The Big Idea: Prizes to Stimulate R&D for New Medicines

Chicago-Kent Law Review
Volume 82, Number 3 

Previously KEI  Research Paper 2007:1, Revised 26 March 2007. Originally the Ruby Hutchison
Memorial Address, Presented November 14, 2006

James Love, Knowledge Ecology International

Tim Hubbard, Wellcome Trust Sanger Institute

The paper is available in PDF format here:

and here: /wp-content/uploads/Love_Hubbard_Big_Idea.pdf

The following are the Table of Contents, the Introduction and the Conclusion. 

Table of Contents    1
1.    Introduction: The core idea    2
2.    Background on prizes and their application to medical R&D    2
3.    Shortcomings of current “price” incentive    4
4.    Prize systems to simulate investments in medical innovation    9
5.    Major issues in the design of prize funds    15
5.1.    Voluntary or non-voluntary?    15
5.2.    Relationship to the patent system    16
5.3.    Fixed total prize fund obligations, or obligation to pay fixed prize per QALY?    16
5.4.    Structure of prizes (and relationship to QALYs)    17
5.5.    Timing of payoff    20
5.6.    Size of the Prize Fund    21
5.7.    Valuation of inventions    22
5.8.    Allocation of set-asides for priority or neglected areas    23
5.9.    Treatment of follow-on innovation    23
5.10.    Transition from current to new system    24
6.    Solving the global free-rider issue    24
7.    Comparison of the prize fund approach to Advanced Purchase Commitments (APC) or Advanced Marketing Commitments (AMC)    25
8.    The World Health Organization’s International Working Group on Public Health, Innovation and Intellectual Property.    27
9.    Prizes as an alternative to price discrimination for products.    29
10.    Incremental or fundamental reform?    31
11.    Conclusion    33
References    35

1.    Introduction: The core idea

The current system of financing research and development (R&D) for new medicines is deeply flawed by the impact of high prices on access to medicine, the wasteful spending on marketing and R&D for medically unimportant products, and the lack of investment in areas of greatest public interest and need.  It can and should be replaced with something better.

The system for financing new drug development can be radically improved, spending spend less overall, aligning investment incentives more efficiently, while making drugs available to everyone at cheap generic prices.

Reforming the way we pay for R&D on new medicines involves a simple but powerful idea.   Rather than give drug developers the exclusive rights to sell products, the government would award innovators money: large monetary “prizes” tied to the actual impact of the invention on improvements in health care outcomes that successful products actually deliver.

   [31 pages of text ]

11.    Conclusion

In this article we have argued that it is possible to construct a viable new system to finance innovation in a way that maximizes access to new inventions while continuing to exploit commercial competitive market incentive mechanisms. 

  1. The prize mechanisms should be thought of as part of a larger ecosystem of financing of medical R&D, and should be implemented in combination with other instruments, such direct or indirect government funding of basic research, non-profit product development partnerships (PDPs), clinical trials, and other traditional and non-traditional types of funding R&D.   What the prizes offer uniquely is an alternative to the marketing monopoly as an incentive for private investment.
  2. When implemented properly, Prize based models can directly reward successful R&D projects, while permitting marginal cost pricing of products, and avoiding the trap of overly bureaucratic and centralized decision-making.
  3. By decoupling the rewards for successful R&D investment from the sales of products, the new model will permit governments to create more efficient and useful incentives for R&D that focus on inventions that improve health outcomes.
  4. Prize mechanisms can be implemented in ways that are consistent with a robust patent system, but are best implemented in systems where the patent system is used to establish ownership of inventions and thus claims on the prize rewards, rather than through exclusive rights to market products.
  5. It is important that those incentives are linked to broad research priorities, and not be overly prescriptive in terms of diseases, mechanisms or technologies.
  6. By eliminating marketing monopolies on products, there is an opportunity for much greater efficiency through unrestricted competition to manufacture the resulting medical products.
  7. The elimination of marketing monopolies, the de-coupling of R&D incentives from prices, and the creation of an evidence based reward system linked to changes in health outcomes, will lead to significant reductions in expenditures to market products, the area of the largest waste in the current system.
  8. It is important that the total obligations to finance the reward payment are not directly tied to utilization, but rather measures of a country’s ability to contribute to global R&D costs, so that countries do not have incentives to limit access to products in order to control budget outlays on innovation rewards.
  9. Prize mechanisms can be introduced in areas where the markets are functioning the poorest, such as for diseases that primarily affect poor people living in poor countries.  But the largest benefit will come from the adoption of prize mechanisms in higher income markets, such as the United States, both because improvements in the efficiency of R&D incentives in high income countries are important for the development of medicines used everywhere, and also because pricing norms in high income countries are forcefully exported to developing countries, creating enormous hardships.
  10. Whilst additional detailed modeling will be required to improve reward structures and evaluation criteria, these efforts are feasible, and not materially different from efforts by governments or insurance companies to determine acceptable reimbursements for insured products.
  11. A significant shift to a new system of incentives that relies upon prizes rather than prices will also require a shift to a new global trade framework that focuses less on intellectual property rights and more on country contributions to mechanisms that support R&D, including but not limited to prize incentive mechanisms.

The major challenge to switching financing systems for medical innovation on a global scale depends on whether there is sufficient political leadership.