Legislation passed by the U.S. Senate on July 31 would weaken patent protection for brand-name drugs by allowing generic drugs to reach the market sooner. Supporters claim that the bill, S. 812, will reduce drug spending by $60 billion over the next 10 years.

That may sound like a lot, but within the context of the $23 trillion that will be spent on health care over the next 10 years, it is a drop in the bucket – a savings of only 0.26 percent. Even if there were no negative effects on the health care system, those savings would barely impact soaring insurance premiums. Yet the bill would impose severe long-term costs on the system and on our nation’s health.

Weaker drug patents would reduce incentives to develop the next generation of drugs. Innovative drugs can do far more to hold down exploding costs and improve our quality of life, but they must be given a strong environment in which to develop.

Brand-name drug companies already face shorter effective patent periods than other industries. Although all patents last 20 years, drug makers spend 8.5 years, on average, putting their drugs through an extensive FDA approval process. That means only 11.5 years remain for the manufacturer to sell the drug and recoup its costs before generic competition ensues. Those costs have grown dramatically, from $231 million per drug in 1987 to $802 million in 2000.

The Hatch-Waxman Act of 1984 was passed to help compensate for the reduced patent time and, simultaneously, to make it easier and far less costly for generics to be brought to market. That act, which the Senate bill seeks to change, has been a great success for both brand name and generic drug makers.

Before Hatch-Waxman, many generic drug firms were hampered by requirements that their copycat drugs undergo the same extensive FDA process as original brand-name drugs. The act changed that by specifying that generic versions would only have to show “bioequivalence” to the brand-name drug, a far less costly task. The generic industry has thrived ever since.

In 1984, generic drugs accounted for just 19 percent of drugs sold. They now constitute half the market for prescriptions and are predicted to reach 57 percent in 2005.

Brand-name manufacturers, meanwhile, must remain highly profitable if they are to continue the research and development that yields breakthrough drugs. Developing new drugs is a high-risk proposition – only one out of 5,000 compounds that are tested will make it to market. And as any investment counselor will tell you, greater risk demands a higher return on investment in order to attract capital.

Enemies of the drug industry often complain about these profits. But if drug patents are weakened, there will be less risk taking and profit margins would have to be even greater over the shorter patent period.

The most effective health-care spending that Americans do is on prescription drugs. Much has been made about double-digit percentage increases in drug spending (not prices), but most of that increase arises from increased utilization. This increased utilization of drugs, however, has brought about a much larger reduction in other health-care spending.

Columbia University professor Frank Lichtenberg analyzed three years of data (1996-98) and found that the additional dollars spent on newer brand-name drugs reduced other health-care spending by more than seven times as much. Furthermore, nearly 18 cents of each dollar spent is plowed back into research and development.

The drug industry currently stands on the cusp of a new era. With the mapping of the human genome, researchers will now be able to study how certain genes affect an individual’s response to a drug. By factoring in a person’s genetic profile, doctors will be able to customize individual treatments and avoid deadly reactions to drugs.

As “pharmacogenomics” becomes more developed, the market for drugs will become more segmented and “blockbuster” drugs may become more scarce. These top-selling drugs have been extremely important to the drug industry’s profitability. Only about three out of 10 drugs brought to market earn enough revenue to recoup their costs. It’s the blockbusters that earn the lion’s share of profits that are used to finance continued R&D.

Strong patent protection will be essential if blockbuster drugs become less common. Unfortunately, drugs that are never created because of S. 812 will go unnoticed. To make matters worse, the Senate added amendments to the bill that increase the scope of price controls on drugs. One allows states to ratchet down the price controls they impose through their Medicaid programs and offer these prices to others who are not on Medicaid. Another allows the re-importation of price-controlled Canadian drugs.

America has taken the lead over the once-mighty European pharmaceutical industry by maintaining strong patent protection and relative freedom from price controls. Hopefully, the House of Representatives will correctly assess the true costs and benefits of S. 812 and kill it before it kills new medicines and, ultimately, Americans.

Chris Middleton is the Senior Health and Tax Policy Analyst for the Center For Entrepeneurship of the Pacific Research Institute in San Francisco. He can be reached via email at cmiddleton@pacificresearch.org.