Iancu & Kappos: Replacing patents with prizes bad for patients

With any luck, Congress will soon reauthorize the Pandemic All-Hazards and Preparedness Act, or PAHPA, a crucial component of the U.S. response to biosecurity threats. As it does so, however, Congress should not replace the free market system for innovation with a centralized big government management scheme.

PAHPA funds the programs and institutions that fight public health emergencies. Current authorization expires at the end of September, which means time is of the essence to shore up this critical tool against biohazards.

The Senate health committee, led by Senator Bernie Sanders, recently passed its version of the bill, moving it closer to a floor vote. But unfortunately, Sanders tacked on a provision that could blow up U.S. leadership in healthcare innovation.

Instead of using patents to reward and encourage invention — as the U.S. has done with stunning success for over 200 years — Sanders wants the government to offer prize money.

As former directors of the U.S. Patent and Trademark Office, we can promise that this plan would be devastating for the future of U.S. leadership in drug research. We know this because Sanders’ gambit has been tested centuries ago and well-studied more recently — by economists at Bowdoin College, Harvard, and Stanford, among others. They’ve all rejected the notion that prize systems can replace the incentives created by patents.

The insurmountable fact is that private-sector investment accounts for the lion’s share of new drug discoveries. In 2019 alone, the U.S. pharmaceutical industry invested $83 billion in research and development. That’s nearly double the annual budget of the entire National Institutes of Health, the current source of most federal research grants.

But investors don’t pour billions of dollars into drug research for fun. They’re drawn by the incentive structure. America’s intellectual property system lets developers patent their inventions, affording them a period of temporary market exclusivity. That gives investors the security they need to commit funds. While a drug is under patent, investors have a chance to recoup their upfront expenditure plus earn some profit.

This system encourages investment in research and development, creating a robust and self-sustaining pipeline of new drug candidates. And it has made the United States the world leader in drug invention. About 44% of all drugs in development worldwide originate within our borders.

A major problem with prize systems is that they undervalue new medicines. While a drug is being developed, it’s very difficult to estimate how much it could eventually be worth — and government prizes rarely fall on the “large” side of the spectrum. As soon as drug developers see that the available award is unlikely to match the market value of a new drug — or even cover costs — the prize system will have no motivating effect.

Sanders’ proposal suggests that the government can do a better job than the free market system at incentivizing the invention of cutting-edge new drugs. But we have no reason to believe, and there is no evidence to support a view that such a federal takeover can improve on, or even sustain our current levels of innovation.

Indeed, we have a very recent example of what federal over-involvement in the drug market does. Last year’s Inflation Reduction Act (IRA) introduced government price-setting on a range of medicines. Already, at least 24 drug companies have cut research efforts thanks to that law. A study by the health data firm Vital Transformation estimates that we could see as many as 139 fewer new drugs come to market in the next decade as a result of the IRA.

And if Sanders thinks his plan is going to save the government money, it’s hard to see how that would be possible. Federal dollars would have to replace tens of billions in annual private-sector drug investment.

The Vermont senator’s proposal rests on the premise that America’s drug development system is broken beyond repair. But that promise is just false. From 2010 through 2019, the FDA approved an average of 38 new drugs annually, 60% more than in the previous decade. So patent protections, not gimmick prizes, have brought thousands of life-changing medical advancements to patients.

Prizes were a fad hundreds of years ago. They did not work. All serious scholarship has demonstrated that prizes fail badly at incentivizing innovation, as compared to our tried-and-true patent system.

We do need to fortify our ability to respond to future pandemics and other public health emergencies — which is why Congress should swiftly reauthorize PAHPA. But lawmakers should not simultaneously neuter the intellectual property system that makes U.S. drug development lead the world.

Andrei Iancu served as the undersecretary of Commerce for intellectual property and director of the U.S. Patent and Trademark Office from 2018 to 2021. David Kappos served as the undersecretary of Commerce for intellectual property and director of the United States Patent and Trademark Office from 2009 to 2013. Both serve as board co-chairs of the Council for Innovation Promotion.

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