Last week the NY Times had an NY article about drug pricing that suggested a new approach for keeping innovation while controlling prices. In particular it suggested changes to the way the patent system works, and how the Federal government might change some of the ways it spends the $30bn the NIH spends on basic research and the $40bn it spends via various programs as a purchaser on drugs:

The government could compensate drug companies for their inventions as an incentive for them to keep innovating. How to determine how much an innovation is worth? One possibility would be for the government to selectively buy patents at a premium over the price a private bidder was willing to offer, and then put them into the public domain, Professor Kremer said. Aidan Hollis, an assistant professor of economics at the University of Calgary in Alberta, devised a different approach: the government would set up a fund to compensate drug companies based on how much their new drugs improve the quality of life and how often they were used. These alternatives would carry several benefits, economists say. In addition to making drugs available at lower prices, they would make it much less profitable for pharmaceutical companies to spend millions of dollars to develop drugs, like Nexium and Clarinex, that are protected by patents but offer little improvement over similar drugs already on the market.

The goal is not to spend less to develop new drugs, Professor Hollis said, but to get more therapeutic bang for the buck – by channeling investment to where it matters most – as well as to increase access to the resulting drugs. "This can be done within the same budget as we devote to pharmaceuticals now," he said.

The Industry Veteran is intruiged by this ray of innovative thought in the nation’s paper of record. He writes  for THCB that:

There are some cute ideas here, but in what is rare for a piece of mass media journalism, the author did a good job of pointing out the flaws in each one of the patent-altering proposals. My own ideas on this matter are somewhat similar to one of the proposals. Let the government fund and conduct all new drug research from pre-clinical up through Phase I clinical trials. At that point they would auction off the compounds, each carrying patent exclusivity to run from the auction date and extending a specified number of years. Since the Big Pharma companies are, essentially, late development managers and marketers, my scheme would just rationalize the process. The auctions would attract high bids because the compounds would carry patent exclusivity and not, therefore, become immediate generics. Of course, I don’t know how much this process would reduce drug costs. I suspect it wouldn’t be much at all. The main virtue of my plan is that it would allow clinical needs and scientific evaluation to drive research instead of profit potential. Then too, it might knock down the fiction that Big Pharma propagates about their high R&D costs for introducing every product. People familiar with the situation already know that their claim is BS, but I suppose the current fiction diverts the general public.

Isn’t it just like economists to advise fixing the basement when the roof is leaking? You want to reduce drug prices? Use price controls the way Europeans do. Afraid that will stifle innovation? Use tax policy to end the 50% tax credit and the expense deductions for me-too’s and for cock-raising, wrinkle-smoothing, lifestyle products. That way you give drug companies a simple message: innovate or die.