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.

Many consider implementing a federal prize system for inventions to be impractical for several reasons. Determining both the criteria for award winning products and the valuation of each winning drug may pose a significant challenge. Suggestions include valuation based on social value, lifestyle improvement, or medical necessity. Additionally, awarding a prize too early may dissuade companies from commercializing products or pursuing R&D. Completely eliminating bias from the panel that decides awards may prove impossible and therefore decrease the competition needed to make the system work.