Why is there resistance to prize funds?

I was recently asked the following question:

Jamie
What is your view on the treatment of prize funds? By all standards it is treated as a radical off the wall proposal when in fact it is market based. Why is there so much resistance?

My response was as follows:

The prize fund approach is of course a market mechanism. The early formulations of the prize fund approach as it applied to drug development, in 2002 to 2004, focused on two different problems. One was how to replace the reward for the final product development. The other concerned the management and design of prizes that would stimulate earlier “upstream” investments and actions to advance science or the drug development process.

In a February 17, 2004 paper in PloS, A New Trade Framework for Global Healthcare R&D, Tim Hubbard and I discussed prizes and other approaches as follows:

Many are doubtful that increased direct funding would generate sufficient incentives or be managed efficiently enough. An alternative market-based approach is one in which R&D organisations compete for rewards for specific R&D output, referred to by economists as a prize model (Wright 1983; Kremer 1998; Shavell and van Ypersele 2001). In a simple formulation, governments would place large sums into a fund that would be allocated every year to firms that bring new products to market. This could work with or without patents. If products were protected by patents or other intellectual property claims, the government could grant compulsory licenses (a procedure allowed by trade agreements to override monopoly rights on a patent, in return for compensation to rights owners; see Box 1) and permit rapid introduction of generic competition. The reward system could be a lump-sum payment, eliminating any incentive to continue to market the product, or a long-term payout structure, which would depend upon evidence of both usage and efficacy. Prize systems could be designed to be fairly similar to the current system, with big payoffs for successful entrepreneurs, but even with this approach, there would be huge opportunities to improve welfare. The reward system could be more rational than the existing system, allocating greater rewards for innovative products and less for ‘me too’ products that do not work better than existing products. Premiums could be given for therapies that address treatment gaps or for inventions that pave the way to new classes of drugs.

Organisations competing for prizes might be expected to behave secretly to ensure that they are the ones to obtain ‘credit’ for the fruits of their work. However, progress in research is also driven by free exchange of information. It may be possible to design models that both reward R&D outputs and at the same time encourage complete and continuous openness with intermediate research outputs. There are now a number of examples of open collaborative public goods models (Cukier 2003), such as those used for the Human Genome Project. The proponents of such models point to the success of GNU/Linux in the software field as evidence that major projects can be undertaken with radically different business models. One of the benefits of complete openness is that it allows independent and open evaluation of R&D outputs, which helps in the allocation of ‘credit’ whether in the form or prizes or new research grants. The open-access publishing movement (Brown et al. 2003) has the potential to help in this process by allowing independent analysis of published science, which will help research funding agencies measure research outputs.

By the Spring of 2004, Representative Bernard Sanders (now Senator Sanders) asked to see a fully specified legislative proposal that would only address the issue of replacing the monopoly reward for the final product, without changing other aspects of the drug development process. The result was a bill, drafted through the Spring and Summer of 2004, (HR 417, 109th Congress, later reintroduced as S. 2010, 110th Congress) that would create a competitive mechanism where:

  1. the amount of the prize fund would be fixed,
  2. there would be a low technical threshold for qualifying for the prize money (just registering a drug for sale),
  3. the amount of the prize money to any one drug developer would be driven by a competition among qualifying products, and
  4. rewards would be based (in part) upon evidence that a product was improving health outcomes, over and above the results one could expect with existing products and technologies.

A draft of the Sanders bill was shown to Aidan Hollis when he visited our offices in 2004. Our signature marketing pitch for the bill then was that it would create a system to reward drugs for their impact on health outcomes.

This early work that Tim and did on prize funds was designed in part to overcome one major objection to prizes for specific technical achievements — namely that you have to have information about the actual (high) technical standard to qualify for *a* prize, and that you would have to know the amount of money to set aside for the prize, risking always guessing wrong on the technical specifications, or putting up too little or too much money.

The prize *fund* approach, offered the possibility of a new incentive system for drug development that:

  1. refashioned the poorly designed economic incentive of the patent monopoly (which encourages “me too” drug development and excessive investments in socially wasteful and often harmful marketing), and
  2. which allows the copying of technologies at a zero cost, on the margin, eliminating the dead weight cost of prices above marginal costs.

This is all about economics and markets, so far.

So why have some companies been so opposed to the prize fund approach? One reason dates back to the earlier 19th century debate over prizes vs patent monopolies. Prizes were perceived to be inferior because they were small, relative to the profits from patent monopolies. Without confidence the size of the prize funds would be realistically big, the industry would prefer to rely upon patent monopolies.

Another reason, and I believe even more important, is that some companies, like Merck, Pfizer, GSK, Sanofi-Aventis, etc, do not internally see themselves as being primarily about innovation. They are strong on the marketing of products, developed by others. Sanofi-Aventis told us their growth came through acquisitions, rather than through their internal pipeline.

Note that today many of these companies are run by people from legal departments (Pfizer) or marketing (A ketchup saleman now runs Novartis).

Look at the analogy of the music industry and proposals for alternative rewards to authors and performers. If you allow peer to peer file sharing to be legal, but provide for an alternative reward system, the interests of the artists can be protected, or even improved. But the music industry lobby is today dominated by the publishers and distributors of music, not the authors or performers. If the public organizes its own distribution and marketing mechanisms, outside of the current commercial business model, it may eliminate or marginalize a support industry that would no longer be needed. Something similar is at work in the prize fund discussion. If you can create a reward system that does not depend upon a marketing monopoly, what happens to the firms that are largely about marketing?

In September 2002, Aventis held a scenario-planning exercise in Ottrott-le-Haut, France, on “Pharma Scenarios for Sustainable Healthcare.” It was at this meeting that the R&D treaty and the prize fund approach were presented as an alternative a world of tough global IPR norms and legal monopolies on the sale of medical products. Several Aventis executives made it clear to Tim Hubbard and myself that they were unhappy with anything that would do away with the marketing monopolies — and only reward the company for innovation — an activity that then employed less than 10 percent of the company work force. Likewise, a few years back, I was in a meeting in London hosted by several agencies and departments of the UK government, including Health, Treasury and Development. They were discussing the Advanced Marketing Commitment (AMC) model, which featured a monopoly by the seller, at subsidized prices. The prices to the consumer were supposed to be a regulated “zero profit” price. I asked the audience, which included also a number of pharmaceutical company executives, if it would be possible to just offer an open license, and allow generic competition — given the promises that the AMC price to consumers would be a “zero profit” price. I was soon taken aside by a government official and told that because of instructions from the Prime Minister’s office and others, the UK government would only consider proposals that allowed the seller of vaccines or drugs to maintain control over the manufacturing and distribution of the products. It turns out that some companies, including but not limited to GSK, were very focused on measures to protect the monopoly in the marketing of products. The thinking was that if the generics industry could manufacture *and* distribute one product, they could more easily and efficiently manufacture and distribute other products. This describes “economics of scope” in the production and distribution of medicines, an important and sometimes overlooked issue.

This discussion also illustrates the reason why the pharmaceutical industry has been anxious to push the Health Impact Fund as an alternative to the prize fund proposals that operate with an open license. They see these debates as being critical to the future of the protection of existing high fixed cost marketing operations that are the principle costs of doing business for big pharma companies, and in further marginalizing the generics industry, as the effects of the TRIPS and new FTA agreements become more constraining over time. Hollis and Pogge are essentially collaborating with big pharma to kill off or marginalize the competitive generics sector. Indeed, the major argument that Hollis and Pogge are promoting are tortured arguments as to why marketing monopolies are not bad for consumers. (See: Why the HIF rejected open licensing)

There is also a different set of objections to some early versions of prize funds that should be discussed, and which have been addressed in the newer proposals by developing countries, small firms, academic experts, medical researchers, MSF, KEI and others. Prize funds that only reward final product development are a good replacement for patent monopolies on products, but they also suffer from some of the same shortcomings of patent monopolies on products, including the fact that many actors do not have access to capital markets, and do not anticipate being able depend upon developing an approved commercial product. There are also concerns about access to knowledge, and incentives to be secret.

Tim and I have written about these issues in our 2009 paper, which was prepared for one of the groups working on the Obama transition team: “Prizes for Innovation of New Medicines and Vaccines,” Annals of Health Law.

The secrecy issue is perhaps the easiest one to address.

Prizes, arguably more even than patents, can give incentives to keep knowledge and materials secret — for example, to prevent competitors from winning the prizes. The “open source dividend” approach, which was embraced in several of the Bangladesh, Barbados, Bolivia, and Suriname proposals to the WHO Intergovernmental Working Group (IGWG) on Public Health, Innovation and Intellectual Property Rights, and the WHO Expert Working Group (EWG) on R&D Financing, would share a percentage of end product prize money with those who openly, freely and without discrimination shared knowledge materials and technology. This new feature in the prize funds would extend the benefits to thousands of individuals, academic researchers, universities, government agencies, non-profit institutions and businesses that open source knowledge. It is an incentive to share. If the open source dividend is large, it is a large incentive to share.

But how do you address the aspiration of small businesses, researchers or non-profit organizations to win prizes, if they can’t realistically manage the whole drug development process? Can you offer lots of smaller prizes, for interim progress toward drug development or scientific progress? The answer is, yes you can, and you probably should, but you also have to address the management of those prize programs, and address issues such as the criteria for the selection of winning projects, standards and mechanisms to address conflicts of interest, how to value the prizes, the licensing of IP rights, and other issues. Several of the Bangladesh, Barbados, Bolivia, and Suriname proposals include interim prizes, such as the TB diagnostics or the Chagas disease prize fund proposals, for example.

Tim Hubbard and I have also explored a competitive mechanism to manage various types of open source projects, where you recognize the complexity and/or ad hoc nature of some valuation or selection issues, and also want private actors to respond to dynamic incentives. Competitive intermediaries were discussed during the 2002 Aventis exercise. In a crude first model, there was a proposal to create and resource 4 funding entities, that would fund various open source projects, including possibly interim results prizes or clinical trials. After a period of experience and evaluation — everyone working for the worst entity would be fired, to be replaced by a new competitor. Subsequently, there were models of resourcing competitive intermediaries from decentralized parties (such as employers with health plans, or insurance companies) who would be motiviated to resource the ones expected to make the most productive funding decisions. These ideas were explored further in our February 2004 PloS paper, and in 2005 book chapter: “Paying for Public Goods,” in Code: Collaborative Ownership and the Digital Economy. Edited by Rishab Aiyer Ghosh. MIT Press, Cambridge, 2005. (pp. 207 229), and explored in the 2009 Annals paper. I believe this is quite an important area to explore, for those who want to create sustainable sources of funding for open source projects, including but certainly not limited to those involving prizes.

This was the discussion about competitive intermediators from our 2004 PLoS paper:

Competitive Intermediators

An R&D contribution norm, established by treaty, would ensure that the amount of money being spent on R&D is maintained. However, new mechanisms would be needed to collect the money to finance the R&D, as it would no longer come via drug sales. This could be via general taxation, although in countries with a private health insurance system this may be anathema. Many will also worry that a centralised national drug development agency taking decisions on R&D priorities and allocation of funds (via prizes or grants as discussed above) could easily become bureaucratic and inefficient.

As a possible alternative, we propose a competitive financing scheme that would work through R&D investment intermediators. These R&D funds would be licensed and regulated (like pension funds). Their role would be to manage R&D assets on behalf of consumers. Individuals (or employers) would be required to make minimum contributions into R&D funds, much as there are mandatory contributions to social security or health insurance or to pension funds. Government would set the required contribution, but the individual (or employer) would be free to choose the particular intermediator that received their contributions. Intermediators would compete to attract funds to invest in R&D on the basis of their prowess for drug development and upon their priorities. Different business models for financing R&D could be tested in such a market, with intermediators experimenting with prize systems, direct investments in profit or nonprofit entities, open collaborative public good models, or other approaches.

Finally, it goes without saying that prizes should only be part of an overall ecology of instruments to support R&D, including most obviously the systems of grants that we rely upon today to provide relatively steady and predictable sources of funding for established research organizations and their staffs. Prizes are really about reforming the pull mechanisms — now largely implemented as the creation of legal monopolies for products. The reform of push funding is also potentially important, and as we go forward, the benefits of competition, freedom, transparency, collaboration and access to knowledge and to the end products will be important to consider in all aspects of innovation funding.

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