Access to Knowledge

A Prize System as a Partial Solution to the Health Crisis in the Developing World

Author(s): Talha Syed
Year: 2009

Abstract: Each year, roughly nine million people in the developing world die from infectious diseases. Millions more endure suffering caused by the same diseases. Many of those deaths and much of that pain could be avoided by modifying the combination of laws and government programs that provide incentives for the development and distribution of drugs. In a recent paper, we argued that such modifications are morally imperative, despite the fact that they would increase the already substantial extent to which the cost of developing new drugs is borne by the residents of the developed world, either by raising their taxes or by increasing the prices they pay for patented pharmaceutical products.

The difficult question, in our judgment, is not whether we should modify our laws and institutions to address this crisis, but which combination of reforms would alleviate the problem most fairly and efficiently. We are currently working on a book that examines and compares a wide variety of potential solutions. In this paper (which will eventually appear as a chapter in that book), we focus on one option: replacing or supplementing the patent system, as the main method by which we encourage the creation of new drugs, with a system of government prizes.

Producing new pharmaceutical products – and then verifying their effectiveness and safety – is both expensive and risky. Substantial financial incentives are essential to induce firms to engage in this activity. The current patent system provides those incentives by empowering the firms that develop novel and nonobvious pharmaceutical products to prevent others from making, using, selling, or importing those products. Armed with that authority, the firms are able to sell the products for prices much higher than the costs of manufacturing them. The resultant profits provide the carrots necessary to prompt the firms to engage in the inventive activity in the first instance.

A prize system would work quite differently. Instead of authorizing drug developers to exclude competitors, the government would pay successful developers. Other firms, including generic drug manufacturers, would be free to make and sell the drugs in question. The resultant competition would keep drug prices close to the modest costs of manufacturing them. The money necessary to run such a system would come, not from consumers (or their insurers), but from taxpayers.

Would a prize system of this general sort be better than the patent system? More to the point, would it be more effective in alleviating the health crisis in the developing world? A substantial body of literature addresses those questions. In this paper, we marshal and critically evaluate that literature – and add to it a number of new arguments of our own.

The discussion is organized as follows. In Part I, we explore the major potential strengths and weaknesses of prize systems. In Part II, we consider how a prize system focused on the production of drugs and vaccines aimed at communicable diseases might be designed so as to capitalize on its strengths and mitigate its weaknesses.

Keywords: access to knowledge, health crisis