1. A Prescription for Excessive Drug Pricing: Leveraging Government Patent Use for Health 
Amy Kapczynski
YLS Panel on Drug Pricing
Sept. 26, 2016
For more details, see
Amy Kapczynski and Aaron Kesselheim, ‘Government Patent Use’: A Legal Approach To Reducing Drug Spending, Health Affairs (May 2016).
Brennan, Kapczynski, Monahan and Rizvi, A Prescription for Excessive Drug Pricing, Yale J. L. & Tech. (2016)

2. US Drug Costs Are Rapidly Rising, Driven by “Specialty Drugs”1
Image from Cynthia Cox et al., Recent Trends in Prescription Drug Costs, J. Am. Med. Association (2016).
Source: Amy Kapczynski, Global Health Justice Project

3. Healthcare and industrial policies have created a “drug-pricing trap”
Industrial policies protect exclusive intellectual property and monopolies
Healthcare laws increasingly mandate that those with insurance have access to new medicines

4. Hepatitis C
Hepatitis C is a liver disease caused by a virus, causing illness and death. It affects as many as 5.2 million people.
In 2014 new drugs introduced that provide 95% cure rate, but cost $84,000 for a 12-week treatment.
The price is leading to extreme rationing.
In 2014, Medicaid paid $1B for HCV drugs but only treated 2.4% of HCV patients in its care.
Treatment rates are even lower in prisons. 17% of the prison population has hepatitis C. Less than 1% are getting treatment.

5. What if the drug cost $1000?

6. Source: Amy Kapczynski, Global Health Justice Project

7. 28 U.S.C. § 1498 “Government Patent Use”
The statute waives federal sovereign immunity for patent infringement
Patent holders are entitled to “reasonable and entire compensation” but not injunctive relief
Government may negotiate in the shadow of its § 1498 power or employ that power outright
Source: Amy Kapczynski, Global Health Justice Project

8. A Lost History
1958 decisions by the Comptroller General (Herbert Cooper)
Pfizer case: DoD contracts with an Italian firm for a generic antibiotic that was 72% cheaper than Pfizer’s version, relying on 1498, and Herbert Cooper.
By the mid-1960s, agencies uniformly refuse to consider patents or infringement liability in procurement.
Pharma tried to have the law revised to be limited to national security issues, but failed. According to the Comptroller General, such an amendment would “forgo one of the valuable powers which the Government has to assure fair prices,” and to remedy “exorbitant pricing” where it was present.

9. A Lost History
“The Federal Government has said that it has adopted this practice recognizing the validity of the patents involved, simply because it feels that it is saving money which really means in the case of the procuring agency that it is doing nothing more largely speaking than saving its own appropriations to the extent that it can buy the infringing drugs at a lesser price than the lawful drugs, and it is inevitable that that can be done.”
PMA lawyer in 1965 Senate Hearing
DOD alone procured 30 drugs this way in the 1960s, at significant discounts, and apparently for modest royalty rates (e.g. 2% of patented price)

10. Back to the Future How to set a reasonable royalty?
Risk-adjusted R&D, plus reasonable profit

11. Who and How? From simpler to more complex
IHS, VA, DOD – generic registration, simple procurement, royalty determination
Medicaid / Medicare – CMS rebate agreement w/ generic company, letters assuming liability.
State prisons – DOJ investigation of 8th Amendment violations, intervention in suits
Source: Amy Kapczynski, Global Health Justice Project

12. Thank you
Source: Amy Kapczynski, Global Health Justice Project

13. Annex I: 28 U.S.C. § 1498, in relevant part
“Whenever an invention described in and covered by a patent of the United States is used or manufactured by or for the United States without license of the owner thereof or lawful right to use or manufacture the same, the owner’s remedy shall be by action against the United States in the United States Court of Federal Claims for the recovery of his reasonable and entire compensation for such use and manufacture For the purposes of this section, the use or manufacture of an invention described in and covered by a patent of the United States by a contractor, a subcontractor, or any person, firm, or corporation for the Government and with the authorization or consent of the Government, shall be construed as use or manufacture for the United States.”
28 U.S.C. § 1498(a) (2012)
Source: Amy Kapczynski, Global Health Justice Project