Data on the costs of the patent system is difficult to locate and highly approximate. The monetary costs of the patent system might come in various forms: the deadweight losses of non-marginal pricing, the extra money spent on marketing (which is also an inefficiency), the extra money spent on litigation. Estimates for deadweight losses range from $3bn- $100bn depending on the areas covered and source.
Data on the costs of the patent system is difficult to locate and highly approximate. It is also important to note that the counterfactual (i.e. the money and lives that would have been expended without the patent system) is very hard to estimate.
First, let us consider the monetary costs of the patent system. This might come in various forms: the deadweight losses of non-marginal pricing, the extra money spent on marketing (which is also an inefficiency), the extra money spent on litigation. A number of rough estimates have been made in this area.
Most estimates have focused in particular on deadweight losses resulting from non-marginal pricing. Hollis provides a good summary of this literature:
‘Guell and Fischbaum (1995), using highly aggregated data, claim that the scale of deadweight loss in the US drug market is on the order of $3bn- $30bn annually; in a more detailed paper (1997) the same authors estimate deadweight losses of $5bn on $8bn of sales, which indicates very large DWL [deadweight loss] for the market overall. Baker and Chatani (2002) construct a very rough estimate for DWL of $5bn - $20bn annually for the US. Globally, the DWL is certain to be many times this figure, because in many markets, drug insurance is unavailable and so consumers are more price-sensitive.’1
Later, in 2004, Baker estimated that the annual deadweight loss was around $25 billion, and would exceed $100 billion by 2013. Baker noted that these figures are roughly equivalent to the total amount the industry spends on R&D.2
There are also some estimates on the costs of marketing under the patent system. Baker noted that industry figures suggested that the amounts spent on marketing and on R&D were roughly equivalent.3 This is roughly consistent with Barton and Ezekiel’s citations, which place the proportion of money spent on marketing between 60% and 200% of R&D expenditure.4
Kinsella has undertaken back of the envelope estimates for the overall administrative and legal costs of the patent system in the US. Kinsella’s estimates are based on the entire patent system, rather than just medical patents. He originally estimate the cost of patents to be $31 billion in 2007,5 revising this to $42 billion in 2010.6 US Patent Office data suggests that between 2008 and 2012, pharmaceutical and medicines accounted for around 4% of all patents.7 This would suggest that the overall cost of medical patents according to Kinsella’s estimates could be between $1.3 and $1.5 billion.
To put these financial costs into perspective, it is worth considering the monetary benefits that the pharmaceutical industry creates. PhRMA estimates that in 2015 $58.8 billion was spent on R&D by the pharmaceutical industry, and that 4.4 million jobs (direct and indirect) are provided by the industry.8
We have not been able to locate data on the number of people who have died as a result of not being able to afford patented medicines which they would have been able to buy at marginal cost. Nor have we been able to locate figures on the health benefits produced by the patent system.
Baker, Dean. “Financing Drug Research: What Are the Issues?” Washington, DC: Issue Brief, Center for Economic and Policy Research, 2004.
“Costs of the Patent System Revisited | Mises Wire.” Accessed September 8, 2017. https://mises.org/blog/costs-patent-system-revisited.
Barton, John H., and Ezekiel J. Emanuel. “The Patents-Based Pharmaceutical Development Process: Rationale, Problems, and Potential Reforms.” JAMA 294, no. 16 (2005): 2075–2082. doi:10.1001/jama.294.16.2075.
“What Are the Costs of the Patent System? | Mises Wire.” Accessed September 8, 2017. https://mises.org/blog/what-are-costs-patent-system-0.
Hollis, Aidan. “An Efficient Reward System for Pharmaceutical Innovation,” 2005.
“Patenting By Geographic Region (UNITED STATES, ALL REGIONS), FRACTIONAL COUNTS Breakout By NAICS Industry Classification, CY 2008 - 2012 Utility Patent Grants Distributed By Year of Grant.” Accessed September 11, 2017. https://www.uspto.gov/web/offices/ac/ido/oeip/taf/naics/stc_naics_fg5/usa_stc_naics_fg.htm.
“2016 Profile: Biopharmaceutical Research Industry.” PhRMA, 2016. http://phrma-docs.phrma.org/sites/default/files/pdf/biopharmaceutical-industry-profile.pdf.
