Robin Feldman: Well, Medicare is a Federal program that is administered by the states through individual, private plans. Even though it is a Federal program, the Federal government is restricted by law from negotiating directly with the drug companies. Now, those negotiations happen at a different level. They are distributed, and each individual plan, through its PBM, negotiates the drug prices. And again, within that system--so, you may have plans that have co-insurance. You may have plans people opt for where they don't have much drug coverage. And even within those who are eligible for Medicare, there are many people who haven't got a Medicare plan.

Robin Feldman: Pharmacy benefit managers. Not any better in full than it is in short. So, PBMs negotiate discounts from drug companies, and then they help the Plan decide what it should charge patients. So, the PBM works for the Health Plans. They are supposed to be getting a good deal for you--for the patient. However, the drug companies have very cleverly turned that system on its head. Before they give a discount to the PBM brokers, they raise the price each year. And then the PBM claim to have negotiated a great deal. And everyone's happy. It's a little like a department store raising prices right before a sale so that the sale price looks appealing. You lift it up, and then you give a rebate, and everybody looks like, feels like they got a good deal. Now, that might not be quite as bad if nobody paid those high-list prices. But, people do. So, for those of us who have health insurance through our employers, 30% have the type of plan where you have to pay 100% out of pocket until you reach a deductible. And, that out-of-pocket cost is based on the high list price. Many people have plans that have what's called 'co-insurance'--you pay part when you pick up your drug. If it's co-insurance--rather than co-pay, which is done a little differently--that's based on the list price. Many people don't have drug coverage. Or, they have no coverage at all.

Robin Feldman: Ah. The rebate system is marvelously complex and difficult, but if you step back, it's one very simple thing: The drug companies are able to play the middle players, who are known as PBMs [Pharmacy Benefit Managers], as well as some hospitals and some doctors, to make sure cheaper drugs are left out. That's all it is. Drug companies pay everyone along the way so that lower-priced drugs lose. They are simply sharing their monopoly rents to keep competitors out. What's interesting and makes it complex is it's all wrapped up in secret deals that even the government and health plan auditors are not allowed to see. Now, I mentioned for you these PBM brokers. If you are looking for an easy score-card to tell you who's on first, the pharma industry will always disappoint you because it's got all these funny acronyms. But, at the center of this system lies these PBM brokers--

Russ Roberts: And, talk about--you mentioned in passing--rebates. Most of the things that we often hear are list prices. But there are rebates. And, how are those working? How do they literally work, and how does the market, all the different players, how do the rebates work?

Robin Feldman: So we look overall, even from that perspective, the price of medicine has skyrocketed. Medicare spending for brand-name drugs, even after accounting for rebates, still rose 62% between 2011 and 2015. I don't know about you, but I'm not bringing home 62% more salary than I did 4 years. Ago. Now, the prices for new drugs and where conditions, some of the ones you were referencing, are causing their fair share of pain; but drug companies have raised prices most sharply for commonly-used medications to treat things like diabetes, high cholesterol, asthma. Those price rises are causing real pain for people.

Russ Roberts: Our guest today is Robin Feldman.... Her latest book is Drugs, Money, and Secret Handshakes: The Unstoppable Growth of Prescription Drug Prices.... You call the rise in drug prices unstoppable; and I know that's to get my attention, which it does. Let's start with the question of how much they've been growing recently. We see some headline stories, some appalling--multiple increase of x-hundred percent in some crucial drug; and that gets people's attention. But, what's going on overall?

Russ Roberts: I just want to say that of course, many CEOs announce to their Board: We are going to lower our prices; and we're going to make higher profits, because if we don't lower our prices, our competitors have. And we're going to go out of business.' So, this is a market where, because of a lack of competition--some of it due to the nature of the product; some of it due to government protection--the competitive forces are just not in place.

Robin Feldman: These are, you have to remember[?]--these are profit-making entities. They are going to respond to the incentives that we put in place in their own interests. Now, imagine if the CEO [Chief Executive Officer] went to a Board of Directors and said, 'I'm going to lower prices and reduce our profits. It's the right thing to do.' That CEO would be fired. That's not what a company does. You don't have perfect market in health care because you have third-party payers; you have a variety of other forces happening. But you can have a functioning market within that system. You just have to allow the right incentives to flow. Then we can get the kind of competition that gets the innovation we need. It's not where we are right now. But it is certainly possible. We are pretty good at markets in this country.

Russ Roberts: Normally, that just wouldn't happen, in certain markets. In real markets, I would say. That is the way I would describe it. Usually, you wouldn't go to a middleman to shave off some portion of the profit unless they provided something of real value. And I think part of what this illustrates--and we're going to get into it in a little more depth--is how abnormal, psychotic, toxic, non-normal health care market is. And I just say this because it has to be said: People all the time tell me, 'Well, we know free markets aren't good in health care,' because look how bad, say, pharmaceutical market is. Well, it's not a free market. It's distorted in all kinds of ways. And some of the ways we are going to be talking about today. But, the other point I want to make and get on the table is that, having read your book, Robin, you are not demonizing any of the players in any direct way, because you are explaining--which is why it's a great bit of economics--how all the players are just responding to the incentives; but the incentives are not particularly well-designed. And they didn't emerge from market forces. They come from, often, attempts to control the market, by legislation. These incentives are in place. And that's the biggest part of the problem. Not some evil conspiracy on the part of drug companies or PBMs. They are just trying to do what they are made to do, which is make money.

Robin Feldman: You are absolutely right: 85% of the PBM market is dominated by the Big Three players. And they tend to move in lockstep. I have talked to large employer plans who have tried to negotiate for transparency or other types of different terms from the PBMs, and they are completely shut out. It's a very small, and a very tight and powerful market. They started out, historically, just processing claims--massive number of claims and paperwork to try to connect all of the pieces for a health plan. Very complicated. When we began to shift to digitization in this country, then the service the PBMs were offering became pretty commoditized. And so they had to try to figure out how to offer a service of value. They switched to, 'In addition to processing all your claims, we'll negotiate with the drug companies.' And that's how we came to where we are today. Now, in theory, if you have somebody like a broker negotiating a deal for you, that should be pretty good; especially if their pay is based on how good a deal they might get. But that's not how things have played out in practice. The incentives within the system push in the wrong direction. So, first of all, the PBMs get their payments from the drug companies in two forms. One is in the form of the rebate. So, the rebate will come later in the year, long after John Smith has bought his hard medication. And it will come to the PBM, who could pocket it or could pass it on to the insurance company. Now, all of the agreements about how much should get passed on and in what circumstances, those are all held deeply secret. Um, the health plan, who is a client, is not allowed to see it. Um, neither are the government auditors. All of the details of these plans are kept completely secret. In my view--I like to say, 'Markets, like gardens, grow best in the sun.' This type of hidden, back-room dealing, is not good for competition.

Russ Roberts: The strange thing about this market and this PBM/pharmacy-benefit-manager component, is that: There are only three--there are 3 very large firms in that market. I know one of them is Express Scripts because it used to be, probably still is, according to St. Louis--I used to know of them when I was teaching at Wash U. [Washington University in St. Louis]. They came into the market to try to make life easier for drug companies--for health care, for health insurance--to manage this very complicated, increasingly complex world of benefit structure, and list different kinds of drugs. And they seemed to me the kind of middleman that would normally make things better. So, why--first of all, am I right that there are three? How important are those three in the landscape? How much do they dominate it? And how did it get started?

Robin Feldman: So, what's the thumb on the scale? So, why is it that drug companies have become very adept at using their monopoly positions, their government-granted monopolies, in order to try to put in place these types of deals? So, companies begin with a position of monopoly from a patent that they have, or from more than a dozen of what are called non-patent exclusivities that companies can get for doing things like testing drugs in children, or working on rare pediatric diseases. Whatever it is. Orphan drugs is one people may have heard of. So, they get additional periods of times for protections. And, companies use these to amass the volume positions and create contract terms that will hobble the generics when they finally get to market. And, as I mentioned: Companies are absolutely masters at repeatedly extending their protections. So, in fact, I show in my research for the book that drug companies are largely recycling and repurposing drugs rather than inventing new ones. More that 3/4 of the drugs associated with new patents are not new drugs coming on the market. They are existing ones. So, instead of innovation, we are seeing secondary patents piled onto new drugs over and over again. We want drug companies to go back to the bench and invent new things. This is channeling innovation in a less productive direction.

Robin Feldman: Yeah. These deals are secret, but it's starting to leak out. And law suits, sometimes in contract disputes between the parties themselves--amazing what you can find when people start fighting with each other. So, let me give you a couple of examples. In October 2017, Shire sued Allergan alleging that Allergan used bundled rebates--that is when you spread your volume across a bunch of drugs--to preserve its dominant market in the blockbuster dry-eye medication Restasis. This should be familiar to you from the Indian Reservation snack food that was tried. So, in this case, according to one Medicare plan administrator, given Allergan's bundling scheme, the new competitor could give its drug away for free--numbers still wouldn't work. As we were talking about with what Budweiser wishes it could do. So, I could give you another one. This is again a case filed in late 2017, and this one is Johnson and Johnson's rheumatoid arthritis drug Remicade. So, according to the complaint, after the patent protection expired, and just weeks after a bio-similar came on the market--that's a cheaper competing drug--the company began a bundling scheme that induced hospitals and health plans to essentially exclude the lower-priced copy, even though it was covered by government plans. So, I could give you--I can go on and on and list some of these. The point is that we are seeing it happen in the real world. There is a wonderful quote from one doctor who said, 'It's Alice-in-Wonderland time in the drug world.' I would say it's Alice-in-Wonderland time except it's our money going down the rabbit hole. You had asked me before, though, about--

Robin Feldman: It absolutely won't work. In part it's because government has put its thumb on the scale in a way that the drug companies have figured out to use to their own advantage. Before I shift to that, if it's all right, I'd love to just give you a couple of examples of where this is actually happening.

And, some conversation on this program we took with Matt Stoller about how competitive the beer industry is; and I'm sure Budweiser tries to do things like that. A bar owner has to decide whether they are only going to be an attractive place to come on a Saturday night if they only have Budweiser. So, there's a cost to excluding the microbrewery. And, even if they succumb to that--even if they think, 'Oh, there's not that many bars around. I think I can get away with it,' the microbrewery will open its own microbrewery and will compete with the better beer, if you think the microbrewery--if there are people who wish to consume the microbrewery's product. We are living in the heavenly time of, I think, the greatest number of craft breweries in American history. There are 5000 small, independent microbreweries out there. The beer is fantastic. It's the golden age. So, that's working, despite the urge of Budweiser to do that. But that won't work in the drug case, will it?

Robin Feldman: The Formulary is specific to a particular health plan. And the Formulary will decide whether you the patient, who is the customer of that health plan, can get reimbursed for that drug, and what level you'll get reimbursed. In other words, does your plan cover it? And there are often up to 5 tiers in health plans; sometimes even 7. And those tiers will determine, um, whether you can access and how much it costs. But those tiers have become a way that the players in the market--specifically the PBMs and the drug companies--have figured out how to drive people into the more expensive drugs. In a way, of course, that benefits the various players along the way. The name of the game in this is: volume. So, a drug company that has a lot of volume with a particular PBM, or a hospital--same kind of deal happens with hospitals--so, a drug company with a lot of volume can offer a better deal in exchange for excluding rival drugs from the formula. Or, just making sure that the rival drug has a disadvantaged position. So, let me give you an example with some simple numbers. Imagine a large company saying to the PBM, 'I'll give you a dollar back from each of these millions of bottles of mine that you sell, if you agree not to put my competitor on the menu.' So, that's worth--if you are a PBM, that's worth millions of dollars to you. Now, if the competitor--particularly as a new entrant or a new generic--starts out selling only a thousand bottles, how could it ever compete? That new entrant could never offer enough off its thousand dollars of bottles, or a thousand bottles, to compensate for the millions of dollars of the PBM would have to forego. And it gets a little worse here. Some patients will always need their prescription filled with the brand name drug. Maybe they have a reaction, or a special condition. Or maybe they are just wooed by advertising and they get their doctor to write, 'No generic, no substitutions.' Whatever the reason, the health plan will have to fill some prescriptions with that high price. So, if I'm a PBM, or a health plan, and I spurn the attractive deal offered by the drug company, I'm going to have to pay that ridiculously high list price. And all of us know that could break the bank. So, when the brand drug calls, company comes calling, the big company, and offers to deal with a PBM, that's a deal that even the PBMs and health plans can't afford to turn down. That's kind of a power that just speaks volumes. Literally.

Russ Roberts: I want to talk about, a little bit more about the Pharmacy Benefit Managers, the PBMs, for one more bit, and then get more into the incentives. But, tell us what the Formulary is. Because, it's a rather striking thing that--again, most of us are simply not aware of. We go into the doctor. The doctor writes us a prescription. We almost never say--I do, because I'm an economist and I read your books--we almost never say, 'Is there an alternative?' We just say, 'Oh. Well, that's what I need. That's what I'll send to the pharmacy.' I go to the pharmacy; I say, 'Could you fill this, please?' They do. That's the end of the story. Usually. And there's a thing working in the background, part of which we talked of is the pricing. But there's also this thing called the Formulary. So, describe that.

Robin Feldman: And that's a key question I spent a lot of timing researching and thinking about. Why can't the big insurers bargain against this? Why don't they? Now, certainly there are many small, regional plans who don't have much power; and one can't underestimate the complexity of the volume flow of claims in these ridiculously complex agreements, and what it would cost them to try to edit all of those, to audit all of those to bargain for the terms they want; then to make sure that the terms are going through. They are not going to be able to do that. But, how about the big plans? We've got big players out there. Why would they ever allow the PBMs to push them into a system like this? They are not naive waifs. And, the answer, I think as always: It's a pretty simple piece of economics. The health plans' short term goal is to keep this year's payments--to the PBM and through the PBM to the drug companies--but the goal is to keep this year's payments as low as possible. And remember that volume agreements can work so that those who are already in the market and have a high volume can offer deals that the cheaper entrants can't match. So, to the middle player, the price is cheaper this way, even if the long-term consequence is to block out the cheaper competitor. And, when a health plan with market clout asks for rebate pass-throughs or access-to-claim terms, the PBMs are starting to offer price-protection contracting. So, with a price-protection contract, the PBM promises the plan that prices won't rise, say, more than 2-4% a year. And then tells the plan, 'Why bother with all the grubby details, expensive to sort through? You care about the bottom line. That's what we'll guarantee.' So, in this way, the health plans' short-term interest in controlling price increases is satisfied without having to sacrifice things that the drug companies want; and that, of course, helped line the pockets of all the intermediary players. Again, it comes back to: What are the incentives driving the system? And they begin with the power that the drug companies have from the patent and exclusivity systems, and their ability to string those out, pile those on, one after another.

Russ Roberts: I understand why they do what they want to do. I don't understand why the drug companies and the health insurers put up with it. Because, it would seem to me, they should--if this is really going on, and they are taking a big slice, this complex rebate process and the use of formularies to keep out competitors: Why wouldn't the drug companies just work directly with the health insurance companies? Let the health insurance companies negotiate the deals; cut the PBMs out of it; and then everybody will be better off. Now, whether the patient is going to be is still a different question. But, it seems like both the health insurers and the drug manufacturers are being taken advantage of by the PBMs.

Robin Feldman: Well, it wouldn't be in a PBM's interest to get rid of this and to operate transparently, because the PBMs' revenue and profit margins have been rising rapidly in recent years. Again, it's the incentives within the system that are driving the behavior that we have. The profit margins for companies on their drugs is about 76% in terms of the marginal cost, once you have the drug in place. It goes back to why companies are incentivized to try to make secondary changes to a drug rather than inventing a new one. Well, the R&D [research and development] is much less when you make a secondary change to a drug. So, when a company makes a secondary change to a drug, like adjusting a drug's dosage, the R&D investment is far less than required for the drug's initial development. So, you may get a change that means very little from a therapeutic standpoint, but you get a lavish reward in return. That's what the drug company is going to be driven to do. The same reason we see PBMs driven the direction they are there, because, well, that's where the profit is.

Russ Roberts: But the question I have, and I'm not sure it's answerable--I'm going to ask it two different ways; you can figure out which is maybe the best way to get at this. So, this is a horrible system. The way you describe it. If it's accurate. And it seems, based on these kind of, the small pieces of information we have from these documents that are revealed in lawsuits, that this is an extraordinarily byzantine and not-so-helpful structure for how drug prices get set. So, the first question that comes to mind is: Why are there only 3 big ones? Why aren't there PBMs able to compete by offering a more transparent deal? Why doesn't somebody start a transparent one, and do a better job, and get rid of all this, what looks on the surface to be exploitation?

Robin Feldman: And the Medicare patient's cost-sharing obligation, by the way, in this fancy plan, is based on the high list price. So, the patient gets socked with higher cost-sharing in all of this. So, it's the taxpayers who are paying to subsidize it, and the patients who are opening their own wallets.

Robin Feldman: It's my pocket. Your pocket and mine and everybody else's out there who pays taxes. If a Medicare plan gives preference to an expensive brand over the generic, the plan saves money, because that super-high brand price quickly pushes the patient through the donut-hole, and the government picks up 80% of the cost. Good for the plan. Great for the drug company. Bad for taxpayers.

Robin Feldman: Yeah. I like to refer to them as ice cream and donuts. So, consider what's called the 80/20 Rule--and this is in the Affordable Care Act. It mandates that health insurance companies have to spend 80% of their premium dollars [i.e., money taken in as premium payments by customers--Econlib Ed.] on medical claims--as opposed to profits or administrative costs. Sounds good. After all, limiting profits for health insurance is, should keep a lid on premiums. But, not so fast. So, think of it this way. If Mom says, you can have 10% of a bowl of ice cream, a smart kid will say, 'Make it a bigger bowl.' And that's exactly what happens. If health plans can only have 10% of premiums of their profits, well, of course they are going to want higher premiums. And so, higher drug costs play into that. And then the health plans have less of an incentive to push back on rising drug costs, if those costs help lift the profit ceiling. That's not what[?] health designed [?] economic incentive. That's my ice cream. Let me give you donuts. So, under the Affordable Care Act, once a Medicare patient reaches the out-of-pocket threshold, the government steps in and picks up 80% of the tab. This is what's known as reinsurance. It's not really insurance. It's the government pocket--

Robin Feldman: It is a problem when somebody else is paying for something that I can enjoy. You know, I may not watch my pocket quite as carefully. And, there are other problems in the health care market: My life and my comfort to me may be of infinite value in a way that is irrational. Health care spending is sometimes irrational. But, every budget has a limit. And, it doesn't take fancy mathematics to recognize that we are going to approach the point at which these price rises and the real spending going out isn't sustainable. There are--by the way, there are provisions of the Affordable Car e Act [ACA] that are making things worse; that even more distort what is happening here. I'm happy to discuss them--

Russ Roberts: Well, I think part of the problem, also, is that the health-insuring industry is also not very competitive. They can pass on increases if they have to--to employers, since many of those systems are employer-based. Employers then can charge a higher price for the fringe benefit that they offer of medical plans, medical coverage, as long as it's not too much, it's not so bad. Since nobody has spent--so few people are spending their own money, there's not as much care taken as to whether the money is being well spent.

Robin Feldman: So, many of these secondary patents are minor changes in dosage or delivery system. It could be a two-times-a-day pill into a three-times- or a three-times-a-day pill into a two-times. Some of them are merely combinations of existing medications that could be purchased individually for a lot less. So, let me give you an example. There's a drug called Treximet. It's a migraine medication that combines an old migraine medicine and Naproxen. You can buy those two separately for about $10 or $15. Treximet--which is just the two pills mixed together--cost over $800 for 9 pills. That's an extraordinary price difference. Now, we were, I was talking about the minor tweaks in dosage or delivery system. That may be of value, to some extent, to some patients. It doesn't mean it has no value. But, it doesn't have the kind of value that we would want for another decade or two of protection. That's really not what we're trying to incentivize. I think--I think if you step back and think about how our system is working or not working, the Patent and Trademark Office doesn't work whether something is better. Whether it delivers much value at all. It just asks whether it's different. And in this country--as opposed to some other countries--the FDA [Federal Drug Administration], when it approves, doesn't ask whether something is better or delivers much value. It just asks whether something is safe and effective. Nobody is asking that question in our system. And, it's a problem for the incentives.

Russ Roberts: So, we talked about this in our previous conversation. I want you to go into it, as you do in the book, this latest book. I don't think most of us have any idea of what these secondary patents are. And, I've always just assumed, well, 'If it's patented, it's like a new thing; and that's great.' It's shocking how unhelpful many of these so-called innovations are, and these new patents that are just a re-patenting--a river[?] term you use. So, talk about what things that are qualifying as, "new patents."

Robin Feldman: So, I always want to start by saying that the drug companies have brought extraordinary innovations. That is important for society. And, those innovations should be handsomely rewarded. That's how the system is designed to work. After a period of time, however, we want competition to step in and drive prices down. And we want the companies to go back to the bench and start inventing. The system has developed in a way that distorts what we are seeing. So, when you have 3/4 of the drugs with new patents not new drugs but existing one, we are not getting the full innovation return on our patent investment. Se are getting a recycling and repurposing of what exists. We are distorting. So, those large numbers of how much it costs to develop a new drug: Those are for the new drugs. For what's probably less than 20% of the market, according to most estimates. But, 80% of what we've got out there don't have those costs. And they are not necessarily the innovation we want. So, the cycle of innovation/reward/then competition, is being distorted into a system of innovation/reward/more reward and less-valuable innovation.

Russ Roberts: Now, the pharmaceutical industry will respond to this with a couple of claims. All of which have some truth to them. And I'm curious how you respond to this. So, one of the claims is that, 'Well, all these profits from drugs,' that eventually--much of them do flow to pharmaceutical companies, not just to the PBMs or the health insurers, 'that's great because that leads to more innovation. We need the drug approval process'; it's incredibly expensive, as you point out in the book. It's not an easy question to answer, how much it takes to bring a successful drug to market, but it's an enormous amount of money to prove safety and efficacy. It might be a billion or more. It's at least hundreds of millions. So, 'We need these profits to sustain, to overcome the costs of development and regulation. And also to make up for the drugs that don't make it: that aren't worthwhile, that aren't successful.'

Robin Feldman: These tweaks really are business as usual in the pharmaceutical system. There are some marvelous outliers. I found one drug when I was researching--it took--a drug that already had an absorption coding around it: put a different coding around it; and got a new patent for that. Sold it by a new name and a new drug. That kind of game is silly. But the basic approach of tweaking drugs a little bit? That's business as usual throughout the industry. And, you're right: Economically, it isn't something that makes sense. Now, my answer for value is simply that it doesn't take the same level of R&D to tweak a drug in that way. You should have gotten your reward from your initial patent. To the extent that this tweak has some value to the market, the market value will reward you. If some patients would rather take it twice a day rather than three times a day--well, that should be enough to compensate for the tweak that you did. It isn't necessary for the government put its thumb on the scale and give you an extraordinarily lavish reward that blocks the competitors out.

Russ Roberts: But that's the heart of the problem. You can debate what the heart of the problem is; and I have one other one that I want to share with you in a minute. But in many ways, this is the crux of the issue, this issue of patents and the ability to get a monopoly and to keep out generics. So, as I mentioned before when we talked; I think most of us think, 'Oh, you get a patent; you get monopoly pricing for x years. Depends on how long it took to get it to market. But then, the generics come in; the price drops.' And that does happen occasionally. But this idea of secondary patenting is where you just change--you tweak it. And you continue to get the monopoly profits and make it harder for generics--either illegal or difficult--for generics to get a foothold. And that's just like shockingly bad. And clearly the idea that you could patent something that's just a tweak on what your previous idea was and extend the power is not what anybody--any economist--would say. Unless we're under-appreciating, say, the new delivery system. That new delivery system makes it sound like it's a--you know, a rocket launcher versus a hand-delivered package. Or, airmail versus horse. A lot of times it's just the coding of the drug. Right? And that's just--or is that just kind an obscure, occasional example of this? Because those [?] seem to be rather--it's rather remarkable to me that that could allow for--to continue to get monopoly pricing.

Robin Feldman: There is an extraordinary distortion here. And I see it in two ways. One is what you are talking about, which is, you see a huge stampede into cancer drugs, which is inspired by the exclusivities that are available there and aren't available other places. So, you see a lot of drugs that have very little effect, if any--maybe extending life for a month or two, or maybe not--but extraordinarily expensive. Economically that doesn't make sense. You also have to think about it in terms of the comparative economics. So, let's say you've got--why are we seeing things that do small tweaks in the market? It's because that's where the returns are so high. So, sometimes you'll hear drug companies say, 'Well, if you don't let me get a reward on altering the existing drug, then I won't do that; and there may be some good changes out there that won't happen because of that.' My answer to it is: It's a comparative problem. If we were allowing market forces to work, that change, and reaching to that group of patients would be an economically attractive solution to you. It's only because we have this system that lets you make hay out of things that have very little value and cost you very little but you are going to make a fortune on it, that we are driving you into that and we are getting a distorted market from it.

Russ Roberts: So, you gave a silly example--a different coding. And yet you find in your work that--I'm quoting--'78% of the drugs associated with new patents were not new drugs coming onto the market but existing drugs.' So, at one end we have the new coding. Maybe at the other end, we have something that works better for women than men, or better for old people than young people, or doesn't make you nauseous. I assume some of the tweaks have actual value than just the coding. But the problem I have as an economist is that some of those "improvements" are trivial. And so, as a result: It's true they are worth something. But, it should be compared, that new value, to the generic. And what this does is, unfortunately, keep the generic just out of the choice system. And that's just a bizarrely bad way to organize anything. I know in medicine--you know, people say, 'Well, I want the best.' Well, the best extends by your life extends your life by 6 days and costs a million dollars versus $10, a lot of people would say, 'I'll take the $10 one and let my kids--or even taxpayers who I don't know--take the money.' It seems wrong. Right? And that whole comparison of value versus cost is totally eliminated by this secondary patent opportunity.

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