Well there are degrees of dysfunction. Compare, for example, the healthcare system of Western European countries to that of the US. I realize this is a charged issue where people have different ideas of how it should work, but for a certain set of goals (maximum coverage, minimum cost), Europe generally does much better than the US. Other things (diversity, productivity, entrepreneurship, I would argue) are done better in the US.

There are obvious and simple ways the patent system could be improved. For example, drug patents already are treated specially, in that they expire quickly--perhaps a similar system could be applied to software patents. Or, exemptions could be made for implementations of patented software that exist for reasons of interoperability or compatibility. Another option would be to enshrine into law the promises companies make not to sue. (As in, the company is not allowed to renege on their covenant not to sue--this is actually probably not really possible from a legal standpoint, but I'm not an expert.)