Our Patent System Incentivizes Drug Companies To Pay Doctors Kickbacks

If we want to stop such practices, perhaps, rather than just suing the pharmaceutical companies, we start to look at the ridiculous incentive structure we’ve set up, whereby drug companies take on very little of the actual risk, but are given incredibly powerful monopolies, such that the prices are considered unbelievable.

Photo: Shutterstock
Photo: Shutterstock

by Mike Masnick
Tech Dirt
May 3, 2013

You may have seen the news recently that the US government has kicked off a lawsuit against Novartis, the pharmaceutical giant, for paying kickbacks to doctors to get them to prescribe certain drugs.

Authorities said the Basel-based company for a decade lavished healthy speaking fees and “opulent” meals, including a nearly $10,000 dinner for three at the Japanese restaurant, Nobu, to induce doctors to prescribe its drugs.

They said this led to the Medicare and Medicaid programs paying millions of dollars in reimbursements based on kickback-tainted claims for medication such as hypertension drugs Lotrel and Valturna and the diabetes drug Starlix.

The charges are detailed in a whistleblower lawsuit first filed against Novartis Pharmaceuticals Corp by a former sales representative in January 2011 and which the U.S. government has now joined.

Of course, this is hardly a surprise to anyone who has followed the medical profession at all over the past few decades. The stories of “favors” and benefits for doctors from mis-named pharmaceutical “sales reps” (often very young, just out of school, incredibly attractive, but with little knowledge of the actual field), whose jobs often seemed more akin to cruise director and entertainer rather than knowledgeable, helpful sales person, are everywhere. That it’s finally taken this long for the government to think that maybe, just maybe, this might distort the nature of our healthcare system, and lead to wasteful prescriptions, including prescriptions that cost significant taxpayer money is somewhat incredible.

What’s worse, as economist Dean Baker points out, is that anyone at all is surprised that this happens. After all, when our own government policy is to hand those drugmakers incredibly powerful monopolies on life-saving pharmaceuticals, we’ve actually created the incentives ourselves for such activity to take place:

When the government grants drug companies patent monopolies that allow them to sell drugs at hundreds or even thousands of times the free market price it gives them an enormous incentive to do things like pay off doctors to prescribe drugs. Everyone who has ever taken an intro economics class understands that fact.

Unfortunately our leading economists do not seem aware of how protectionism in the prescription drug industry leads to corruption that can both raise costs and jeopardize the public’s health.

Perhaps that’s why it took the US government so long to even attempt to crack down on such activities. It created the environment in which such activities thrive and are encouraged.

If we want to stop such practices, perhaps, rather than just suing the pharmaceutical companies, we start to look at the ridiculous incentive structure we’ve set up, whereby drug companies take on very little of the actual risk (most drugs today are actually first created by universities using publicly funded money), but are given incredibly powerful monopolies, such that the prices are considered unbelievable.

True competition in the market would — as always — lead to both more actual innovation, lower prices, less corruption and (most importantly) better health and public safety.