Patent Problems Create Higher Drug Prices. Time to Fix the System

Innovation and pioneering breakthroughs by U.S. drug companies have led to their dominance in the global pharmaceutical industry. Driven by a patent system designed to encourage investments in life-saving treatments, U.S. drug manufacturers are responsible for developing more than half of the new molecules introduced over the last 10 years. Yet patients in the United States pay almost three times more than patients in other developed countries for pharmaceutical products. The high prices of prescription medicines pose increasing concerns for policymakers, patients, and the health care system as a whole.

In fact, the Biden administration has moved forward with several initiatives to tackle the problem of high-priced prescription drugs. The Inflation Reduction Act capped the prices for some drugs while allowing Medicare to negotiate prices on high-cost drugs. At the same time, the Federal Trade Commission announced that it is challenging improperly listed patents in the Food and Drug Administration’s Orange Book that would delay generic competition, and the Department of Health and Human Services has proposed plans to re-license the patents of high-cost drugs to third parties if they were developed with public funding.

Yet, in many ways, these measures address symptoms of a problem and not the core problem itself. More than that of any other industry, the pricing model of the pharmaceutical industry hinges on patents and the monopoly power they grant to drug makers. Leading drug manufacturers seek out blockbuster drugs that can be sold exclusively for the duration of the patent (roughly 20 years) before faced with competition by generic producers. When properly balanced, this exclusivity promotes innovation and supports the capital investments required to bring a drug to market. However, the patent system can also be gamed and abused to maintain and extend monopoly power that thwarts innovation and keeps drug prices artificially high.

This policy brief provides an overview of how pharmaceutical companies exploit patent laws to protect their profits, rather than prioritize true innovation, and proposes a set of reforms to realign the industry’s incentives in ways that encourage innovation and drug discovery rather than simply propping up government-protected monopolies.

The Scope of the Pharmaceutical Industry

The U.S. pharmaceutical industry is responsible for 3.6 percent of gross domestic product and employs over 1 million people as of 2022. On a global scale, pharmaceutical sales totaled almost $1.5 trillion in 2022, with U.S. companies accounting for nearly half of this figure. Developing a new drug is a costly and risky endeavor, requiring 10 to 15 years to bring it to market at an average cost of $314 million to $2.8 billion. Consequently, the industry invests heavily in research. In 2022, it was estimated that domestic firms spent over $100 billion in research and development (R&D)—a 10-fold increase from the 1980s.

While a robust pharmaceutical industry is essential for driving medical progress, patents meant to incentivize innovation and defray R&D costs have instead become a tool for pharmaceutical companies to extend monopoly power and maintain high prices on existing drugs well beyond the intended period of exclusivity. This hampers competition and innovation and exacerbates the associated losses in consumer welfare.

Innovation Vs. Monopoly

The American patent system originates directly from the U.S. Constitution, which granted Congress the authority “to promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” Granting a temporary monopoly provides an incentive to invent; in exchange for this exclusivity, inventors must publicly disclose their inventions, expanding the intellectual commons. However, the patent system works only when properly applied with high-quality patents. When patents are of low quality or used strategically to block competition, innovation actually may be impeded as patents are deployed defensively to block entry by innovative new firms. Determining the appropriate balance between spurring invention and delaying competition has long been a source of controversy that has made it challenging to establish the appropriate breadth and scope of patents.

As the broader debate on patents and patent quality unfolds across all sectors of the economy, the pharmaceutical industry, in particular, has developed strategies to prolong the exclusivity of their products. In addition to patenting active ingredients in primary patents, pharmaceutical manufacturers also assert secondary patents to further protect the exclusivity of their products. These secondary patents are of varying quality and cover aspects of the drug like dosage, delivery, packaging, and other factors. Pharmaceutical companies employ a variety of tactics with these patents to delay generic competition and prolong their market dominance, including:

Patent Thickets: A popular ploy employed by pharmaceutical companies is the creation of “patent thickets,” which are dense webs of overlapping patents that make it difficult for competitors to enter the market without risking infringement. By filing multiple patent applications for a single drug, companies can extend their monopoly protection for decades, keeping both brand-name and generic rivals out of the market. A congressional investigation revealed that for the top 12 best-selling drugs, pharmaceutical companies have obtained over 600 patents, providing a cumulative total of nearly 300 years of market exclusivity. The top-selling drug Humira, for example, was protected by 166 patents, and Revlimid has 117 patents. Patent thickets are often built around secondary patents that have little therapeutic value and are non-inventive, but they can provide significant additional revenue by limiting competition and keeping prices higher than they would be in a competitive market.

Evergreening: Similar to patent thickets, another common strategy is “evergreening,” where pharmaceutical companies seek additional patents for minor modifications to a drug compound to extend the medication’s period of exclusivity. These modifications may include alterations that provide little to no therapeutic benefit to patients, such as changing the dosage or delivery of the drug. One study found that between 2005 and 2015, 78 percent of new patents were associated with existing drugs, not new ones. This suggests that pharmaceutical companies invest significantly in extending current monopolies, diverting resources that could be used to develop truly innovative treatments. As a result, patients have fewer options and face higher prices for pharmaceutical products.

Product Hopping: A third strategy used by pharmaceutical companies is “product hopping,” which involves discontinuing a drug as its patent expires and then encouraging doctors to prescribe a new, reformulated version of the drug. By the time a generic version of the original drug becomes available, the market has already “hopped,” or shifted, to the newly formulated version of the product, which is protected by a new patent. The reformulated drug often provides little to no medical benefit to patients over the original formulation, but it does enable drug companies to maintain monopoly prices, as evidenced by the fact that new formulations are introduced for about half of all small-molecule drugs. One analysis estimated that “just five instances of specific product hops cost the U.S. health care system $4.7 billion annually.”

Patent Abuse Slows Innovation and Harms Consumers

When patents are deployed to specifically extend monopoly power, there are significant economic consequences. First, it keeps drug prices artificially high for longer periods, which strains the budgets of patients, taxpayers, and the health care system. Second, it diverts R&D resources away from truly innovative research and toward defensive patenting activities. Third, the outsized profits enabled by extended monopolies may reduce the industry’s incentive to invest in the high-risk, high-reward research needed to develop breakthrough therapies.

Moreover, the anticompetitive practices employed by pharmaceutical companies undermine the intended purpose of the patent system, which is to promote innovation by providing a limited period of exclusivity in exchange for public disclosure of the invention. When companies abuse the patent system to prolong monopolies, they do not contribute to the public store of knowledge or spur follow-on innovation. Instead, they create barriers to entry that stifle competition and deny patients access to affordable medicines.

Fixing the Patent Problem

Improving patent quality is a key step toward minimizing gamesmanship in the patent system. Eliminating poor-quality patents limits pharmaceutical companies’ ability to build patent thickets and delay competition. Yet this type of patent reform has proved challenging, primarily because advocates for stronger patents have successfully equated intellectual property rights to tangible, physical property rights. But patents operate differently; they are not intended to be natural property rights. As former Solicitor General Paul Clement has noted, patents “are creatures of positive law whose scope, contours, and very existence depend on the will of Congress.” As with any government program, those contours of the law are susceptible to rent-seeking behavior that can distort outcomes to favor the concentrated benefits of organized interest groups over the dispersed interests of the broader public. Moreover, patents are granted by a large federal bureaucracy of 14,000 employees with its own incentives and institutional constraints. Resources are strained, and patent examiners are under significant time constraints when evaluating patent applications.

The challenge lies in striking the right balance between providing sufficient incentives for innovation and avoiding the potential negative effects of long-term monopolies. Like any other federal program, if the outcomes can be improved by reforming the legal framework, then an evaluation of the costs and benefits of the existing system is warranted. Reforms that can improve outcomes in the least-cost manner will yield a better patent system that rewards innovation while minimizing the gamesmanship to extend monopoly prices. To realign incentives to prioritize true innovation, policymakers should consider the following reforms:

1. Implement reforms to improve patent examination at the U.S. Patent and Trademark Office: The patent office received more than 640,000 patent applications in 2020. Improving patent quality requires providing sufficient resources to improve the quality of examinations. Furthermore, the examination process itself should also be evaluated to ensure that incentives and institutional frameworks do not favor overpatenting or the possibility of issuing an invalid patent. Additionally, requiring patent applicants to demonstrate patent validity more rigorously would shift some of the burden onto patentees, potentially improving overall patent quality. One study found that time constraints in the current examination process can yield an increase in invalid secondary patents for pharmaceuticals.
2. Clarify patentability standards: Patents should be issued for novel and non-obvious inventions only. Additionally, laws of nature and abstract ideas cannot be patented. These standards have been defined by law to avoid overly broad patents that limit new entry and restrict innovation. A proper application of these standards would diminish pharmaceutical companies’ ability to create patent thickets that unnecessarily extend drug exclusivities and monopoly prices. Unfortunately, the Patent Eligibility Restoration Act, which has advanced in Congress, would significantly broaden patent eligibility and strengthen the hand of patent owners in ways that would make it even more difficult for low-cost innovators to enter the market.
3. Restrict evergreening: Limiting the ability of pharmaceutical companies to obtain secondary patents for non-substantive changes to existing drugs would expedite generic competition and enhance consumer welfare. Secondary patents should be issued only when they provide significant, identifiable therapeutic advances or meaningful benefits to patients.
4. Strengthen the PTAB review: The Patent Trial and Appeal Board (PTAB) was established by the 2011 America Invents Act as a means to address questions of patentability. The PTAB plays a critical role in reviewing and invalidating low-quality patents through administrative proceedings. Congress should resist efforts to weaken the PTAB’s authority and instead provide it with the resources and support it needs to efficiently weed out patents that should not have been granted in the first place. Despite the benefits provided by the PTAB, Congress is considering the Promoting and Respecting Economically Vital American Innovation Leadership (PREVAIL) Act, which would significantly curb both access to the PTAB and the way it conducts reviews.

Conclusion

The U.S. pharmaceutical industry plays a vital role in driving medical innovation and contributing to the nation’s economy. However, the industry’s misuse of the patent system to extend monopolies and keep drug prices artificially high has become a significant problem. Congress should focus on realigning incentives for pharmaceutical companies to prioritize the development of breakthrough therapies over legal maneuvering to extend drug exclusivities and block competition. This entails improving patent quality and the ability to challenge weak or invalid patents.

Getting these reforms right is critical for striking a fair balance between effectively incentivizing the pharmaceutical industry to continue investing in drug discovery and development and ensuring that new treatments can be affordable. Congress appears to be moving patent policy in the wrong direction with bills that would further entrench patent holders and make competition even more difficult. Without a balanced approach that fosters true innovation while avoiding patent gamesmanship, the American health care system risks perpetuating a cycle of excessive patenting and limited options for reducing the costs of prescription medicines.