Everybody loses in the end: Billion-dollar government prizes won't improve on market incentives

In his latest attempt to replace America's free market with government regulators to set prices for medicines, Senator Bernie Sanders wants to reward drug developers with cash prizes determined in Washington. In his vision, these would replace the current US patent system.

The independent Vermont senator has championed a government prize system for many years, but moved closer to his goal this summer, when he added a provision to a bill directing federal agencies to study his idea. The bill will get a vote soon, as its real purpose is to authorise the crucial Pandemic and All-Hazards Preparedness Act, which must be extended by the end of September.

Putting up prize money to develop breakthrough drugs for cancer or Alzheimer's may sound like a good idea. The prospect of a financial reward would in theory incentivise biotech companies to compete, and as a society, we would benefit from the new cures.

In the Sanders scheme, these new drugs could immediately become available as generics, meaning any company could mass-produce them without respecting intellectual property protections. Proponents call this approach "delinkage", because it delinks the price of drugs from the cost of drug development.

A better label for the scheme would be "unhinged". Such an arrangement would vastly underperform our current system. It would radically reduce investment in research and development, leading to many fewer new medicines coming to market. We know this because prize systems have already been well studied and found wanting.

The cost of prizes

Prizes have a long history of failure compared to patents. Zorina Khan, an economist at Bowdoin College, compared the results of patents and prizes in the 18th and 19th centuries. She found that in prize systems, judging panels struggled to be impartial and, due to a lack of technological know-how, often gave awards to the most established firms, even when their inventions weren't the best ones.

Prize judges also sometimes fell prey to marketing schemes or patronage, resulting in a system that favoured the wealthy. In general, Khan found that patents nearly always promoted more innovation than prize committees.

Governments have tinkered with innovation prizes for a long time, and even so, few if any life changing inventions have come about because of reward money. We didn't need federal contests to give us the electric lightbulb, the automobile, the personal computer, or thousands of modern cures.

The fact is, we already have a system that encourages drug development while ensuring affordability over the long term. Patents grant creators exclusive rights to sell their inventions for set periods of time, after which they can be legally copied as generics.

This system has given us more than 19,000 FDA-approved medicines, with about 49 new ones approved each year. Some 90% of all drugs dispensed in the US are already lower-cost generics, which is one reason the average price of a prescription covered by Medicare or Medicaid fell between 2009 and 2018, according to the Congressional Budget Office.

That's not to suggest that our market-based system is perfect. But consider what we would lose if we dismantled it in favour of centrally planned prizes.

Drug development is enormously expensive and time-consuming and faces a high risk of failure. It can cost more than $2 billion in private investment and take more than a decade to nurture a new discovery from lab bench to FDA-approved medicine. Companies and their investors can only put up that cash thanks to patent protections, which ensure that if a drug is successful— a big if, since most drug candidates wash out along the way—they will have a window of time during which to earn a return.

Remove intellectual property protection, and you remove the private investment. In theory, backers might still invest on the chance that a company could win a government prize. But with the odds of "winning" lower and the prizes for winning smaller, a great deal of biopharmaceutical investment would dry up. It would flee to other technological sectors still protected by patent rights—and we would see many fewer new medical breakthroughs.

Passing the buck to Congress

Prize proponents might argue that their system simply needs to fund biomedical research at current levels to be effective. But that is a pipe dream at best.

In a 2020 study from the Information Technology and Innovation Foundation, Philip Stevens and Stephen Ezell looked at proposals to supplant patents with drug-development prizes. They found that governments would have to replace $180 billion a year in private investment to fund prizes at current spending levels.

As they point out, governments would be unable to marshal such funds; they currently spend only a small fraction of that on biomedical research and development—and fight tooth and nail over every item in annual budgets. It's hard to imagine the viability of handing over medical-research decisions to a Congress that can't agree on basic funding for infrastructure or the military.

The political fights wouldn't just be domestic. The US accounts for more than a quarter of global investment in biomedical research and development. In a prize-based system, US taxpayers would replace that funding. But with no patent protections for the resulting drugs, they would be handing over this value to companies around the world that choose to make copycat versions. It's not clear that the American people would accept such a major new wealth transfer abroad, including to major economic competitors like China.

But that doesn't even get to the fundamental absurdity of the prize proposal, which is the notion that we'd be better off with government bureaucrats pre-planning medical breakthroughs. Inventors themselves often don't even know how their work will be used. To cite just one of myriad examples, a pair of scientists at the University of Pennsylvania filed their first patents for mRNA technology 14 years before their discoveries became the basis for COVID-19 vaccines.

Misguided proposal

The drug discovery process is filled with wrong turns and dead ends. Back in the 1960s, the National Cancer Institute developed azidothymidine, or AZT, to treat cancer—and shelved it because it didn't work. In the 1980s, the Institute realized that AZT might be effective against a deadly new epidemic. A private company, the predecessor to GlaxoSmithKline, funded a clinical trial, commercialised the drug, and received several patents.

AZT soon became the first approved drug to treat AIDS. Yet if the same developer had only been offered a "cure for cancer" prize, it wouldn't have bothered trying to turn a failed oncology drug into an AIDS treatment.

As stories like this one illustrate, the patent system doesn't pretend to know what needs to be invented. Rather, it encourages scientists to create and compete, and the most-needed technologies become successful.

Congress does need to reauthorise the Pandemic and All-Hazards Preparedness Act. But it should drop the misguided proposal to revisit drug development contests. Replacing our current system with a centrally planned regime of expensive government prizes wouldn't promote innovation—it would squash it.

Andrei Iancu served as the undersecretary of commerce for intellectual property and director of the US 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