A Prize System as a Partial Solution to the Health Crisis in the Developing World

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Citation: William Fisher, Talha Syed A Prize System as a Partial Solution to the Health Crisis in the Developing World.



Download: http://www.tfisher.org/Prizes5.2.pdf

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Summary:

Explores "replacing or supplementing the patent system, as the main method by which we encourage the creation of new drugs, with a system of government prizes".

Benefits:

  • avoid "the social-welfare losses caused by the monopoly pricing of patented products"
  • better distribute knowledge: government has better info about needs (both grants and prizes do better than patents -- counteract current biases against vaccines, for drugs for rich and "me too" drugs offering little improvement over existing drugs), private firms about promising research (both prizes and patents do better than grants); also prize system invites tuning, patent system (see current) does not
  • "reduce socially wasteful expenditures by pharmaceutical firms" (eg marketing, estimated 15-33% of pharma expenditures)

Hazards:

  • increased taxes to finance prizes
  • could foster rent seeking -- already a major problem with the patent system, but spending to convince government of prizes/sizes (eg tuning above) could be larger
  • "prize systems are clumsy in dealing with sequential innovation"
  • distrust that government will disburse prizes may increase prize system cost

Optimal Design: "what sort of prize system would be most effective in alleviating the health crisis in the developing world"

Option: prize targets effective drug treatment of specific disease. ex: "Advanced Market Commitment" to buy number of doses of effective treatment at certain price. Weaknesses:

  • potentially diverts resources from treatments for other diseases which would have greater welfare impact.
  • exacerbates tendency to do redundant research if all focused on certain disease

Option: prize for effective drug treatment of any neglected disease. Non-drug improvements (eg in delivery) might be more effective, could be expanded to include.

Option: prize for any socially beneficial innovation. In theory socially optimal. Disadvantages:

  • more difficult administration/evaluation (and pharma easier than other fields due to existing apparatus, eg drug approval, metrics such as DALYs, non-market based valuation may be less controversial/more established for health
  • political palatability

Nature and size of prize options:

  • "prize would consist of enhanced patent protection for some other drug, presumably a lucrative drug that addresses a disease common in developed countries." (many disadvantages, starting with current implementation does not address access problem)
  • "tie the size of the prize to the value of the patent that the drug developer could obtain" (government acquires patent for neglected disease; disadvantages starting with valuation, not changing research incentives toward neglected diseases)
  • "leave the patent in the hands of the developer, and pay poor potential consumers enough to enable them to buy the drug" (poor info about demand curve for neglected diseases, fails to redirect research incentives)
  • "tying the amounts of the prizes issued to drug developers to the social value of their products, measured by the DALYs they would save" (problems include measurement and gaming), two variations:
    • "allocate a fixed sum of money to be distributed in a given year to drug developers; that pot would then be divided among the participating firms in proportion to the relative social value of their inventions"; advantage is cost known, disadvantage prize for particular treatment unpredictable
    • "pay each participating firm a specified amount of money for each DALY saved through the distribution of its products"

Authors prefer last, "dollars for DALYs".

Relationship with existing patent system:

  • Do not alter patent system at all (plus: feasibility; minus: expensive, retaining costs of patents)
  • "replace the patent system with respect to all innovations eligible for the new prizes" ex: Medical Innovation Prize Fund Act (would be bitterly opposed by pharmacos, may require TRIPS agreement modification)
  • "leave the patent system in place, but would force a drug developer to choose between retaining a patent or obtaining a prize"

Authors prefer last; replacement seems infeasible. Choice compatible with "dollars for DALYs".

Managing redundancy: more info needed on optimal level of firms working on same problem. Some ideas for attenuating, eg registration requirements for firms with prize-qualifying drugs.

Sequential innovation: Authors want to delink returns to pioneers from control of follow-on innovation by further compensating pioneers when their innovations contribute to follow-ons.

Group of developed nations could agree to prize system, rather than only US.

Theoretical and practical relevance:

Questions:

  • Increased tax hazard, while questioned in terms of efficiency relative to fixing patent problem, seems could be questioned absolutely: if wasteful expenditures reduced, and government main buyer of drugs, could not prizes lead to tax reduction?