug-company profits. The industry will fight vociferously to protect them. In West Virginia, where the issue came up last summer, industry lawyers warned a legislative advisory council away from proposing such action on patents, claiming it would be unconstitutional. With virtually unlimited resources, the drug companies could drag states through courts for years. Still, the specter of states compelling companies to license their patents to other firms terrifies the industry. And even the fight to do this would open the industry to further scrutiny on pricing policy. All of which, some officials hope, could make drug companies more willing to negotiate discounts.

That’s what District of Columbia Councilman David Catania hopes will happen. Catania, a Republican who recently registered as independent after breaking with President Bush over the same-sex-marriage issue, introduced a compulsory license bill February 1. It authorizes Washington, D.C.’s mayor to declare a health emergency and, under eminent domain authority, issue a compulsory license to a generic firm to produce select patented drugs. Under eminent domain requirements, the patented drug company would be given “just compensation†for the patent. The councilman argues that if drug companies were smart, they would “start talking about price reductions now rather than leave themselves open to a long, drawn-out due process review and hearings to determine just compensation.†Such review and hearings, he warns, would expose “just how pervasive the price gouging and profiteering has been.â€

Such a use of government power would be outrageous. The Supreme Court is about to decide the limits of the eminent domain power. One hopes they will consider the prospects of things like this when making their ruling. [Update: It doesn’t look good, according to interpretations of the oral arguments by Dahlia Dithwick and SCOTUSblog.]

While forcing the owner to sell a parcel of land in order to build a highway grates against my limited government sensibilities, it is at least a longstanding practice with limited application. Further, property values are relatively easy to measure based on sales of similarly situated parcels. But how would the government determine the value of a unique good, like a drug patent? Presumably, that value is the market price of the drug; i.e., the current price. Obviously, Catania and his supporters believe the market price is too high. So, by definition, the compensation for this taking would be less than “just.”

There is an argument to be made that medicine is not truly a free market and that drugs should be available for those who need them. If government is to intervene, though, it should do so using a mechanism other than theft.

Conceivably, the federal government could simply go into the pharmaceutical business on the rationale that medicine should be a public good. Government already regulates drug safety and sales are legal only with government approval. R&D for pharmaceuticals could be undertaken at taxpayer expense. This route could be direct (an agency actually manufacturing the drugs) or indirect (the goverment would bid drug contracts out as it does those for military hardware).

Less drastically, government could widen the availability pool of subsided medicine. We already do it for the very poor, certain veterans, the elderly, and those employed by the government. The government, as a large distributor, would be in a position, as is Wal-Mart or CVS, to negotiate a good price.

I’m sure there are other mechanisms to accomplish the same goals. Changing the rules after companies have invested years of research and millions of dollars, though, is simply a non-starter.

Update: For more on the takings issue, see Steve Bainbridge and Orin Kerr. In a follow-up post, Bainbridge invokes the C-word. It’s not unwarranted in this case.