Patently Absurd: the Ice Bucket Challenge in Another Context
28/08/2014 | Ben Wolcott for the CEPR
Social media and the commentariat are abuzz with updates and analysis on the Ice Bucket Challenge, an internet phenomenon where people do some combination of dumping cold water on themselves and donating money, raising over $90 million for the ALS Foundation so far. While the ice bucket challenge has drawn support and criticism from various corners, it´s worth pointing out that foundations like the ALS Foundation, which fights “Lou Gehrig´s Disease on every front,” exist in their current imperfect form because of the structure of patent law.
Felix Salmon argues that donating money to disease-specific charities isn´t efficient. Because of government underinvestment in basic research, numerous charities fundraise and funnel money towards specific research. Salmon argues that it would be far more efficient for the government to fund basic medical research instead of having “a grab bag of disease-specific charities competing against each other”. 21 percent of the ALS´ Foundation´s budget goes to fundraising and administration.
Instead of arguing about whether people should or should not donate to the ALS Foundation or similar charities considering their inefficiencies, I want to develop a related point: private foundations shouldn´t have to lead basic medical research efforts. Instead, the government should increase the $30 billion that currently goes through the National Institute of Health (NIH), so it can address this underfunded public good.
While NIH does conduct basic research, the U.S. heavily relies on the patent system to encourage private companies to come up with medical innovations. Many people assume that patents are necessary to fund medical research, but this couldn´t be farther from the truth. Researchers do not need massive financial incentives to do their job – you can simply pay them a wage. That´s how the most of the economy functions. Medical patents are nothing more than inefficient government-supported monopolies to help researchers recoup their costs. For example, because people affected by some of the most socially and economically costly medical issues (HIV/AIDS for example) may not be able to pay high prices, there is little incentive for big pharmaceutical companies to conduct the risky research that would do the most good. Patents create the wrong incentives for researchers and the companies that hire them.
The ten largest pharmaceutical companies capture a third of the market, and several have profit margins on the order of 30 percent. Big pharma are big-time oligopolists who spend almost twice as much on promotion as on research and development. That´s why Gilead Sciences sells Solvadi for $84,000 even though generics are available for less than $1,000 in Egypt. While some of that money is going to recoup research costs, a significant portion is monopoly rent.
I´ve followed the back and forth between critics and supporters of the Ice Bucket Challenge. While they may fundamentally disagree about some issues, everyone outside of the pharmaceutical industry can probably agree that the ALS Foundation shouldn´t have to lead the fight for basic research. The government should support public goods. Medical patents certainly don´t.