Different ways of paying for drug development could generate more drugs that we desperately need more cheaply.

On Thursday, the Senate Committee on Health, Education, Labor, and Pensions voted to take a significant first step on a long road that could lead to far lower prices on new, better pharmaceutical drugs for Americans.

The measure was part of an amendment to a bill reauthorizing the Pandemic and All-Hazards Preparedness Act, and was reported out of the committee 17-3. It allocates $3 million for the National Academies of Sciences, Engineering, and Medicine to study different models to pay for the development of new drugs. NASEM, which was created by Congress to provide high-quality advice on technical issues, would have to produce the report within two years.

The bill’s language specifically instructs NASEM to examine two ways of funding new drugs: the government paying for it directly, and innovation prizes for inventors. Drugs created in this manner would presumably then be placed in the public domain and sold as generics.

This issue is almost never discussed in U.S. politics and would likely sound arcane and meaningless to most people if they ever heard about it. But in reality, it’s both easy to understand and powerfully relevant to all of our lives. Different ways of paying for drug development could generate more drugs that we desperately need, while at the same time saving regular people huge amounts of money.

The most important thing to understand about drugs is that they are expensive to discover and test for safety and efficacy — but once that’s done, they’re generally cheap to manufacture. According to the Food and Drug Administration, when a patent on a drug has expired and there are five generic companies producing it, the price will fall nearly 85 percent. In the 10 years from 2009 to 2019, the lower costs of generics saved the U.S. health care system $2.2 trillion.

The current way of dealing with this dynamic is so entrenched that it may seem like a law of nature. First, pharmaceutical companies pay the high costs of developing new drugs. (At least theoretically — the federal government often pays for a significant chunk of the upfront outlays.) Then, so the drug companies can recoup their investment and make a profit, they are granted a patent on their discoveries that lasts 20 years. This gives them alone the right to make and sell the drug. In other words, for two decades the government steps in to prevent a free market from functioning.

The most striking recent example of this is vaccines for Covid-19. Moderna raked in $36 billion for its vaccine in 2021 and 2022 — and if you try to make and sell a version of it yourself, you will go to jail. This case is especially galling, given that the government paid even more than usual for the drug’s development costs.

The proposed study could lay the ground for a new world, in which the government would use different mechanisms in another pandemic to create incentives for the creation of treatments. Pharmaceutical companies would still make money, just not gargantuan amounts of it thanks to a public health emergency.

You can measure the age of this current patent system by the fact that it’s mentioned in Article I, Section 8 of the Constitution: “The Congress shall have Power … 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.”

It’s important to read this carefully, however. Congress has the power to grant patents, but the Constitution does not require it to do so.

Thomas Jefferson expounded on his perspective on this at great length in a letter he wrote in 1813. “Ideas,” he said, “should freely spread from one to another over the globe, for the moral and mutual instruction of man, and improvement of his condition. … Society may give an exclusive right to the profits arising from them as an encouragement to men to pursue ideas which may produce utility. but this may, or may not be done, according to the will and convenience of the society.”

The time seems ripe now to consider whether our current system serves the the will and convenience of society. The U.S pharmaceutical industry is incredibly costly, with 2021 revenues of $550 billion and profits far higher than those of other industries.

But the price may not be the worst part of it. Patents perversely disincentivize companies from developing actual cures — because when a patient is cured, they no longer will need the drug. As Chris Rock once said, “There ain’t no money in the cure. The money’s in the medicine. That’s how a drug dealer makes his money — on the comeback.”

This has led to systematic underdevelopment of new antibiotics, with disastrous results: Over 1 million people worldwide are now killed every year by antibiotic-resistant bacteria, with the number potentially rising to 10 million by 2050.

This is also a problem for new classes of drugs. Goldman Sachs analysts explained it straightforwardly in 2018, writing in a report: “The potential to deliver ‘one shot cures’ is one of the most attractive aspects of gene therapy [but] while this proposition carries tremendous value for patients and society, it could represent a challenge for genome medicine developers looking for sustained cash flow.”

Drug companies are also left unmotivated to research drugs to treat rare diseases, given the low number of potential buyers. This has long been recognized as a flaw in the patent system; the passage of the Orphan Drug Act in 1983 was an attempt to nudge pharmaceutical companies to make some effort in these areas. Notably, the Orphan Drug Act followed a 1979 FDA report examining the problem of drugs for unusual afflictions.

Meanwhile, patents incentivize the development and promotion of truly dangerous drugs. The Sackler family made billions from helping to generate an opioid epidemic, inventing drugs that were extremely profitable because they were addictive and patients were desperate to keep using them, up until the point they expired.

Thus, we might be much better off with the government simply absorbing all the cost of developing new drugs and then allowing any drug company to manufacture them. This makes particular sense because the government already pays for a large chunk of the expenses. Money from the National Institutes of Health contributed to the development of every single one of the 210 new drugs approved by the FDA from 2010-16, providing a cumulative subsidy to the drug industry of $100 billion.

Dean Baker, a progressive economist at the Center for Economic and Policy Research, looks closely at this issue in his book “Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.” He estimates that if patent protection for drugs and medical devices ended, with the government covering the tab for research, the net saving for regular Americans would be in the hundreds of billions of dollars each year.

The proposed NASEM study would examine this issue and much more. But whether it will actually happen is still very much up in the air. The reauthorization of the Pandemic and All-Hazards Preparedness Act will have to pass the entire Senate, and the study would then have to survive reconciliation with the House version. (A House committee has approved its own PAHPA reauthorization, but without the study.)

Most importantly, the pharmaceutical industry will be doing everything possible to knife this positive development in its crib. PhRMA, the industry’s trade group, has released a statement that it is “deeply concerned” because a new system of drug development could let “the government pick winners and losers.” That’s a power they intend to keep for themselves, along with all the profits that flow from it.