[A2k] New US Senate bill to replace monopolies for medicines with system of prizes

[Judit Rius Sanjuan]

Today Senator Sanders introduced the Medical Innovation Prize Fund Act
of 2007.

Here is a link to the text:
http://www.keionline.org/misc-docs/SandersRxPrizeFundBill19Oct2007.pdf
The bill number will be assigned next week.

Below is the KEI release on the bill
http://www.keionline.org/index.php?option=3Dcom_content&task=3Dview&id=3D15=
0

Experts comment on Senate bill that replaces monopolies for medicines
with system of prizes

Senator Sanders introduces bill to use prizes rather than monopolies to
stimulate development of new medicines. Proposal would separate
incentives for innovation from the price of products.
Taxpayers, employers and consumers would benefit from much lower prices
for new products, and more efficient targeting of R&D incentives.

FMI: James Love, Knowledge Ecology International (KEI)
james.love@keionline.org
Phone: +1.202.332.2670, Mobile +1.202.361.3040.

Washington, D.C., October 19, 2007 - Health experts, consumer groups,
and academics today offered comments on a bill by Senator Bernie Sanders
(I-VT) which proposes opening all new medicine to generic competition.
The legislative proposal would eliminate patent-enforced market
exclusivity for new drugs, but would give developers large cash rewards
from a "Medical Innovation Prize Fund," when products improved health
outcomes. The result would be a new paradigm for the development of
medicines, one that does not link R&D incentives to the prices of products.

The level of funding for medical innovation prizes would start at $80
billion per year, and increase with the growth in GDP. But by
eliminating monopolies and allowing generic competition, prices on drugs
would fall dramatically, saving taxpayers, employers and consumers more
than $200 billion per year.

Under the Sanders proposal, the patent system would be still be used,
but the patent owners would no longer be given monopoly rights to
control the manufacturing and sale of products. Instead, patents would
be used to establish who "owns" the right to the cash rewards given for
new inventions. Drugs developed without patents would also be eligible
for the prizes.

In recent years, there has been a proliferation of prizes to stimulate
innovation in fields as diverse as movie preferences, space travel,
mining, energy and the environment, and medical science.

Unlike many of these prizes, the Medical Innovation Prize Fund is not a
winner-take-all contest based upon success in achieving a specific
technological outcome. Instead, every new prescription drug or biologic
product registered by the FDA would "win" something from the prize fund,
but the amount given to a developer would vary, according to the
evidence, obtained over a ten year period, that that product improved
healthcare outcomes.

The basic approach used in the Sanders Bill is to create a competition
among drug developers to supply innovations that make people better off.
Using well-known pharmacoeconomic metrics such as Quality Adjusted Life
Years (QALYs), the managers of the Prize Fund would estimate the
benefits of various products, compared to benchmarks of existing
medicines, and divide the $80 billion fund on the basis of relative
effectiveness of products in improving health outcomes. Products that
produced more benefits would get a larger share of the prize fund than
products that produced fewer benefits.

Each new product would be eligible to participate in the Prize Fund
payments for ten years -- a period roughly similar to the effective life
of exclusive marketing rights under the current system -- balancing the
need for evidence to evaluate the benefits of inventions with the
interests of investors in obtaining a rapid return on investments.

The legislation contains provisions to ensure that firms are rewarded
for "follow-on" innovation, while those products that are "first"
continue to share in prize payments, even when displaced in the market
by new versions that are slightly better.

The Sanders bill also sets aside 18 percent of the prize fund rewards
for three special health areas:

(1) 4 percent (initially $3.2 billion) of such amount for global
neglected diseases;

(2) 10 percent (initially $8 billion) of such amount for orphan drugs; and

(3) 4 percent (initially $3.2 billion) of such amount for global
infectious diseases and other global public health priorities, including
research on AIDS, AIDS vaccines, and medicines for responding to
bioterrorism.

According to the findings of the bill, at present only 14 percent of new
drug approvals are for products that are both new and better than
existing medicines, and monopoly rights to sell drugs lead to high
prices and rationing of medicines. The Prize Fund approach would solve
both problems. Investments in R&D would be targeted at inventions that
actually improve health outcomes, and prices for products would fall
dramatically as monopolies were eliminated.

The findings also note:
"By funding innovation prizes at .6 percent of GDP, the United States
will provide an incentive for innovation that would be more than $80
billion in 2007, an amount that is more than five times the averag rate
of royalties for patent owners, and more than four times the level of
private sector R&D spending that would assigned to the U.S. market,
based upon the U.S. share of global GNP."

"The substitution of prize fund awards to companies for successful
product research and development in place of marketing exclusivity for
new medicines will lead to more competition, greater utilization of
generic products, lower prices, and savings to federal, state and local
governments, private employers and individual consumers of more than
$200 billion per year. Savings in governmental expenditures alone would
be more than sufficient to fund the prize fund established through this
legislation."

The following are comments by experts on innovation and public health,
beginning with consumer and public health groups, followed by academic
experts:

Comments by consumer and health NGOs

Bill Vaughan, Consumers Union. " As health-care costs continue to
spiral, our nation must focus debate on why prescription drugs cost so
much. Unfortunately, Congress has never delved into why the process that
brings new drugs to market is so insanely expensive, inefficient, and
ineffective. Senator Sanders=92 bill, 'The Medical Innovation Prize Act of
2007,' could at long last begin that debate. The current system is
simply not working and is increasingly unaffordable. Our nation spends
small fortunes on the latest version of a drug already on the market,
while breakthrough research on the key health issues like Alzheimer's
and cancer seems to lag. The Senator's prize proposal is worth debate
and consideration as a replacement for our current drug-development system.=
"

Merrill Goozner, Author, The $800 Million Pill: The Truth Behind the
Cost of New Drugs. "Research is risky, new drugs are too expensive, and
industry focuses far too much of its effort on drugs of minimal medical
significance. The prize fund solves all these problems by disconnecting
the incentives for generating breakthroughs from the price that
individual patients or their insurers must pay. Sen. Sanders has pointed
the way toward a new system of financing medical progress in the 21st
century."

Buddhima Lokuge, M=E9decins sans Fronti=E8res (MSF). "Study after study is
confirming what our field teams have seen for years. Using the price of
pharmaceuticals to fund innovation leads to the rationing of essential
medicines and the exclusion of low-income populations. At the same time,
diseases like TB, for which medical innovation is urgently needed, today
are neglected because they primarily affect the poor. There is a growing
consensus today that new approaches are urgently needed."

James Love, Knowledge Ecology International (KEI). "The Sanders bill
offers a huge change in the business model for drug development =96 as
large as the change in the business model for network services that we
call the Internet. Like the Internet, it would create a culture of
abundance in terms of access to knowledge goods. By separating the
markets for innovation from the markets for the physical goods, the
Prize Fund would ensure that everyone, everywhere, could have access to
new medicines at marginal costs. It would dramatically increase
incentives to invest in products that improve our lives, and decrease
incentives to invest in wasteful and often harmful marketing of 'me too'
drugs that do little to improve health outcomes. The bill correctly
avoids tying prizes to specific technology solutions, and instead gives
drug developers the freedom to use different ways to improve health
outcomes. The mechanisms to determine prize valuations will be less
complex than those used to justify drug prices or reimbursement. Given
the expected costs of health care in the coming years, we need to find
ways to control costs. This bill does this in a unique way. It cuts
costs and expands access at the same time. As the Internet has proved,
when the benefits of change are large, it is possible to change an
entrenched but dysfunctional business model."

Ethan Guillen, Universities Allied for Essential Medicines (UAEM). "We
applaud Senator Sanders for introducing this innovative legislation. The
current intellectual property system has done a great deal of good, but
remains flawed, as is demonstrated by the fact that millions still do
not have access to life-saving medicines. Universities must join with
Senator Sanders in searching for new ways to make the IP system work for
those in both rich and poor countries."

Edmund Mierzwinski, Consumer Program Directors, U.S. PIRG. "It is
natural for consumers to distrust monopolies, which can even limit
access to medicine. The Prize Fund bill, from U.S. Senator Bernie
Sanders (I-VT) shows us that we don=92t have to tolerate monopolies or the
abuses of monopoly pricing to stimulate innovation. This innovation
without monopolies approach realigns R&D incentives with consumer
interests. With innovation rewarded with prizes rather than monopolies,
consumers would benefit from generic drug competition, and low prices.
Much of the savings in the bill would be due to the cutbacks in wasteful
marketing efforts that now drive costs up. Unlike many proposals for
cost control, the prize fund would expand access, while providing
enormous savings, and target R&D efforts more effectively.

Mark Cooper, Consumer Federation of America. "Consumers have an interest
in innovation, but also in affordable prices. The current system of
granting marketing monopolies for new medicines fails on several counts.
Most new drug approvals offer little in terms of therapeutic benefits
over existing medicines. Prices for new drugs are very high and
increasing at an alarming rate, and very little of what we spend is
actually reinvested back into R&D. The monopoly rents collected by the
patent holders vastly exceed the costs necessary to provide incentive
for innovation. The prize fund approach is a bold proposal to fix a
broken system. It provides incentives to innovate through prizes while
making drugs available to consumers at prices that reflect the
economically efficient and generally low cost of production of generic
products. CFA urges the Senate to hold hearings on this innovative and
promising proposal to support medical innovation."

Rob Weissman, Essential Action. "The patent monopoly-based system of R&D
has proven inefficient at advancing a needs-driven public health agenda.
Even by Pharma's estimates, barely more than a sixth of what is spent on
drugs is invested in R&D, and the actual amounts may be significantly
less. What is spent gets directed to health problems where there is
market demand; this sometimes correlates to priority health needs, but
often does not. The Medical Innovation Prize Fund suggests an altogether
different, market-based system of supporting innovation. It promises to
deliver much more bang for the buck, incentivize research in priority
health areas currently under-addressed (including but not limited to
"neglected diseases" prevalent in poor countries but not rich nations),
end wasteful expenditures on marketing, and make medicines dramatically
more affordable. These advantages can all be achieved because the prize
fund eliminates inefficient monopolies and enables generic competition
as soon as products reach the market. Whatever complexities the Medical
Innovation Prize Fund approach may engender pale beside the irrational
and wasteful complications that we take for granted in the current
system of medical R&D.

Dean Baker, co-director, the Center for Economic and Policy Research.
"The current system of financing research on prescription drugs through
patent monopolies leads to enormous economic waste and leads to a
situation in which hundreds of millions of people find it difficult or
impossible to pay for the drugs they need. The Sanders bill provides one
mechanism for correcting some of the worst problems of this system.
Under the bill all prescription drugs could be sold in a competitive
market, just like most other products. Without government patent
monopolies, the vast majority of drugs could be sold for a few dollars a
prescription, as is the case with generic drugs at present. The Sanders
bill begins the necessary debate over reforming a financing mechanism
that is essentially a relic from the feudal system. It is virtually
inconceivable that if we were designing a method for financing drug
research from scratch that anyone would opt for the current system of
patent monopolies. We should not be stuck with such an inefficient
system forever simply because we inherited it from Old Europe."

Professor Brook K. Baker, Health GAP and the Northeastern University
School of Law Program on Human Rights and the Global Economy. "The
adoption of a prize fund to reward therapeutically targeted innovation
and to simultaneously encourage the development of a competitive,
low-cost generic market could revolutionize access to medicines in the
U.S. and end up saving U.S. insurers, governments, and patients hundreds
of billions of dollars for many years to come. However, the proposal
will need to be extended globally to ensure that products that receive
prizes in the U.S. are not subject to monopoly prices in low- and
middle-income countries where innovators are unregulated with respect to
their right to file patents abroad. As much as we need a system to
increase access to medicines and to lower bloated prices and
dysfunctional research and development priorities in the U.S., we need
an even more massive effort to transform the international intellectual
property regime and to substitute a more rationale international system
for energizing targeted innovation and promoting the broadest possible
access to affordable medicines."

Academic Experts

Burton A. Weisbrod, John Evans Professor of Economics, Northwestern
University: "Senator Sanders' bill addresses the seriously-flawed
current system in the pharmaceutical marketplace. It breaks the link
between the incentives for pharmaceutical firms to undertake R&D on new
and more effective drugs, and their incentives for pricing those
drugs--and breaking that link is critical. The basic economic problem is
that R&D is extremely expensive, but producing their end result,
"pills," is not. Under current law the only way the high cost R&D can be
made profitable is to charge prices for pills that vastly exceed the
tiny cost of producing them. The result is the high prices that
consumers face for drugs that are increasingly essential, especially for
an aging population, and the increasingly common evidence of some
consumers being priced out of the market. The fundamental reform that is
called for is to separate the incentive for developing effective new
drugs from the incentive to produce low-priced pills. This is exactly
what Senator Sanders' bill, for a Medical Innovation Prize Fund, would
do, and this approach has much to be said for it. The bill poses
problems of implementation, but major "prizes" have been used to promote
innovation in many other contexts, and as a replacement for our current
patent-based monopoly-pricing system the prize-fund approach has vast
potential. Its goals of strengthening incentives for both new drug
development and for pricing policies that broaden access to those drugs
are attainable."

Steven Shavell, Director, John M. Olin Center for Law, Economics, and
Business and Samuel R. Rosenthal Professor of Law and Economics, Harvard
University. "Senator Sanders' proposed new legislation to replace the
system of exclusive marketing rights for drugs with a system of prizes
may constitute a great win-win policy for consumers and for the drug
industry. Under the Sanders' plan, consumers would benefit greatly and
immediately. Consumers would no longer pay sky-high prices for new
drugs, because drug developers would no longer have monopolies and would
not be able to charge what the market will bear. All new drugs would be
like today's generic drugs - their prices would be driven down by
competition among many drug producers. A developer of a new drug would
still benefit, however. The developer would receive a reward from a
government prize fund that could equal or exceed what it obtains today
if it holds a patent. Moreover, drug companies would be free to improve
and modify any drugs without permission from patent holders. Hence,
consumers would benefit from more versions and improvements of new drugs
than they do today.

Kevin Outterson, Associate Professor of Law, Boston University. "Our
current biomedical R&D system is unfair and inefficient. R&D is
increasingly driven by marketing rather than medical need. Drug
companies finance R&D from consumers, health plans and governments
through high-priced patented medicines. The Medical Innovation Prize
Fund Bill is a serious attempt to simultaneously provide access to all
drugs at generic prices, while increasing the effectiveness of drug R&D.
Prizes for innovation is an old idea, but deserves serious study again
as a possible replacement for our deeply flawed current system."

James Boyle, William Neal Reynolds Professor of Law and co-founder of
the Center for the Study of the Public Domain at Duke Law School. "There
is a long, distinguished and successful history of using prizes as
incentives for innovation. Prizes have successfully encouraged advances
ranging from methods of determining longitude in the 18th century, to
private, manned space flight in the 21st. Some prizes have stipulated
that the invention must be offered to the public free of patent rights
-- allowing widest possible use because competition drives the price
down to generic levels. Representative Sanders' bill daringly extends
this notion to the drug patent system with the aim of producing medical
innovation while slashing costs and avoiding some of the heart-wrenching
moral dilemmas presented by the high prices of patented pharmaceuticals.
At the same time, the Bill contains provisions that would encourage the
production of medicines in areas that the market will not serve,
particularly drugs that treat diseases of the global poor, or that treat
"orphan diseases" affecting comparatively few individuals. Personally, I
do not support the idea that we completely replace our current drug
patent system with the prize fund. I would rather experiment with
supplements and additions to our current system, gather data, and
reinforce what has been proven to work empirically. But I think that
Representative Sanders' Bill, by focusing us on the possibility of other
ways of producing innovation, has the possibility of spurring a hugely
valuable national debate on the subject. In addition, I think that parts
of this Bill -- particularly those dealing in the areas where the patent
system will not work to encourage innovation, such as producing
medicines for tropical diseases -- would be ideal places to begin the
experiment."

Frederick M. Abbott, Edward Ball Eminent Scholar, Professor of
International Law, Florida State University College of Law. "There is
wide acknowledgment that the system intended to promote innovation in
the pharmaceutical sector is broken, as perhaps best reflected in the
November 2006 Report by the Government Accountability Office to Congress
on New Drug Development in the United States. There are good reasons for
trying to separate the way in which research and development of new
drugs is rewarded from the prices ultimately charged those drugs. The
current innovation system, based almost solely on patents, encourages
sales of high priced drugs and high sales volumes, even though this may
not be what is in the best interests of patients and public health.
Prizes are an important alternative mechanism for promoting innovation
that may be particularly useful in the field of medicines. With the
establishment of prizes based on addressing important public health
needs - whether cancer treatment, an HIV-AIDS vaccine or a cure for
diabetes - researchers would be encouraged to tackle fundamental public
health problems, and could be handsomely rewarded for doing that. Prices
of new drugs could then fall proximate to production costs. There may
not be a single solution to the innovation and access problems
confronting the pharmaceutical sector, but the proposal to establish
prizes as an alternative incentive mechanism deserves serious
consideration as a solution in a variety of settings where innovation
and access are both essential. It is important to begin to evaluate the
merits and feasibility of prize funds, whatever role they may ultimately
play in the total mix of pharmaceutical innovation policies."

Aidan Hollis, Associate Professor, Department of Economics, University
of Calgary. "The fundamental question to be asked about this bill is
whether it will accelerate the rate of pharmaceutical innovation. The
mechanism being used is sound: innovators earn more money the greater
the health impact of their new drug. Under the current system, in
contrast, firms are often rewarded very richly for innovations with
relatively small effects on population health, and not enough for more
important innovations. Since the Sanders bill ties the reward to the
innovator directly to measurable health effects, the incentives for
innovation are exactly right. Companies with a great pipeline of
therapeutically valuable products should love this bill, because it
promises them an opportunity to make a lot of money =96 and companies with
a pipeline full of products which are marginally effective (but which
they were planning to market heavily) will hate this bill. One criticism
that can=92t be made of this bill is that the rewards to innovation aren=92=
t
adequate. That is only a complaint that 0.6% of GDP is not a big enough
share to spend on pharmaceutical innovation. If that is the concern,
then all that is required is to set aside a larger share. A question
that naturally arises is why there should be such special treatment of
pharmaceutical innovation. There are two reasons for this: first, the
pharmaceutical market in some respects functions very poorly because the
people who consume are typically poorly informed about what they
consuming and don=92t choose it =96 doctors choose for them. And the doctor=
s
who choose don=92t pay the price of the medicine =96 that is typically spli=
t
between the consumer and the insurer. Thus the market does not provide
the same incentives for performance as other markets. Second,
pharmaceuticals are unusual in that what is valued can be measured,
independent of price, as an impact on health. While measures of health
impact of a drug are imperfect, they are meaningful. It is much harder
to measure the value of other types of innovation. Drug companies with
weak product pipelines will certainly claim that this bill introduces
too much government interference into the pharmaceutical market. That is
also a canard. Governments already interfere very substantially in
pharmaceutical markets as insurers and regulators. The proposed
mechanism in the bill will force pharmaceutical firms to compete to earn
their share of the prize fund by developing products which have great
therapeutic value. The government=92s role is limited to estimating
therapeutic value. I hope that other governments, including Canada=92s,
will be so forward-looking as to introduce similar legislation."

--
Judit Rius Sanjuan
Attorney
judit.rius@keionline.org

Knowledge Ecology International (KEI)
www.keionline.org / www.cptech.org
1621 Connecticut Ave, NW, Suite 500 Washington, DC 20009 USA
Tel.: +1.202.332.2670, Ext 18 Fax: +1.202.332.2673