[Ip-health] Interview about Medical Innovation Prize Fund

[james.love@keionline.org]

Before taking his new job as President of Public Citizen, Rob Weissman
interviewed me by email for the Multinational Monitor, on the topic of
the medical innovation prize fund.  Jamie

http://www.multinationalmonitor.org/mm2009/052009/interview-love.html

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
[percent] 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 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.