Prize System for Inventions

Some economists and legislators have advocated for a prize system instead of a patent system for pharmaceutical drugs (see Medical Innovation Prize Fund Act) given the potential for price hiking and deterring R&D in our current patent system. Legislators have proposed bills that provide for prize systems for a small class of drugs (see Prize Fund for HIV/AIDS Act). Under this system, companies that invent a new drug will receive a lump sum prize from a pool of up to $3 billion per year and no right to exclude would be awarded to the company. The money for the prize pool would be provided by the federal government and insurance companies. A panel of experts would determine which drug performs the best allowing research to be targeted towards a specific problem. Proponents of the HIV/AIDs Act including Bernie Sanders suggest that the prize system may lower barriers to entry and allow nontraditional parties to participate in finding a needed solution.

Proposed Prize Systems have taken many forms including:

1. Opt-in systems where the government pays at least the monopoly profits that the patent holder would expect to receive.
2. System where patents are exchanged for compensation through an auction.
3. Offer cash subsidy to consumers who value the patented product more than the marginal cost but cannot afford the patented product at a monopoly price.

Problems & Considerations Surrounding the Prize System

There is lack of empirical evidence supporting the benefits of a prize system over a patent system, but several factors may be considered if a prize system is to be implemented (BU):

Valuation Problems What is the criteria for awarding a prize and how much prize money is each innovative drug worth? This is one of the biggest problems in establishing a prize system. Prize payments that are too low won’t provide enough incentive, while payments that are too high may incur resource duplication costs. The prize payment amount also has to be individually tailored to the benefit of the drug. People suggest the value of the payment be dependent on the ‘social value’ of a drug, but how is that social value determined? Will a distinction be made between medically necessary drug inventions and lifestyle improvement drugs (e.g. acne medication)? Additionally, private investors such as Bill and Melinda Gates are able to supply similar prize systems for pharmaceuticals discoveries, but the government may struggle to find adequate resources for funding.

Timing of Prize Payments The timing of the prize payment has to be timed well; if awarded too early other companies may not be incentivized to produce a drug that would’ve been higher quality than the drug that won the prize. After the prize is awarded, incentive to commercialize the drug is reduced since there is no patent system. One potential solution is to defer prize payment until there has been a certain degree of commercialization.

Administrative Problems The MIPF creates a board of trustees that has the responsibility of awarding prize payments. Though the board of 13 members is designed to be unbiased, it is unlikely that they will not be subject to political and external pressures, leading to a distorted allocation of resources. An appropriate screening mechanism to confirm the reported benefits of the invented drug has not been designed either and may be needed to preserve the safety of the consumer.