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Big news on pharmaceutical prizes
Senator Bernie Sanders, the first self-described socialist ever to be elected to the Senate, has introduced a bill that I might actually sign on to, The Medical Innovation Prize Fund Act of 2007. In essence, the prize fund would pay pharmaceutical companies to release their patent rights to the public domain.
The level of funding for medical innovation prizes would start at $80 billion per year, and increase with the growth in GDP....
Under the Sanders proposal, the patent system would 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.
I like that the funding amounts are serious and would be available to non-patented products (innovations without property rights are underfunded). I worry about corruption and funding directed according to political pressure. I would be reassured if the system were clearly voluntary - that is, pharmaceutical manufacturers should have the option of the patent or the prize. Clearly an option will increase profits for the pharmaceutical firms but medical innovation has many beneficial returns not captured by the pharmaceutical companies so I am not worried about bigger transfers.
Most importantly, a prize fund would make clear the tradeoff between pharmaceutical revenues and R&D and it would reduce the pressure for price controls which I think are a serious threat to future medical innovation.
Thanks to Ben Krohmal for the pointer.
Posted by Alex Tabarrok on October 25, 2007 at 07:21 AM in Economics, Medicine | Permalink
Comments
The notion that taxpayer-funded prizes would not be subject to the same Politics of Pull as the rest of the federal budget has no basis whatsoever in political reality.
One quick hypothetical: "prizes for cancer research versus prizes for AIDS research." Does anyone seriously think that debate would be objective, scientifically grounded and strictly apolitical?
And, incidentally, we don't even need hypotheticals -- we already have real-world examples.
Posted by: KipEsquire at Oct 25, 2007 10:02:22 AM
I did a quick read of Sanders' bill. It appears non-voluntary, and worse, even if your innovation is determined to be unprizeworthy, you still don't retain rights to it. The bill explicitly states that no one may sell proprietary drugs in the US after a certain date, with no qualifier about whether or not the company was awarded a prize.
One other note: the bill has nothing to say about tort liabilities post approval. I am guessing the government will find a way not to be liable for "owning" the new drugs, but rather, to eventually add clawback provisions.
In essence, the entire bill appears to be nothing more than an attempt institute price controls by another name. I would note that the funding of the awards is lower than the amount the government claims to spend by itself each year on drugs still under patent protection.
Posted by: Yancey Ward at Oct 25, 2007 10:02:53 AM
Can you really trust a socialist to propose a market oriented reform? No. Government ownership of the fruits of the "means of production" is government ownership of the means of production.
Can't you just imagine that prize awarding committee? Lawyers and bureacrats, end to end-arguing about strict adherence to submission procedures and the finer points of administrative law, rather than efficacy and safety.
I'm sorry but this is a trojan horse, pure and simple. Take it from a bureaucrat.
Posted by: at Oct 25, 2007 1:02:23 PM
This is really a stupid idea, for many reasons. It shifts most of the costs of drug development from consumers (or their insurance companies) to the taxpayers. And who decides just how much a particular drug patent is worth? Lawyers? FDA bureaucrats? Politicians? Since Sanders calls himself a socialist, I'm not surprised that he lacks any understanding of basic economics, but I'm amazed at how the politicians always want to take a whack at the drug companies. I don't have any connection with them, but they do lead the world in drug development and remain one of the few bright spots in the US economy, generating lots of taxable revenues and oodles of high-paying jobs. But let the politicians have their way, and these companies will be ruined.
Posted by: Ned at Oct 25, 2007 1:45:27 PM
I certainly favour prizes for innovations, but I don't think that's what this is.
One unacknowledged problem is that it is very expensive to market medical treatments, and if you don't market them they don't get used. I know of many very effective and very cheap treatments of which which the general public are unaware, but which are hardly used because it is not worth anybody's money to go to the vast expense of informing/ educating them.
One example is the herb St John's Wort/ Hypericum which is probably better than the SSRI (Prozac type) drugs for treating depression and anxiety states (ie. it is as-or-more effective and safer - and you don't need a prescription to buy it) - but who knows this?
It isn't patented or patentable, so nobody can make much money from selling it, so nobody will spend much money selling it.
Posted by: Bruce G Charlton at Oct 25, 2007 1:53:46 PM
Sunk costs and R&D determine how much a patent is worth, and the prize should be correlated. I would like to see this incetive applied to other areas of the economy which lack incentives, and in many cases, it already has been. It is not always at the cost of taxpayers either, just look at the prie to land a robot vehicle on the moon.
This system of prize money awarded to drug companies is much better than vouchers that third world governments "own" in order to produce generic AIDS, malaria, and countless other drugs. In alost all cases, the use of these vouchers is suppressed by the US government. Citizens of third world countries deserve treatment, we just have to create incentives for drug companies to get drugs to them. Getting generic drugs to third world countries is a worthy cause of tax payers dollars, especially when we preserve the market through government fabricated incentives.
Posted by: avatara at Oct 25, 2007 2:06:22 PM
The problem, as I see it, is the government and the public are famously terrible at determinining which drugs are most valuable for the public good. The market, on the other hand, does this very well. The prizes would attach incentives to the wrong kind of R&D, in terms of the overall public good, because the largest prizes would go to whatever was percieved as the most valuable innovations, rather than what actually ARE the most valuable innovations.
Posted by: Wilson at Oct 25, 2007 4:17:41 PM
Bruce, would you care to list those good cheap methods? Every little bit of getting the word out helps.
Posted by: Nancy Lebovitz at Oct 26, 2007 6:33:36 AM
It is truly disheartening to see how many commenters who consider themselves to be such great advocates of the "free market" defend the status quo, which is a GOVERNMENT-GRANTED MONOPOLY IN THE FORM OF A PATENT. I am not endorsing the prize system per se, though I think it's promising, but I just want all you supposed libertarians out there to think for a second about how heavily involved the Government already is in the Pharmaceutical market through the Patent system! With Pharmaceuticals as the Second most profitable industry in the country, behind only Oil (another heavily government-aided industry), there is clearly something wrong here.
Posted by: Dan B at Oct 26, 2007 4:26:16 PM
It is truly disheartening to see how many commenters who consider themselves to be such great advocates of the "free market" defend the status quo, which is a GOVERNMENT-GRANTED MONOPOLY IN THE FORM OF A PATENT. I am not endorsing the prize system per se, though I think it's promising, but I just want all you supposed libertarians out there to think for a second about how heavily involved the Government already is in the Pharmaceutical market through the Patent system! With Pharmaceuticals as the Second most profitable industry in the country, behind only Oil (another heavily government-aided industry), there is clearly something wrong here.
Posted by: Dan B at Oct 26, 2007 4:26:41 PM
It is truly disheartening to see how many commenters who consider themselves to be such great advocates of the "free market" defend the status quo, which is a GOVERNMENT-GRANTED MONOPOLY IN THE FORM OF A PATENT. I am not endorsing the prize system per se, though I think it's promising, but I just want all you supposed libertarians out there to think for a second about how heavily involved the Government already is in the Pharmaceutical market through the Patent system! With Pharmaceuticals as the Second most profitable industry in the country, behind only Oil (another heavily government-aided industry), there is clearly something wrong here.
Posted by: Dan B at Oct 26, 2007 4:26:52 PM
It's not about defending the free market. . .clearly we are debating two alternative means for the government to encourage innovation. Patents clearly encourage innovation; what's more, they encourage innovation in products which are likely to be worth the most on the open market. The prize system will also encourage innovation, but I'm not convinced it will do a good job at encouraging innovation in areas where it will do the most good for the most number of people in comparison to the status quo.
An open free market in pharmaceuticals would be in no one's interest, for obvious reasons. I've got nothing per se against the government handing out dough.
Posted by: Wilson at Oct 26, 2007 7:34:12 PM
Come on now! Doesn't this take us right back to v.Mises and Hayek on the inability of Socialism to calculate?
Posted by: R. Richard Schweitzer at Oct 26, 2007 9:04:26 PM
Dan B,
I am opposed to the patent system as a matter of principle, but I won't tolerate many of the utilitarian arguments advanced against it. If one wants to abolish it, fine with me, but I require honesty about some of the results. In the case of pharmaceuticals, abandonment of the patent system without instituting another government support system would cause pharmaceutical research to grind to a halt.
Posted by: Yancey Ward at Oct 27, 2007 12:04:39 AM
I don't think it's that clear that the patent system encourages innovation. A study by F. M. Scherer found that around 80% of product and process innovations would have been developed even if patents didn't exist, solely for the sake of remaining competitive. Patents also impede the "shoulders of giants" effect, the cumulative process of building on previous innovations, by erecting toll gates on the use of existing technical building blocks. They encourage a business model based on living off of one-hit wonders, rather than coming up with new innovations.
In the specific field of drugs, patents skew R&D toward "me too" drugs rather than fundamentally new drugs--tweaking existing drugs just enough to justify repatenting them. And most of the much-vaunted "high cost of R&D" comes, not from developing the version of a drug actually marketed, but from securing patent lockdown on all the possible major variations of the drug. In other words, much of the drug companies' costs are the direct result of gaming the patent system.
On top of all that, some 50% of drug R&D is actually conducted at taxpayer expense, and some of the biggest cash cow drugs currently under patent were developed on the government tit. At the absolute bare minimum, anything developed with taxpayer money ought to be declared in the public domain.
It's no accident that all the industrial sectors that flourish in the global economy are heavily dependent either on direct taxpayer subsidies (e.g., armaments and agribusiness) or on artificial "property" rights like copyright and patents (biotech, software, electronics, and entertainment).
Posted by: Kevin Carson at Oct 27, 2007 3:02:19 AM
Kevin Carson,
When it comes to pharmaceuticals, you don't know what you are writing about. The R&D on drug discovery and development is almost completely funded by pharmaceutical companies themselves. The only part of the process that is funded by the government is the research on the discovery of the biological targets, and the government doesn't fund all of that either.
What causes me-too drugs is the fact that treating the underlying affliction is extremely profitable, or highly valued by the market.
And your assertion that "most of the much-vaunted high cost of R&D comes, not from developing the version of a drug actually marketed, but from securing patent lockdown on all the possible major variations of the drug" is simply false. We investigate different structural classes because it decreases the risk (extremely high, I would point out) that the program itself will fail to produce a drug that can pass the hurdles set by the FDA- it only has the additional benefit of poisoning the well for potential competitors- ironically providing a barrier to the derisively named me-too drugs.
Where I agree with you is that the system probably doesn't provide a lot of net benefit for a wide array technologies, but pharmaceuticals are fairly unique in that they require a very large, up-front capital investment in a very risky endeavor in which the final, government-approved product is trivial to identify and copy in large quantity. If you want to advance a utilitarian argument against patents for pharmaceuticals, you will have to also advocate abolishment of the FDA. No sane investor will put up capital for pharmaceutical research without patent protection in the present regulatory environment- it would be a sure money loser.
Posted by: Yancey Ward at Oct 27, 2007 12:09:24 PM
Kevin Carson, good analysis about government-funded research being used by drug companies as basic science. This is undeniable really, and was similarly evident in the rise of technology post-WW2. Much of the basic science of these innovations- the computer, the internet, etc. was done by government-financed research and then refined by private firms. That is fine and worked great, as long as you didn't have a screwy patent system that discouraged innovation and idea-sharing, which the tech sector did not, hence the boom of the tech sector.
Yancey, I have to respectfully disagree with you on the notion that the profitability of "me-too" drugs is a sign of the FUNCTIONING of the market rather than a sign of the DYSFUNCTION of the market. What you have basically is a situation where the basic science for a drug has been done long ago, then companies try to continue making monopoly profits off of the drug by creating supposedly "new" versions of the drug when the old patent expires and the Market brings the old drug's price down to reasonable levels through generic drug manufacturers' competition. The "new" versions are relentlessly marketed to both patients (who have little knowledge in this area) and to DOCTORS (who are relied upon for accurate information by patients), and you end up with a situation where patients are told by their bribed doctors (bribed through junkets, merchandise, etc.) that this "new" drug is really much better than the old drug. The doctor proscribes the "new" drug and only the pharmaceutical firm is better off, not the patients who pay higher insurance fees to pay for these drugs.
And you call THAT a healthy system that incentivizes innovation?
Posted by: Dan B at Oct 27, 2007 2:02:11 PM
DanB,
If I grant all you say, the fault is with the patients and the doctors that use the more expensive drugs when generics are just as good (a condition, I would note, that is not always true, but is often asserted to be true in general- you need some actual examples, and the corresponding data, to show that follow-up versions- often completely different molecules- are actually no better; they often are better in a number of different ways), and the insurance companies that acquiesce to paying for them.
Like I wrote above, I would scrap the patent system tomorrow if I were king, but I would do it with completely open eyes, and would not promise nivana on all societal fronts. A clean, principled objection to intellectual property is the best approach- don't muddy it up with iffy utilitarian arguments.
Posted by: Yancey Ward at Oct 28, 2007 12:22:33 AM
Some of the comments reflect knee jerk reactions against doing anything different in the drug development field, and a few others make the predictable but fairly empty assertions that prizes are somehow more socialistic or political than the grant of government backed legal monopolies (such as patents, sui generis rights in pharmaceutical test data, patent extensions for registration delays, orphan drug exclusivity, orange book 30 month stays in generic drug registrations, pediatric testing exclusivity, etc) and government policies regarding front end R&D subsides (such as R&D and orphan drug tax credits, $7 billion in NIH funded clinical trials, other federal grant and contract funding now given to for profit and non-profit drug developers) and reimbursements for products (VA, medicaid, medicare, federal drug benefits for employees, special programs for kidney products, etc).
In every area, the Sanders Prize Fund approach needs to be compared to the world we actually live in, and the incentives outlined in the bill should be considered as alternatives to an extremely expensive system that provides few innovative new drugs at the cost of about $.5 trillion per year globally in terms of higher prices.
The Sanders bill looks to market incentives to stimulate R&D, but it does not package those incentives as government granted monopolies. The advantages of avoiding the monopolies are quite large, empirically.
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