Healthcare Patents and Hot-Dog Vendors

Excerpts from the book

Confronting Complexity

X-Events, Resilience, and Human Progress


John L. Casti

Roger D. Jones

Michael J. Pennock



Click to Buy Paperback



While patents on medical devices seem normal, patents on drugs and chemical entities may seem like a stretch. I am not sure that the law makers in Venice in 1474, who invented the legal concept of a patent, envisioned the need to patent molecules. In fact, molecules were not even envisioned at that time. We all know that a patent allows an inventor time to commercialize his or her product, but are patents really needed for the economic viability of healthcare? Shouldn’t healthcare be all about saving lives and promoting health and not about making money on people who desperately need healthcare? Do patents have a benefit to patients, not just the patent holders? I think the answer to this question is “perhaps.” Patents promote diversity of products in the healthcare market place by forcing inventors to develop drugs outside the domain of currently patented products.

This idea can be illustrated more colorfully with the famous hot-dog vendor example from economics. Consider a beach that contains, in addition to the bathers, two hot-dog vendors located at either end of the beach. There is nothing to differentiate their products, other than their location on the beach. Bathers will purchase from the closest vendor, therefore the value or quality of the product of a particular vendor depends on the number of bathers closer to the vendor’s cart than the competition. In order to capture market share and value, each vendor moves his cart closer and closer to the other until they meet in the middle of the beach. At this time, each vendor has captured half the market share of the beach, and, since they are in the same location, their differentiation has vanished. Their dogs are now commodities, and the market is driving the price to the cost of production. This is the classic process of commoditization.

Let’s apply this to healthcare. A perfect market for a pharmaceutical company is the hyperlipidemia market. Properly treated patients with high cholesterol can live a normally long lifetime, paying the manufacturers of Crestor or Lipitor quite a lot of money for the valuable service. Since this market is large, stable, and profitable, all pharma companies will want to enter this market, which is at the center of the healthcare beach. Diabetes is a similar market. If, however, the makers of Lipitor have a patent, other pharma companies cannot enter the exact same area of the beach as the Lipitor manufacturer. The patent forces the vendors to maintain some distance on our healthcare beach. The other non-Lipitor-producing pharma companies must come up with a product that is sufficiently different from Lipitor to be patented, or they must develop drugs for an entirely different disease, say pancreatic cancer. This forces companies to innovate and provide products for the entire healthcare beach, not just the stable lucrative parts of the beach. The downside for patients is that they must pay more for Lipitor while it is on patent. The upside is that pancreatic patients may receive life-extending treatments they would not otherwise have received.

The healthcare connections and tradeoffs are not always obvious to a Medicare patient entering a donut hole and wondering why the costs of medications are what they are. See related blogs for discussions of even more connections and tradeoffs in healthcare.

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