August 02, 2012
Patent monopolies raise the price of drugs from free market prices of $5-$10 per prescription to hundreds or even thousands of dollars per prescription. They have the same effect with medical devices.
The actual cost of using even the most advanced medical equipment is usually very low. After all, the machinery is already there, the only cost is a bit of electricity, the technicians’ time and possibly the time of a highly paid medical specialist. Even if we averaged the cost of manufacturing the machine over the number of uses, the cost is still likely to be relatively low. The big cost involved with medical equipment, as with prescription drugs, is the cost of the research that went into its development.
Using patent protection as a mechanism to recover these costs is incredibly inefficient, as Robert Samuelson inadvertently shows us in his column today. The piece is devoted to the results of a study that found that effective monitoring of the use of MRIs and greater cost-sharing with patients has led to a substantial reduction in the growth of their usage. As Samuelson reports, the study suggests that the main cost of this reduction in usage to patients may have been somewhat slower treatment of various aches and pains. It doesn’t have data on whether it might have had more serious effects in delaying the treatment of life-threatening conditions.
While it is certainly desirable to limit the unnecessary use of medical technology, it is worth noting that this problem comes about largely because of the patent monopoly provided for medical equipment. The article cited by Samuelson focuses on the fees paid to radiologists, one of the most highly paid medical specialties. However, even with their bloated pay of more than $500,000 a year, radiologists account for a small portion of the costs of an MRI. (Freeing up trade in radiological services could probably knock down this cost by 60-80 percent.)
With a typical radiologist able to perform more than 5000 MRIs a year, their fee would only account for around $100 of the cost of a scan. This means that most of the cost is going to pay for the overhead associated with buying the equipment, not the use of highly paid labor in the scan itself. Since this is a sunk cost (the machinery is already sitting there), we should want people to get scans anytime the expected benefit exceeds the $100 we have to pay the radiologist (until we get free trade), plus the pay to the other technicians and medical staff involved in providing the procedure.
Under this standard, we would probably want many of the people with aches and pains to be able to have access to the equipment. By contrast, devising and enforcing an effective system of controls like the one described in this column involves a considerable amount of time, much of it from highly paid professionals.
The alternative is to devise a mechanism for paying for research up front and letting the equipment be sold at its marginal cost of production. This would make MRI scans and the use of most other medical equipment cheap. It would also remove the incentive for providers to use this equipment in situations where it is not appropriate, since they would not be making the super-profits that patent monopolies allow.
There are alternatives to the current patent system. As Nobel winning economist Joe Stiglitz suggested with prescription drugs, we could have a patent buy-out system, where the government buys up useful patents and puts them in the public domain. Alternatively, the government could simply pay for research up front, perhaps doubling or tripling the $30 billion a year it now spends on research through the National Institutes of Health.
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