Eyes on the Prize: Incentivizing Drug Innovation without Monopolies

An Interview with James Love

James Love is director of Knowledge Ecology International, a Washington, D.C.-based not-for-profit. He is also co-chair of the Trans-Atlantic Consumer Dialogue Working Group on Intellectual Property and chair of Essential Inventions.

Multinational Monitor: You’ve proposed substituting prizes for patent monopolies to reward innovation in the pharmaceutical sector. Don’t patents provide an effective incentive for innovation?

James Love: Exclusive rights on inventions provide an effective incentive for innovation in some areas, but not in other areas. For example, a monopoly is not an effective incentive for investments in basic science, for projects that are pre-commercial or for the re-purposing of medicines that are sold off patent for a different indication. Nor are monopolies an effective incentive for research that establishes a drug has harmful effects.

In the areas where a legal monopoly does stimulate investment, there are very significant inefficiencies. If the cost of the incentive was not an issue, the answer would be yes, the prospect of a legal monopoly will stimulate investment. But in the area of new medicines, it is quite inefficient.

At the core of the problem are the inefficiencies associated with any monopoly, but amplified by the special characteristics of the market for medicines, which is structured in ways quite different from most other goods.

Monopolies often lead to high prices, particularly in areas where substitution is not possible, such was when patients are required to use particular treatments for severe illnesses.

There are also distortions caused by the complex chain of actors who are involved in prescribing and paying for medicines.

Products are prescribed by doctors who don’t pay for the medicines. When insurance exists, the third parties that do have to pay (employers, governments or private insurance) resort to various tactics to discourage utilization of expensive products, including both explicit and non-explicit forms of rationing.

The current granting of marketing monopolies is also inefficient for a different reason that is not widely appreciated. By linking the research and development (R&D) reward to the price of the product, it necessarily provides incentives for investors to develop products that do little more than existing medicines. The well-known tendency of companies to launch “me too” or “copycat” products is a rational response to the reward mechanism.

If an existing drug is receiving $100 for a monthly prescription, a new product that works about the same will often get about the same amount, all other things being equal. But in this stylized example, the second product is in fact not offering much that we don’t already have, in terms of health outcomes. What you should be paying for are the improvements in health outcomes, not replicating what we already have. Any system that combines monopolies with rewards linked to the prices of products suffers from this major inefficiency.

The two areas of the greatest waste in the current system are the vast sums spent marketing products that have few if any medical benefits relative to other medicines already on the market, and the costs of developing these “me too” products.

MM: Can you provide a thumbnail sketch for your prize proposal for the U.S. pharmaceutical market?

Love: In the U.S. market, the first proposal was to retain much of the current system, in terms of the granting of patents, but to eliminate the market exclusivity for prescription medicines. The reward for a successful R&D effort would not be a legal monopoly, but rather a share of the Medical Innovation Prize Fund.

The Medical Innovation Prize Fund would base its rewards on the impact of new products on health care outcomes. The rewards would be based upon objective evidence. Outcomes would be benchmarked against existing medicines. These changes alone would vastly reduce incentives to spend money to develop or market products that have little therapeutic gain over existing medicines, leading to very large savings.

The elimination of monopolies on products permits competition by generic manufacturers, and will lead to low prices, particularly in a market where there is no initial period of a monopoly to associate the product with a trademarked brand name.

In the absence of a legal monopoly, the procurement of difficult-to-manufacture biologic products could be organized much better, given the opportunities for governments and insurance companies to acquire products from low cost suppliers. The lower prices would lead to the elimination of price sensitive formularies, better utilization of products and improved health outcomes.

The earlier versions of the Medical Innovation Prize Fund also had set-asides for certain types of products, such as treatments for orphaned or neglected diseases, or public health priorities.

The new version of the Medical Innovation Prize Fund will introduce two new features. One is the “open source dividend.” In response to criticism that prizes would result in too much secrecy, the open source dividend would set aside some of the prize money to be shared with those who openly share knowledge, materials and technology that were instrumental in the development of the new product. A second is a system of intermediaries rewards, managed by competitive intermediaries.

MM: What does it mean to break the link between the markets for R&D and marketing, and why do you emphasize this point?

Love: Nearly all of the problems that plague the current system of drug development today are directly related to the decision to link R&D rewards to product monopolies. This gives us high prices, unequal access to medicine, rationing of medicines, wasteful spending on marketing, and excessive investment in the development and marketing of medically unimportant new products.

MM: If patents are a kind of prize for innovators, why would a cash prize be superior?

Love: Prizes can be designed in ways that provide more rational and efficient incentives for product development. If prizes are used as a substitute for the monopoly, you can avoid all sorts of problems caused by the monopoly, such as high prices or wasteful marketing efforts.

MM: Where does the money come from for large-scale prizes?

Love: To be a serious alternative to the current system, the prize would would have to be large. We have estimated a prize of 0.5 to 0.6 of U.S. GDP would be more than enough. In today’s economy, the U.S. prize fund would have been about $80 billion per year, growing with the GDP.

In the original versions of the bill, the money for the prizes would have come from the federal government. In the next version of the bill, there will likely be some sharing of the costs with entities that provide health insurance. We believe insurance companies will support the prize fund approach, because it is a far cheaper and more sustainable way to pay for innovation than the current system.

MM: Is this a massive public subsidy for Big Pharma?

Love: The current system is incredibly wasteful and constantly gamed by Big Pharma. The prize fund approach would radically reform the market for innovation, in the same way the Internet has radically changed the way we use telecommunications. The supply of useful innovation would be a highly competitive activity, rather than one that is crippled by irrational incentives, corrupt marketing practices and unproductive rent-seeking activities.

MM: How would a prize system work to lower medicine prices?

Love: By eliminating legal monopolies and prompting competition for products. Prices would be low, as they have been in India for decades.

MM: How would a prize system affect innovation? Do you think R&D investments and approaches would look the same under a prize system as under the current patent system?

Love: The prize would would target incentives on products that significantly improve healthcare outcomes. The incomes of patients would be irrelevant. Developing mediocre products would not be as profitable as it is today.

MM: Prizes like patents tend to be designed as winner-take-all, and thus may foster secrecy and discourage collaborative initiatives. How would you address this?

Love: The problems of secrecy and the lack of collaboration are very important. One important feature of the prize system is that it would reward products that were developed using open source development models — patents are not required to benefit from the prize fund. But I believe more important will be the introduction of the open source dividend, which is designed to directly reward the sharing of knowledge, materials and technology. The open source dividend could be implemented without the prize fund, but will work better within the prize fund framework.

MM: If the existing private sector innovation system is inefficient, and breakthroughs largely traceable to government funding, why not replace altogether the private medical R&D system with a public system?

Love: We have a large public system for drug development. Government outlays on on R&D are huge, even for later stage clinical trials. I don’t think the elimination of the for-profit sector is a good idea. There is considerable value in providing space for investors to make bets using their own money, and to pursue strategies they think might make sense. Not all academic, non-profit or government researchers are good judges of the commercial potential of products. With the right incentives, the private sector can play an important role.

MM: Critics say that allocating rewards in a prize system would require an elaborate and perhaps unworkable bureaucracy. What’s your response? How, for example, do you decide how big prizes should be, and how they should be allocated?

Love: Any system of rewards for drug development, including reimbursements for expensive products sold under legal monopolies, will be complicated. Determining reimbursements for new medicines is not a simple exercise. At present, the U.S. outsources these decisions to private insurance companies, and the results are not impressive.

The prize fund would be a fixed size. The rewards to competitors would be via a zero sum competition for shares of the fund. The more one competitor received, the less available to everyone else. This creates an important dynamic and discourages gaming of the system.

Right now, many countries are able to set reimbursements with a fairly small staff. The Australian and New Zealand systems use a small number of professionals. The UK employs more, but the size of the National Institute for Health and Clinical Excellence in the UK is very small, relative to the nature of the problem and even the size of the private bureaucracy in insurance companies.

The prize fund would allow new products to participate in the prize fund for 10 years, providing 10 separate evaluations of the value of products, based upon the evidence that emerges.

At the end of the day, the exact allocation of prizes to particular products does not have to be precise. The R&D process itself is highly uncertain, and investors can rely upon capital markets or competitive intermediaries to pool risks. What is important is that the size of the prize fund is large, and the process is rational enough to send the right signals regarding what outcomes are highly valued, and transparent and free of corruption. It should be much easier to manage than a system of reimbursements that aspires to provide rational rewards.

MM: Are there other, significant prize systems now in place? How do they compare to what you are proposing?

Love: Not in the area of medical technologies. There are many prizes in other fields, such as mining technology, software, environmental and green technologies.

MM: Would a prize system be compatible with World Trade Organization (WTO) and other global rules requiring patents?

Love: Yes, and this would not be a significant problem. Everything could easily be done under the flexibilities of the WTO’s Agreement in Trade-Related Aspects of Intellectual Property (TRIPS), specifically under TRIPS Article 44.2.

MM: Is the prize approach a model only for rich countries, or is it a viable option for developing countries also?

Love: The prize approach is very compelling for developing countries, where incomes are low, access is highly constrained and R&D incentives work poorly. The challenge is to identify the source of the prize fund money. In countries like Brazil, Chile, Costa Rica, Malaysia, South Africa or Thailand, with systems of public and private health insurance, the prize system would be relatively easy to implement. In a country like India, with a very limited health insurance system, the funding of the prizes will be a challenge.