Friday, January 25, 2008

Prizes to stimulate innovation in pharmaceuticals

James Love and Tim Hubbard have published their paper on using prizes to stimulate important pharmaceutical drug developmentThe Big Idea: Prizes to Stimulate R&D for New Medicines in the Chicago-Kent Law Review, Volume 82, Number 3 (2007), pp 1519-1554.


In this article we have argued that it is possible to construct a viable new system to finance innovation in a way that maximizes access to new inventions while continuing to exploit commercial competitive market incentive mechanisms.

The prize mechanisms should be thought of as part of a larger ecosystem of financing medical R&D and should be implemented in combination with other instruments, such as direct or indirect government funding of basic research, non-profit product development partnerships (PDPs), clinical trials, and other traditional and non-traditional types of funding R&D. What the prizes offer uniquely is an alternative to the marketing monopoly as an incentive for private investment.

When implemented properly, prize based models can directly reward successful R&D projects, while permitting marginal cost pricing of products and avoiding the trap of overly bureaucratic and centralized decision-making. By decoupling the rewards for successful R&D investment from the sales of products, the new model will permit governments to create more efficient and useful incentives for R&D that focus on inventions that improve health outcomes.

Prize mechanisms can be implemented in ways that are consistent with a robust patent system, but are best implemented in systems where the patent system is used to establish ownership of inventions and thus claims on the prize rewards, rather than through exclusive rights to market products. It is important that those incentives are linked to broad research priorities, and not be overly prescriptive in terms of diseases, mechanisms or technologies. By eliminating marketing monopolies on products, there is an opportunity for much greater efficiency through unrestricted competition to manufacture the resulting medical products.

The elimination of marketing monopolies, the de-coupling of R&D incentives from prices, and the creation of an evidence-based reward system linked to changes in health outcomes will lead to significant reductions in expenditures to market products, the area of the largest waste in the current system.

It is important that the total obligations to finance the reward payment are not directly tied to utilization, but rather measures of a country’s ability to contribute to global R&D costs, so that countries do not have incentives to limit access to products in order to control budget outlays on innovation rewards.

Prize mechanisms can be introduced in areas where the markets are functioning the poorest, such as for diseases that primarily affect poor people living in poor countries. But the largest benefit will come from the adoption of prize mechanisms in higher-income markets, such as the United States, both because improvements in the efficiency of R&D incentives in high-income countries are important for the development of medicines used everywhere, and also because pricing norms in high-income countries are forcefully exported to developing countries, creating enormous hardships.

Whilst additional detailed modeling will be required to improve reward structures and evaluation criteria, these efforts are feasible and not materially different from efforts by governments or insurance companies to determine acceptable reimbursements for insured products.

A significant shift to a new system of incentives that relies upon prizes rather than prices will also require a shift to a new global trade framework that focuses less on intellectual property rights and more on country contributions to mechanisms that support R&D, including but not limited to prize incentive mechanisms.

The major challenge to switching financing systems for medical innovation on a global scale depends on whether there is sufficient political leadership."

So we should
  • Offer prizes to stimulate effective R&D to produce drugs to tackle diseases not adequately targeted by current IP and market forces (This I agree with)
  • Implement them in parallel with a balanced IP system and government and other funding of basic research (Also agree)
  • Award prizes based on the success of the R&D in producing effective drugs (Agree)
  • Don't grant monopolies, where income depends on (hugely expensive and wasteful) marketing, high marginal costs and volumes sold. (Very sensible)
  • Decouple rewards from the maximising of profits from monopolies to allow a focus on efficient incentives to do effective R&D (This sounds good in theory. The crunch comes in the implementation and identifying measures of effective incentives and outputs - the problem with complex systems is that we often focus on the parameters that are easy to measure rather than those that provide the real measures of success, since the latter are so difficult to pin down. Though I agree wholeheartedly that the vast (from a global health system perspective) waste of money on marketing could potentially be short circuited, it's not clear that other inefficiencies will not be introduced in the inevitable efforts to game the system, whatever it might eventually turn out to be).
  • Recognise the level of the reward can't be tied to the overall global volume of sales of the drugs produced, otherwise rich countries have an incentive to restrict access to the drug, to reduce the size of the prizes they would have to pay to successful researchers. (Makes a lot of sense but I'm not sure how the level of the prize is actually to be judged?)
  • Introduce prizes urgently in areas of greatest health need, since the current market system is completely failing to produce (and make accessible) drugs to treat diseases which are widespread amongst poor people in poor countries. (Agreed)
  • Decouple price from reward to reduce incentives for companies (which would no longer be monopolies) to impose high prices on poorer countries (Agreed)
  • Look to the insurance industry as a successful parallel model to work from, though the precise details of the proposed prize based system need to be worked out.
  • Push for a big change to the current global trade infrastructure moving away from the obsession with IP monopolies towards a system which focuses on producing successful R&D outcomes. (Whilst I agree there is an unhealthy fixation on IP monopolies in the prevailing set up, it's still not clear to me what the finer details of the alternative system might be, albeit that prizes for effective pharmaceutical and medical research might be a part of it)
  • Understand that with such fundamental structural changes in the offing it would require paradigm shifts in global politics and strong political leadership to have any chance of getting off the ground. (This is a major barrier to anything getting done in this area)
It's a thoughtful paper worth perusing in full.

Update: David Reynold's presentation on the US Medical Innovation Prize Fund (S.2210, 110th Congress) -

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