Republic, Lost_ How Money Corrupts Congress--And a Plan to Stop It - Lawrence Lessig [82]
So, too, was doing something about the high cost of prescription drugs. The pharmaceutical industry (PhRMA) is the third most profitable industry in America.19 One reason it is so profitable is the monopoly the government gives it in the form of drug patents. Those patents are necessary (so long as drug research is privately financed), but there has long been a debate about whether they get granted too easily, or whether “me-too” drugs get protection unnecessarily. (A me-too drug is a new drug that performs very similarly to a drug it is intended to replace. Patents for such drugs may be unnecessary since the cost to society of a patent is large [higher prices], and the added benefit from the me-too drug is small.)
Patents, however, are not the only government-granted protection from an otherwise free market that the drug companies receive. In addition to patents, the government sometimes promises not to use its market power to “force” drug companies to offer lower prices to the government. I put that word in scare quotes, because of course there’s no coercion involved. Instead, it is just the workings of an ordinary market, where large buyers pay less than small buyers. Ordinary souls understand this to be the difference between wholesale and retail: The wholesaler pays less per unit than retail prices. But when the wholesaler is really, really big, that means it can leverage its power to get really, really good prices from the seller.
Thus talk of “market power” and “forcing” shouldn’t lead you to think that anything bad is happening here. A seller is “forced” to sell to wholesalers at lower prices in just the sense that you are “forced” to pay $3.50 for a latte at Starbucks. If you don’t like the price, you can go someplace else. If the seller doesn’t like the price the wholesaler demands, the seller can just say no. People might not like what the market demands. But most of us don’t get a special law passed by the government to exempt us from the market just because we don’t like what it demands.
The drug companies, however, did. In 2003, Congress passed President Bush’s biggest social legislation, the Medicare Prescription Drug, Improvement, and Modernization Act.20 This massive government program—estimated to cost $549 billion between 2006 and 2015,21 and not covered by any increase in taxes—was intended to benefit seniors by ensuring them access to high-price drugs. It also had the effect of benefiting the drug companies, however, by ensuring an almost endless pipeline of funds to pay for the high-cost drugs that doctors prescribe to seniors.
The best part of Bush’s plan (for the drug companies at least) was a section called Part D, which essentially guarantees drug companies retail prices for wholesale purchases.22 The law bars the government from negotiating for better prices from the drug companies. Thus, while the government is not permitted to use its market power to get lower prices from the drug companies, the drug companies are permitted to use their (government-granted) market power (from patents) to demand whatever price they want from us.
This is not a simple issue. Sane and independent economists will testify that it is very hard to determine exactly what price a government should be able to get its drugs for. For just as there is a problem with a monopoly (one seller), there is a problem with monopsony (one buyer). Permitting a monopsonist to exercise all of its market power can certainly cause social harm in just the way that permitting a monopolist to exercise all of its market power can cause social harm.
My point, however, is not to map an economically ideal compromise—even assuming there is one. It is instead to track the president’s position on these complicated policy questions. For when Congress passed the Prescription Drug Act, there was no ambiguity in Barack Obama’s reaction. He was outraged. As he said on the floor of the Senate, this was just another example of “the power and the