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What happened to Bernie Sanders's best idea?

Scott Eisen/Getty Images

Bernie Sanders's best idea is, so far, missing from his presidential campaign.

Both Sanders and Hillary Clinton have unveiled plans to cut drug prices. Both documents feature the standard raft of liberal ideas: Let Medicare bargain with drug companies, let pharmacies import drugs from Canada, force more transparency in pricing, and so on.

But Sanders isn't a standard-issue Democrat when it comes to pharmaceutical spending. He's a radical. Yet his most radical idea — and perhaps his best — was left out of his proposal.

The pharmaceutical industry is staggeringly, ridiculously profitable — its margins dwarf those of other industries. Pfizer, for instance, boasted a 42 percent profit margin in 2013. And, as the BBC notes, Pfizer wasn't alone; in 2013, "five pharmaceutical companies made a profit margin of 20 percent or more — Pfizer, Hoffmann-La Roche, AbbVie, GlaxoSmithKline and Eli Lilly."

Pharmaceutical profits 2013

BBC

Whenever you see profits like that, you should ask a simple question: Where is the market failing? Why isn't competition grinding down those profits into nothing?

The answer, here, is there's no market at all. The patent system give pharmaceutical companies a government-backed monopoly over the sale of their drug for 20 years. Within that period of time, they can charge as much as they want for the drug.

We're number one — in drug prices

Prescription drugs Mario Tama/Getty Images

The good of this system is that extraordinary profits can generate extraordinary innovation — and they have. For all the talk of me-too drugs, the pharmaceutical industry has driven tremendous advances in human well-being. Liberals angry about the high prices of pharmaceuticals are often too quick to dismiss the benefits of those drugs, or to assume that they would have been developed and brought to market amid more modest rewards.

The bad of this system is that pharmaceuticals are becoming increasingly, wildly unaffordable. America's spending on pharmaceuticals has more than doubled since 2000. Other countries offer patents to drugmakers, but they recognize the fundamental problem — when there's no competition for a lifesaving medicine, there's almost no price that dying patients and their families won't mortgage their home to pay, and so there's almost no price that a sufficiently mercenary pharmaceutical company can't charge.

Every other developed country deals with this problem the same way: The government sets pharmaceutical prices. So in Canada, for instance, Pfizer can have their monopolies, but they can only charge what the Canadian government allows. America allows pharmaceutical companies to charge whatever they want, and so they do.

There's another, subtler, problem lurking in the American system: The big money is made in treatments for the most common conditions. If you invent a drug that cures baldness, or lowers cholesterol, the profits are massive; if you invent (or, in the case of Daraprim, become the sole manufacturer) of a drug that treats a rare, but deadly, condition, the possible profits are minuscule — at least unless you jack up the drug's price to ridiculous levels.

The result is predictable: Drugmakers spend fortunes on derivative drugs for common conditions and nearly nothing on more serious, but rare, illnesses.

Bernie Sanders's radical idea: prizes, not patents

Before he ran for president, Sanders had a fascinating idea for overhauling this system. The bill was S.627: The Medical Innovation Prize Fund Act. It proposed setting aside 0.55 percent of gross domestic product — about $86 billion in 2012 — as prize money for pharmaceutical development.

The concept, in its way, was wonderfully simple; rather than rewarding drug companies with a lengthy patent for creating new drugs, the government could reward them with prize money. The size of the prizes would be set based on the severity of the condition, the size of the patient population, and so on. So the prize for a drug curing Alzheimer's might be in the billions of dollars, while the prize for a slightly better treatment for tinea versicolor would be tiny. Either way, the drug would then be generic from the get-go — anyone could produce it, which would mean costs would fall sharply.

This is a bold reimagining of how pharmaceutical innovation could, and should, work. The idea, as an analysis from Knowledge Economy International observes, is to "separate the markets for products from the markets for innovation." It would create a pathway to offer huge rewards for innovations that didn't have huge markets, and to make it more profitable for pharmaceutical companies to pursue real breakthroughs rather than simply steal market share from one another by creating derivative drugs for existing markets.

Even so, Sanders's bill goes quite a bit further than I think is wise. He more or less does away with the patent system entirely — a move that requires too much faith in the federal government to decide what drugs need to be developed, and that suggests too little faith in a market that, all things considered, has done amazing things.

When I asked Sanders about the concern that reducing pharmaceutical profits could harm innovation, he had little patience for the idea. "A lot of the money in health-care research goes into me-too drugs, copycat drugs where they will come up with another drug that really doesn't substantially increase the kinds of benefits that it has on the patient," he said.

Sanders is too pessimistic. There's research showing higher expected profits lead to more pharmaceutical innovation, and that that innovation has real benefits. Moreover, even me-too drugs can have their uses; different drugs work on different patients, and while derivative drugs may not have massive benefits for society, they can have huge benefits for small groups of patients.

So I wouldn't go as nuclear as Sanders. The current pharmaceutical market has worked too well to do away with it entirely. My preference would be to keep the patent system in place but begin to develop a prize system in parallel — perhaps starting with rare but severe diseases.

Still, the prize idea shows Sanders at his best: uninterested in the customary boundaries of American policymaking, skeptical of the industry-friendly status quo, and unafraid of angering some of the richest corporations on Earth. It's the kind of actually bold thinking the presidential race — and the country — needs more of, and so it was disappointing to see it left out of his plan to cut pharmaceutical costs. Here's hoping it makes a comeback.

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