The Government Can Legally Commandeer Drug Patents

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In last Monday’s CNN healthcare debate between Sens. Bernie Sanders and Amy Klobuchar on one side, and Sens. Lindsey Graham and Bill Cassidy on the other, Cassidy accused Sanders of wanting to expropriate the property of the pharmaceutical industry. “I’ve heard Bernie say in a VA hearing that if we can’t afford a medicine, the government should just take over the intellectual property—it should commander the manufacturing plants, the distribution chains, it should become the pharmaceutical company,” Cassidy claimed.

Cassidy appeared to be referring to a 2015 letter that Sanders sent to the Veterans Affairs director asking him to override pharmaceutical patents on wildly expensive life-saving drugs to treat Hepatitis C. But despite Cassidy’s professed horror at the idea, there’s nothing extralegal or even unusual about the government overriding drug patents. The government’s right to do so is etched into federal law—a law that it has regularly relied upon for more than half a century.

New drugs commonly receive years of patent protection that allow pharmaceutical companies to charge high monopoly prices. This is meant to reward drug manufacturers for years of investment into research, development, and clinical trials. Manufacturers front the costs of development, and in return get extensive patent protection to recoup those costs, and then some.

Take Sovaldi, one of the expensive new hepatitis C drugs that Sanders wrote about in 2015. It’s a miracle drug, capable of wiping out infections in twelve weeks with minimal side effects compared to earlier treatments.

Aware of its profound effects, Sovaldi’s manufacturer, Gilead Life Sciences Inc., released the drug in 2013 at a retail rate of $1,000 per pill—$84,000 for a full treatment. The eye-popping price drew the ire of the U.S. Senate, and dozens of state Medicaid programs had to limit patients’ access to the drug. The high cost even led the VA to stop enrolling veterans who need treatment for hepatitis C, triggering Sanders’s letter.

Sovaldi is an extreme example, but exorbitant drug prices are a growing problem in the United States. Certain cancer treatments now cost more than $100,000. Armed with government-granted monopoly protection, manufacturers price these drugs at whatever they think they can extract from the market (i.e., desperate people with severe illnesses), rather than what the drugs actually cost to produce. These costs are borne by government programs, insurers, and ultimately patients.

But the government has a potentially powerful safety valve at its disposal to counteract outrageous pricing by the pharmaceutical industry. Under 28 U.S.C. § 1498 (“Section 1498”), the federal government has the power to use or manufacture any patented product, and must provide only “reasonable” compensation to the patent holder. The government could therefore elect to either contract with another manufacturer to produce a cheap generic version of expensive patented drugs. Or it could use the threat of Section 1498 to negotiate a license from the brand-name manufacturer to use their drugs at a steep discount.

This is sensible policy: intellectual property—like all property rights—is meaningful only by virtue of government enforcement. Government provides the patents, the courts, and the laws to protect drugmakers’ intellectual property. In exchange for this valuable enforcement of intellectual property rights, the government gets to insist on its own right to carve out exemptions from patents for public use, while providing fair compensation to the patent owner.

Another way to think of Section 1498 is as eminent domain for drugs. As Hannah Brennan, Amy Kapczynski, Christine Monahan, and Zain Rizvi explained in a 2016 law review article, the government must have the power to acquire property for public use with fair compensation in order to combat what’s known as the “holdout problem.” Without eminent domain, a single property owner could extort an astronomical sum from the public fisc for the use of his or her property, while holding up a socially beneficial project. The same is true for drugs: a patent owner with a monopoly on a socially beneficial drug can charge exorbitant prices that subvert the public’s interest in access to health-improving medication. Section 1498 gives government a tool to defuse this harmful power.

It’s a tool that the government once wielded with some frequency. As Brennan and her coauthors explain, Section 1498 was used routinely by federal agencies in the 1960s and early 1970s to obtain cheaper generic drugs. In one notable case, the Defense Department purchased an antibiotic from a generic manufacturer in Italy at a 72 percent discount on the price charged by Pfizer, the drug’s patent owner. During the Anthrax scare in 2001, the Bush administration threatened to use Section 1498 to purchase generic versions of Bayer’s antibiotic ciprofloxacin, which proved enough to coax Bayer to cut its price in half.

The government’s use of Section 1498 to cut drug prices waned as the pharmaceutical industry’s power grew. In 1965, the pharmaceutical lobby tried (and failed) to amend Section 1498 to limit the law only to instances that implicated “national security.” Government officials strongly opposed any change that would “forgo one of the valuable powers which the Government has to assure fair prices” and to remedy “exorbitant pricing.” Yet government reliance on the law to purchase prescription drugs still fell off in the 1970s during the Nixon administration.

Section 1498 is still used today in areas outside of prescription drugs. The U.S. Army Corps of Engineers relied on Section 1498 to use patented methods to clean up hazardous waste. The government also uses the law to use patented electronic passports and genetically mutated mice, according to Brennan and coauthors.

But if the government wants to put downward pressure on drug prices, Section 1498 remains ready at its disposal. One of the most frequent objections to government regulation of drug prices is that it would stifle innovation. As Sen. Cassidy said during the CNN town hall, “It’s a cheap fix to commandeer [the drug industry], and the price is tremendous. There won’t be that cure for Alzheimer’s, there won’t be that cure for cancer, there won’t be because there was a short term grab.”

These concerns are overblown. By its own terms, Section 1498 entitles patent holders to reasonable compensation, with the right to sue in federal court if they don’t like what the government offers. The law thus functions as a safety guard on the monopoly power of drugmakers, ensuring that they receive prices that are not too hot, not too cold—to get fair compensation for research and development plus a reasonable profit, but not the windfall overcompensation currently charged on the retail market.

There’s some push to redeploy Section 1498 to cut the price of expensive drugs. Louisiana health secretary Rebekah Gee has been urging federal officials to employ the law to cut the price of hepatitis C drugs. The state’s 35,000 uninsured or Medicaid-enrolled residents with hepatitis C are projected to cost Louisiana $764 million per year at the drugs’ retail rate.

Any hope of using Section 1498 to cut costs, however, requires action by the Trump administration. That will almost certainly be a long shot. Candidate Donald Trump campaigned on using Medicare’s purchasing power to negotiate lower prices from drug companies. But upon taking office, Trump promptly ditched this pledge after meeting with a group of pharma executives, suddenly accusing Medicare of “price-fixing” to disadvantage drugmakers.

Of course, that’s not true. Medicare is (in)famously barred from negotiating drug prices—a provision written by pharmaceutical lobbyists and included in the Medicare prescription drug benefit bill in 2003 to reassure conservatives that government purchasing power wouldn’t distort the free market.

But Section 1498 could provide an end-run around Medicare’s price-taking straightjacket. With Section 1498 looming overhead, pharmaceutical companies could either grant the government discounted licenses to use patented drugs in public programs like Medicare and Medicaid, or else risk the government invoking the law to manufacture even cheaper generic drugs elsewhere.

If Trump rediscovers his campaign pledge to drive a hard bargain with drug companies, Section 1498 already gives him a backdoor way to do so. Section 1498 is a big stick, and if the administration bothered to pick it up or even tweet it out, the threat of this power alone could compel drugmakers to slash prices.

What Sen. Cassidy calls “commandeering” has actually been federal law since 1942. If the government wants to, it could use its power to countervail the monopoly power of patent-owning drugmakers. Doing so would liberate lifesaving drugs from corporate domination for public use.