Patents, Prizes, AMCs and CAMCs

1. Patents, Prizes, AMCs and CAMCs Aidan Hollis University of Calgary October 2007

2. Reward partly proportional to social value Decision to invest made by person with the most information Risks borne by innovator Reward only partly proportional to social value High prices prevent access and cause uncompensated losses. PatentsStrengthsWeaknesses

3. Prizes • Prizes come in many varieties, which makes the word easily misunderstood. • Can increase incentives as a supplement or substitute for patents. • I will address three types of prizes • Sanders-style prize fund for all drugs • AMCs • Comprehensive AMCs

4. Sanders-type prize fund • This is a replacement for patent exclusivity rights for pharmaceuticals. • All drugs are included. • Basic idea is that payments would be made to innovators based on estimates of the incremental therapeutic benefit of the innovation out of a fixed prize fund.

5. Sanders Proposal • Advantages • Access • Efficient alignment of R&D incentives with medical need • Risks borne by innovators • Disadvantages • Overturns existing system • Difficulty in assessing how the reward fund should change over time • Funder needs to assess each innovation’s impact • Especially problematic for “life-style” drugs.

6. Advance Market Commitments • AMCs create incentives for rapid commercialization of a specific vaccine. • Essentially, they address the problem that the patent system may not create strong incentives for certain products. • Size of payment justified by estimates of QALY impacts. • They require the recipient to commit to a single price over a long period to avoid double-dipping. • Firm that doesn’t want to commit to a fixed price doesn’t need to accept supplementary AMC payment.

7. The Limits of AMCs • The AMC administrator must pre-specify technical standards. • Therefore, AMCs cannot create broad incentives. • Eg: the pneumococcal vaccine AMC is for one product. • AMCs appear suitable chiefly for incentivizing late-stage development and commercialization.

8. Comprehensive AMCs • Basically an optional alternative to patent exclusivity. • Similar to AMCs – it is an optional add-on. • Payment made for innovative drugs based on measured health impact. • Payment determined after observing the product, not before. • Similar to Sanders-type prize. • Recipients forgo exclusivity. • Corresponding obligation of AMC-style fixed price. • Payment is a share of fixed prize fund, with the share equal to share of health impact.

9. Comprehensive vs. Standard AMCs • Two differences from standard AMCs. • Payments based on QALYs per unit, estimated afterwards, instead of before. • Requires open licensing to avoid double-dipping. • Thus this mechanism can deal with any new medicine, not just those pre-specified.

10. CAMC Properties • Optimizes incentives for included drugs • Ensures generic pricing from beginning • Incentivizes continuing promotional activities • In effect, it uses patent system to “calibrate” rewards • Firms can substitute in or out – if payments too high, more firms will give up patent exclusivity, thus driving payment down (and vice versa).

11. Application to drugs for developing countries • This system could be implemented with respect to sales of drugs in developing countries. • In this case there may be financing available. The question is how to allocate the money. • CAMC has the advantage of technically maximizing the incentive effects of this financing.

12. Comparison to Sanders Bill • CAMC proposal is an optional version of the Sanders prize fund bill. • Reduces concerns about how to deal with lifestyle drugs. • Creates options for firms. • Allows for test run: the larger the amount of money in the reward fund, the more this resembles a mandatory mechanism.

13. How accurately can impact be measured? • Imperfectly, of course. • This shouldn’t be a big deal. • Patent exclusivity is dismal at ensuring that the profits from a drug are proportional to the social value… • Prices are poorly related to health effect and doctors don’t know prices

14. Patents Fairly efficient incentives High prices Summary Sanders prize fund AMCs Comprehensive AMCs

15. Patents Fairly efficient incentives High prices Summary Sanders prize fund AMCs • Effective • But limited to specific well-understood products Comprehensive AMCs

16. Patents Fairly efficient incentives High prices Summary Sanders prize fund • Perfectly efficientincentives • Low prices • Complete overhaul of system AMCs • Effective • But limited to specific well-understood products Comprehensive AMCs

17. Patents Fairly efficient incentives High prices Summary Sanders prize fund • Perfectly efficientincentives • Low prices • Complete overhaul of system AMCs • Effective • But limited to specific well-understood products Comprehensive AMCs • Perfectly efficient incentives only for drugs in the system • Low prices for drugs in system • Automatically calibrated rewards • Incremental implementation

18. Patents Fairly efficient incentives High prices Summary Sanders prize fund • Perfectly efficientincentives • Low prices • Complete overhaul of system AMCs • Effective • But limited to specific well-understood products Comprehensive AMCs • Perfectly efficient incentives only for drugs in the system • Low prices for drugs in system • Automatically calibrated rewards • Incremental implementation

19. Patents Fairly efficient incentives High prices Summary Sanders prize fund • Perfectly efficientincentives • Low prices • Complete overhaul of system AMCs • Effective • But limited to specific well-understood products Comprehensive AMCs • Perfectly efficient incentives only for drugs in the system • Low prices for drugs in system • Automatically calibrated rewards • Incremental implementation

20. Comparison to direct research funding and subsidies • The benefit of patents and prize-type mechanisms is that the incentives are (relatively) efficient. • The people with the most information about the probability of success of a research project make the decision on whether to fund it, and bear the risk. • The problem with direct research funding and subsidies is that decisions are made by managers with incomplete information and without any risk sharing. • In addition, subsidies of large pharmaceutical companies create moral hazard and may be politically difficult to sustain.

21. Other incentive mechanisms • Patent extensions • Special tax on sick people to pay for drugs for other sick people. • Fast track regulatory review • Can only be a good idea if it is believed that regulatory review is taking too long and accelerating it cannot be separately funded.