[Ip-health] Stiglitz on medical innovation prizes

[Benjamin Krohmal]

This is the latest of several Stiglitz pieces advocating a prize fund
approach to promoting medical innovation.
Others are here:
http://www.cptech.org/ip/health/prizefund/files/stiglitz-bmj.pdf
and here:
http://www.cptech.org/ip/health/js_new_scientist_06.pdf


Business Day
9 March 2007
Dying in the name of monopoly
Joseph Stiglitz

http://www.businessday.co.za/articles/opinion.aspx?ID=3DBD4A407148


PART of modern medicine=E2=80=99s success is built on new drugs, in which
pharmaceutical companies invest billions of dollars on research. The
companies can recover their expenses thanks to patents, which give
them a temporary monopoly and thus allow them to charge prices well
above the cost of producing the drugs. We cannot expect innovation
without paying for it.

But are the incentives provided by the patent system appropriate, so
that all this money is well spent and contributes to treatments for
diseases of the greatest concern? Sadly, the answer is a resounding
=E2=80=9Cno=E2=80=9D.

The fundamental problem with the patent system is simple: it is based
on restricting the use of knowledge. Because there is no extra cost
associated with an additional individual enjoying the benefits of any
piece of knowledge, restricting knowledge is inefficient. But the
patent system not only restricts the use of knowledge; by granting
(temporary) monopoly power, it often makes medications unaffordable
for people who don=E2=80=99t have insurance.

In the Third World, this can be a matter of life and death for people
who cannot afford new brand-name drugs but might be able to afford
generics. For example, generic drugs for first-line AIDS defences
have brought down the cost of treatment by almost 99% since 2000
alone, from $10000 to $130.

But, despite the high price they pay, developing countries get little
in return. Drug companies spend far more money on advertising and
marketing than they do on research, far more on research for
lifestyle drugs (for conditions like impotence and hair loss) than
for lifesaving drugs, and almost no money on diseases that afflict
hundreds of millions of poor people, such as malaria.

It is a matter of simple economics: companies direct their research
where the money is, regardless of the relative value to society. The
poor can=E2=80=99t pay for drugs, so there is little research on their
diseases, no matter what the overall costs. A =E2=80=9Cme-too=E2=80=9D drug=
, for
example, which nets its manufacturer some portion of the income that
otherwise accrues only to the company that dominates a niche, may be
highly profitable, even if its value to society is quite limited.

Similarly, companies raced to beat the human genome project in order
to patent genes such as that associated with breast cancer. The value
of these efforts was minimal: the knowledge was produced just a
little sooner than it would have been otherwise.

But the cost to society was enormous: the high price that Myriad, the
patent holder, places on genetic tests (between $3000 and $4000) may
well mean that thousands of women who would otherwise have been
tested, discovered that they were at risk, and taken appropriate
remediation, will die instead.

There is an alternative way of financing and incentivising research
that, at least in some instances, could do a far better job than
patents, both in directing innovation and ensuring that the benefits
of that knowledge are enjoyed as widely as possible: a medical prize
fund that would reward those who discover cures and vaccines. Since
governments already pay the cost of much drug research directly or
indirectly, through prescription benefits, they could finance the
prize fund, which would award the biggest prizes for developers of
treatments or preventions for costly diseases affecting hundreds of
millions of people.

Especially when it comes to diseases in developing countries, it
would make sense for some of the prize money to come from foreign
assistance budgets, as few contributions could do more to improve the
quality of life, and even productivity, than attacking the
debilitating diseases that are so prevalent in many developing
countries.

A scientific panel could establish a set of priorities by assessing
the number of people affected and the impact on mortality, morbidity,
and productivity. Once the discovery is made, it would be licensed.

Of course, the patent system is itself a prize system, albeit a
peculiar one: the prize is temporary monopoly power, implying high
prices and restricted access to the benefits that can be derived from
the new knowledge. By contrast, the type of prize system I have in
mind would rely on competitive markets to lower prices and make the
fruits of the knowledge available as widely as possible.

With better-directed incentives (more research dollars spent on more
important diseases, and less money spent on wasteful and distorted
marketing), we could have better health at lower cost.

That said, the prize fund would not replace patents. It would be part
of the portfolio of methods for encouraging and supporting research.

A prize fund would work well in areas in which needs are well known
=E2=80=94 the case for many diseases afflicting the poor =E2=80=94 allowing=
 clear
goals to be set in advance. For innovations that solve problems or
meet needs that have not previously been widely recognised, the
patent system would still play a role.

The market economy and the profit motive have led to extremely high
living standards in many places. But the health-care market is not an
ordinary market.

Most people do not pay for what they consume; they rely on others to
judge what they should consume, and prices do not influence these
judgments as they do with conventional commodities.

The market is thus rife with distortions. It is accordingly not
surprising that in the area of health, the patent system, with all of
its distortions, has failed in so many ways.

A medical prize fund would not provide a panacea, but it would be a
step in the right direction, redirecting our scarce research
resources toward more efficient uses and ensuring that the benefits
of that research reach the many people who are currently denied them.
Project Syndicate, 2007. www.project-syndicate.org

=E2=80=96Stiglitz is a Nobel laureate in economics, is Professor of
Economics at Columbia University and was chairman of the Council of
Economic Advisers to president Clinton and chief economist and senior
vice president at the World Bank. His latest book is Making
Globalization Work.

Benjamin Krohmal
Coordinator - Project on Medical Innovation
Knowledge Ecology International
Tel: +1-202-332-2670 ex. 14
Fax: +1-202-332-2673
ben.krohmal@keionline.org