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Free Market Drugs Could Save the Government Billio
April 28, 2005 - Washington, DC – The federal government could save $110 billion annually if prescription drugs were sold in a competitive market, according to a report by the Center for Economic and Policy Research (CEPR). The cumulative savings over a 75-year planning horizon would be $3.3 trillion (in discounted 2005 dollars), slightly larger than the $3.2 trillion Social Security shortfall projected by the CBO.

The report, “Bigger Than the Social Security Crisis: Wasteful Spending on Prescription Drugs” calculates the savings that the federal government could accrue in Medicare if drug research was publicly financed and the resulting patents placed in the public domain. “By eliminating government imposed patent monopolies, drug prices would decline by approximately 70 percent,” said Dean Baker, CEPR co-director and author of the study.  

Beginning in 2006, with the start of the Medicare prescription drug benefit, the government will pay more than 50 percent of prescription drug costs for those over age 65. As a result, any measure that reduces drug prices will lead to large savings for the government.

One way to reduce drug prices is to publicly finance drug research so that the ensuing patents remain in the public domain. The government currently spends $30 billion a year on biomedical research, primarily through funding the National Institutes of Health. The Free Market Drug Act (FMDA), introduced last year in Congress, would expand public funding for biomedical research in order to replace the pharmaceutical industry’s patent-supported research. It would increase spending by approximately $20 billion, with the additional money explicitly allocated towards the development of new drugs. All the findings from publicly supported drug research and ensuing patents would be placed in the public domain. Thus, any new drugs developed with public financing could be sold as generics from the day they are approved.

“The enormous potential savings from developing a free market in prescription drugs could be used to cover the projected Social Security shortfall,” said Baker. “In addition, publicly financing drug research would eliminate incentives to conceal or misrepresent research findings, as happened with drugs like Vioxx and Celebrex,” said Baker.

The Centers for Medicare and Medicaid Services estimates that the U.S. will spend $521 billion on drugs in 2014 (the last year for which CMS publishes projections). This figure could fall to approximately $160 billion if drugs were sold in a competitive market (an annual savings of $5,000 for a family of four).

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