GIST

Globalized in 1995 by the TRIPs Agreement,[1] humanity’s dominant mechanism for encouraging innovations involves 20-year product patents, whose monopoly provisions enable innovators to reap large markups or royalties from early users. Making innovators reliant on monopoly rents raises the price of innovative products. This is harmless in some cases: buyers pay more for a product they prefer. But it can be profoundly problematic when potential buyers cannot afford a new life-saving medicine, for example, or when a powerful green technology is underutilized because the benefits of its deployment overwhelmingly go to third parties whom potential buyers care little about. In such cases, monopoly markups that are intended to reward innovations also greatly impede their diffusion.

This problem can be much alleviated by establishing sector-specific international impact funds as a supplementary alternative reward mechanism. Such an impact fund would enable innovators to exchange their monopoly privileges on any patentable technology for impact rewards based on the social benefits achieved with it.  By promoting innovations and their diffusion together, such international impact funds would bring substantial gains in justice and cost-effectiveness, especially in the pharmaceutical and green-technology sectors.

 

IMPACT FUNDS

Each impact fund would cover a broad domain of innovation, for example: pharmaceutical innovations, rewarded according to their health impact; green-technology innovations, rewarded according to emissions averted; educational innovations, rewarded according to their impact on skills and employment; agricultural innovations, rewarded according to their impact on harvest yields and reduced consumption of water, pesticides, or fertilizer. This meta-innovation in how we encourage and reward innovations can be applied in any innovation domain definable through a uniform metric of social value. 

Delinking a registered product’s sales price from the fixed cost of R&D, impact funds remove the headwind of monopoly markups. They further support diffusion by adding a tailwind of impact rewards. This substitution transforms innovator motivations. While monopoly rewards incite great efforts to find, stop, prevent, and deter patent infringements, impact rewards encourage innovators actively to promote the rapid, widespread, and effective deployment of their technology for optimal effect. Earning no share of its sales price, such innovators would nonetheless promote its effective deployment by providing technical assistance or even discounts — insofar as they expect the increase in impact rewards earned from such promotional investments to exceed their cost. Unlike patent earnings, impact rewards are insensitive to socioeconomic position: the reward for protecting a person from pollution, disease, or premature death is unaffected by what this person does, would, or could pay.

Any international impact fund would, in its specific domain, underwrite predictable annual disbursements, each divided among registered innovations according to impact achieved in the preceding year. This principle of division ensures fairness among innovators, who are rewarded in proportion to benefit provided, all at the same reward-to-benefit rate. Suitable innovations could be registered with the appropriate impact fund and would then participate in a fixed number of consecutive annual payouts. With these rewards enabling registrants to recoup their R&D expenses and to make satisfactory profits, registrants would have to agree, in the included countries either to waive their exclusive monopoly privileges or else to charge neither markups nor royalties during the reward period and then to waive any remaining monopoly privileges thereafter. An impact fund might be designed to require either of these concessions or else to leave the choice to each registering innovator.

Because participation is optional, an impact fund’s reward rate emerges endogenously.  When innovators find the going rate unattractive, registrations dry up and the reward rate rises as older innovations exit at the end of their reward period. When the reward rate is seen as generous, registrations multiply, and the reward rate declines. Such equilibration reassures participating innovators and contributors that the reward rate will be fair between them, and stable over time.

Any impact fund would organize a wide competition across a whole domain of innovation, thereby creating a new kind of competitive market that helps innovations achieve optimal impact. It would train participating innovators to holistically organize their research, development, marketing, and delivery operations toward realizing the most cost-effective benefits. Covering R&D costs and innovator profits as public goods, it would make access to registered innovations widely affordable at competitive prices – with registrants highly motivated to promote impactful deployments. 

Impact funds would further benefit lower-income populations by encouraging R&D that targets their specific needs within their specific circumstances. The capped sales price, supplemented with impact rewards, enables innovators to make good profits from selling to people who cannot pay high markups. This would attract innovator attention to neglected tropical diseases, cheap nutritious foodstuffs, reliable local energy generation, pollution-free stoves, and so on. In the competition to develop such advances, innovators from low-income countries would not face the usual crushing head start by Northern innovator firms. Impact funds would therefore also help build, in lower-income countries, capacities in R&D, manufacturing, and deployment.

Impact funds require long-term funding that, at least initially, might come from affluent states. A coalition of them could launch an impact fund with contributions tied to population size and per capita income. With economic growth and accession of additional states, annual disbursements would grow, enabling the impact fund to attract a rising number of registrations. An impact fund might gradually become independent from states by building an endowment that welcomes contributions also from foundations, corporations, individuals, and bequests. 

In allocating most of the fixed costs of innovation to more affluent countries, taxpayers, and donors, impact funds resemble the current monopoly regime. The big difference is that impact funds avoid excluding the poor. Such exclusion can be deeply immoral, as when so many patients cannot afford life-saving medicines that generic manufacturers stand ready to mass-produce and supply cheaply. Such exclusion also harms us all: monopoly markups on green technologies impede their adoption with the result that older, dirtier technologies ruin our planet; and propagation of diseases among the poor endangers everyone’s health. 

Another great advantage of impact funds is that they can take full account of externalities, such as a green technology’s benefits for people other than its buyer or the reduced infection risk enjoyed by people other than the user of a new medicine. The current regime, by contrast, rewards patentees through user-focused decisions; and innovative activities therefore aim to generate benefits for users while largely ignoring both positive and negative externalities. This leads to substantial underinvestment in green innovations, whose benefits overwhelmingly go to distant strangers and future generations, and to substantial underinvestment in new pharmaceuticals that, by slashing the incidence of their contagious target disease, would bring large benefits to non-users but would thereby also slash the innovator’s future sales. Let us examine these two sectors more closely.

 

GREENOVATIONS

Monopoly markups stimulate green innovations[2] – but also make them more expensive. Most affluent states offset this competitive disadvantage through environmental regulations, carbon taxes or green subsidies. Such compensatory measures are largely absent in the Global South as they would cause substantial capital outflows to Northern patentees. Consequently, existing green technologies are massively underutilized there, with devastating effects on air pollution[3] and climate.

Coal-fired power plants provide a telling illustration. Frontier technologies can substantially reduce emissions but cost more because of royalties to patentees. Mitsui Babcock charged manufacturers of steam boilers about $1.5 million per 600 MW boiler for using its patented “ultra-supercritical” technology.[4] Consequently, many plants in India and other lower-income countries deployed less efficient subcritical or supercritical technologies[5] that will generate up to 30% higher emissions for decades.[6]

Scant deployment of green technologies in the Global South is a big problem. In the remainder of this century, these countries will experience massive economic growth, intensified by large increases in population. The technologies they will use, the practices and habits they will form, the roles they will be prepared to play in the fight for a livable planet will matter far more than any choices affluent nations will make within their own borders.[7] 

Rapid emissions reduction requires that highly effective and locally appropriate green technologies be widely and quickly deployed throughout the Global South. This could be achieved through a Green Impact Fund for Technology.[8] The GIFT would invite innovators to register any new green technology, with two effects in all countries below a certain per-capita income (e.g., $10,000 per annum): 

  • the innovator grants permanent royalty-free licenses throughout the GIFT Zone for its registered technology; and
  • the GIFT rewards each registered technology for six years for emissions averted with it in the GIFT Zone.

Rewards can be paid through fixed annual disbursements – initially of $1 billion, perhaps, with possible subsequent scale-up. Any new green technology could be registered for participation in six consecutive such disbursements, each divided among registered innovations according to emissions averted with them in the GIFT Zone in the preceding year. 

Because demand for high-priced greenovations is weak in lower-income countries, limiting the GIFT to them substantially reduces the opportunity costs of GIFT registration, and therefore the GIFT’s endogenous reward rate ($/tonne of CO2e), while correspondingly increasing its ecological impact relative to the amounts it disburses.[9]

The GIFT would boost the deployment of high-impact green technologies in the GIFT Zone, with massive reduction of emissions in the Global South. Especially for technologies geared to poor populations and tropical regions, the GIFT would also open whole new areas of green R&D, accelerate the overall pace of green innovation and expand capacities for innovation and manufacturing in the Global South. To be accepted and ecologically effective in the GIFT Zone, greenovations must be locally appropriate: must be sensitive to socio-cultural context and congruent with equitable access so that they mitigate rather than exacerbate existing socioeconomic inequalities.

The GIFT’s climate impact would greatly exceed the sum of the assessed and rewarded impacts of all GIFT-registered innovations. This is so not only because the GIFT confines the rewardable impact of a registered greenovation to the first six years after registration. A more important reason is that, by accelerating the pace of innovation, the GIFT raises the standard against which newly registered innovations will be assessed. Over time, this effect will grow to be quite large. A greenovation registered in 2040 will be rewarded for the emission reductions it achieves relative to the alternatives being deployed in that year. But this 2040 state-of-the-art will be far superior to what it would have been if the GIFT had not been in operation for the preceding decade or more. This acceleration of green innovation is an achievement the GIFT need not pay for. It is likely to be especially significant in classes of green technologies that, under the current regime, suffer neglect because they are suitable for use only in the Global South, are more expensive than their dirtier alternatives, or bring widely diffused benefits that buyers/users care little about. 

An experimental pilot could test and refine the GIFT idea and thereby make adoption of the GIFT more feasible and likely. This pilot would involve a single reward pool of, say, $120 million, to be split among pre-selected green innovators in proportion to the emission reductions they achieve with their respective innovations, affordably priced, in a self-selected region of the GIFT Zone over a 2-year period. The pilot would show concretely how green innovators respond to competitive impact rewards and how ecological impact can be assessed in a reliable and timely manner. It would help refine impact assessment and provide an indication of the cost-effectiveness of the new impact rewards. The GIFT pilot would also yield its own ecological benefits and policy insights through the pilot projects it monitors and rewards. 

The GIFT and its pilot could be administered within the UNFCCC’s Green Climate Fund. High-income countries can most easily afford the cost and have contributed most to the climate crisis. Supporting the GIFT would help them fulfill their 2009 promise to devote $100 billion annually to climate change mitigation and adaptation[10] and discharge their responsibilities under Sustainable Development Goals 13 and 17.[11]

The GIFT is realistic because it can be implemented unilaterally by a few willing states and because, conferring a clear benefit, it would be welcomed by the countries of the GIFT Zone. It is likely to be well received also by firms with significant green technology patent portfolios, as it would substantially increase their opportunities to make money from developing and selling greenovations for the GIFT Zone. The proposal will find support also among potential green-technology customers in the GIFT Zone, who will gain better and cheaper options for greening their operations. States and populations in the GIFT Zone will benefit from price reductions, from substantial declines in air pollution, and, longer-term, from a deceleration of climate change. Green movements around the world would applaud the initiative, as would organizations concerned for living conditions in the Global South. Defenders of intellectual property rights would find the initiative palatable because it applies only to the GIFT-Zone countries and, with each greenovation, lets its innovator choose between the two rewards. Some wealthy states might be initially reluctant to contribute to the GIFT’s cost – but others could readily proceed without them. The GIFT would, as intended, reduce demand for obsolete dirty technologies throughout the GIFT Zone but would also give the firms selling such technologies ample new opportunities to supply state-of-the-art green substitutes. With support from a few major states, the GIFT could be instituted without significant political resistance.

 

PHARMACEUTICALS

Some new medicines sell at prices several thousand times their cost of manufacture. An example is sofosbuvir, an effective hepatitis C drug introduced in the U.S. in 2013 at $84,000 per course of treatment, 3000 times the estimated cost-based generic price of $28.[12] In lower-income countries, patented medicines are often much cheaper but still widely unaffordable on the also much lower incomes there. In its first five years, sofosbuvir had reached only 5 million patients worldwide; the other 66 million remain infected and continue to spread the disease.[13] Such disease proliferation benefits the patentee who, were its new drug deployed in a global population-level strategy of disease eradication, would find its future sales decimated. Each year, hundreds of millions suffer, and millions die, from lack of access to pharmaceuticals that competing generic firms could and would supply quite cheaply if patent enforcement did not prevent them from doing so.[14]

Prices for patented medicines are set at such exorbitant levels because – economic inequalities being very large globally and even intra-nationally[15] – a lower price would not gain enough in increased sales volume to compensate for the loss in reduced profit margin. 

Making pharmaceutical firms reliant on monopoly rents hurts the world’s poor also through its influence on R&D decisions. Firms that derive their earnings from monopoly markups ignore diseases heavily concentrated among the poor, as shown by the strong correlation between disease-specific R&D investments and the average income of the corresponding patient population.[16] As a result, while male pattern baldness garners abundant research attention, humanity is woefully underequipped with pharmaceuticals against the 20 WHO-listed “neglected tropical diseases,” which “cause devastating health, social and economic consequences to more than one billion people,”[17] as well as the familiar great diseases of poverty – including tuberculosis, malaria, hepatitis, pneumonia, and diarrhea – which routinely kill some 6 million people each year.[18]

Systematic neglect of the poor in both R&D and dissemination of pharmaceuticals makes them a breeding ground where new diseases, such as Ebola, swine flu, and COVID-19, can gain traction and old diseases can survive and evolve new, perhaps more virulent or drug-resistant disease strains (which often emerge in patients who cannot afford to take an expensive drug at full dosage for the full course of treatment) – as has happened with tuberculosis in China and India, and with malaria in South East Asia and Ethiopia. In this regard, the interests of the affluent are aligned with those of the poor: we all want diseases contained, suppressed, and eradicated from this planet. But this is achievable only with a population-level strategy that includes the poor. 

Humanity has eradicated only one human disease, smallpox, in a joint effort led by the Soviet Union at the height of the Cold War.[19] We certainly could have eradicated other infectious diseases too, including most of those mentioned two paragraphs back. But under the current innovation regime, disease eradications are unlikely.[20] Here is why. Pharmaceuticals can protect people against harm from infectious diseases in two distinct ways. At the individual level, they can protect their users. At the population-level, they can be deployed to contain and suppress a disease toward eradication, thereby saving people from being endangered by it in the first place. Although we consumers much prefer being benefited in the latter way, this way is money-losing for pharmaceutical firms which profit only by benefiting people in the former way. It is not profitable for them to address the needs of poor patients; and it is financial suicide for such a firm to suppress a disease for which it is selling an exclusive remedy. Under the current monopoly patent regime, pharmaceutical firms have a vital financial interest in the continued flourishing of their target disease. Thanks to this interest, the poor – though unable to afford patented medicines – nonetheless make a crucial indirect contribution to innovator profits.

Pharmaceutical innovation would be much more cost-effective if there existed a Health Impact Fund (HIF) inviting innovators to permanently forgo monopoly markups on any new patentable pharmaceutical in exchange for impact rewards. These rewards could be paid through predictable annual disbursements, each divided among HIF-registered pharmaceuticals according to incremental health gains achieved in the preceding year. Forgoing its monopoly privileges, each registered product would participate in ten consecutive disbursements and then be freely available through open licensing.[21]

At least initially, the HIF requires states to provide reliable long-term funding whose size can be set to attain the desired number of registrations. To make such funding politically realistic, the HIF should exclude non-contributing affluent states from its scope: HIF-registered products should not be rewarded for health gains achieved in those states nor face constraints on their sales price there. This exception would give affluent countries an incentive to join the funding partnership. It would also lower the opportunity cost of registration and thereby depress the HIF’s endogenous reward rate, making it cheaper for the HIF to attract a given portfolio of registrations. Thus, missing contributions from non-contributing affluent states would largely be offset by the HIF’s smaller annual disbursements. Consequently, a HIF capable of supporting 20–30 products (with 2–3 entering and 2–3 exiting in a typical year) can be created even without support from some major affluent states. This HIF might then expand over time – through economic growth in contributing states, accession of new states, or agreement to raise the contribution rate. Similar growth could occur if states decided to devote part of an international tax – on greenhouse gas emissions, perhaps, or on financial transactions – to the HIF. In any case, the HIF should also welcome donations from non-state actors (foundations, corporations, individuals, and bequests), perhaps using them to build an endowment that could support an increasing share of its annual budget.

The prohibition of monopoly markups on HIF-registered pharmaceuticals could be implemented through open licensing or, perhaps preferably, through a tender process that selects two or three reliable contract manufacturers to mass-produce the registered pharmaceutical on the registrant’s behalf. Such a tender process affords superior economies of scale, facilitates health impact measurement, and makes it easy for the registrant to sell the product below its price cap into impoverished regions when the expected additional health gains make it profitable to do so.[22]

The HIF’s most important purpose is to incentivize firms to fully include poor people in their dissemination strategy. Such inclusion requires that an effective new pharmaceutical is cheap enough to be affordable to all while delivering it to even the poorest is profitable enough for firms to want to do so comprehensively and effectively. In our world of widespread poverty, these two requirements stand in tension. There is no sales price low enough to fulfill the former and high enough to fulfill the latter. The HIF resolves this tension by paying participating firms an impact-based delivery premium in addition to the sales price.

The HIF improves upon innovation prizes and other pull mechanisms – such as advance market commitments[23] – in five main ways. It constitutes a structural reform, establishing stable and predictable long-term innovation incentives. It lets innovators, who know their own capacities best, decide which innovations to pursue across the whole range of disease areas. It avoids having to specify a precise “finish line” – hard to get right in advance – and instead rewards each registered innovation according to the benefits produced with its deployments. It avoids having to specify a reward-for-benefit rate, which instead evolves endogenously through market forces. It gives innovators strong incentives also to promote (through information, training, technical assistance, discounts, etc.) the fast, wide, impactful diffusion of their registered innovations.

The HIF’s premium for delivery of a registered pharmaceutical is based on the incremental health gains produced with it, which might be assessed in quality-adjusted life years (QALYs). Such “health gains” are defined to include externalities, such as the benefits that use of a HIF-registered product confers upon third parties, typically in the form of reduced infection risk. A registered pharmaceutical would earn its maximum reward by eradicating its target disease – and this even if the innovator then had no more patients left to treat.

Under the current monopoly regime, new pharmaceuticals that are just slightly better than existing alternatives can earn as much as first-in-class innovations; and duplicative products that do not improve the state-of-the-art at all can still capture a large market share, thereby garnering huge profits and reducing the rewards of a preceding break-through innovation. The HIF avoids such inefficiencies by rewarding only incremental health gains, gains that would not have occurred without the registered innovation. It thereby discourages socially wasteful efforts to field a duplicative product against a HIF-registered innovation: if HIF-registered, the duplicate would earn too little for lack of incremental impact; if unregistered, it would earn too little because of its uncompetitive price.

The HIF would create powerful new incentives to develop precisely those high-value innovations that the current regime leaves inadequately rewarded, rapidly to provide these with ample care at very low prices, and to deploy them strategically to contain, suppress, and ideally to eradicate the target disease. Here pharmaceutical innovators would want to collaborate closely with national health services and organizations like the Global FundGAVIMédecins Sans Frontières, and Partners in Health on the optimal strategic deployment of their products aimed at containment, suppression, and ultimately eradication of the target disease. Creation of the HIF would greatly improve the prospects of permanently freeing humanity from some of the most destructive infectious diseases and would greatly enhance humanity’s preparedness against the grave risks that communicable diseases pose due to evolving mutations and drug resistance.

All this makes creating the HIF an extremely cost-effective reform. In fact, its true cost is likely to be markedly negative insofar as savings on registered pharmaceuticals and other health-care costs as well as gains in economic productivity and associated tax revenues would benefit its funders – also indirectly by reducing the cost of health insurance, national health systems, and foreign aid. In addition, the HIF would largely avoid the wasteful expenditures entailed by monopolies: expenses for multiple staggered patenting in many jurisdictions with associated gaming efforts (e.g., evergreening), costs of preventing monopoly infringements, costs of mutually-offsetting competitive promotion efforts, economic deadweight losses, and costs due to corrupt marketing practices and counterfeiting.

In this context we should note that the HIF does not face the kind of fierce resistance with which the pharmaceutical industry opposes any proposal to diminish its patent privileges (including the recently proposed TRIPS waiver for COVID-19 related medical supplies). The HIF would offer such companies a voluntary exchange, giving them new opportunities to do well by doing good: to earn money by benefiting poor populations. Aligning profits with human needs, the HIF would make the business of pharmaceutical innovation much more equitable in terms of research priorities and access to its fruits.

The example of the Global Fund suggests that creation of the HIF is entirely possible. To mobilize the needed political support, it would be extremely helpful to try out the HIF approach on a smaller scale. COVID-19 was a great opportunity to do so. Instead, this pandemic became a depressing showcase for the flaws of the current monopoly regime. Effective vaccines were developed in record time. But manufacturing was scaled up slowly as innovators sought to safeguard their proprietary technologies and know-how, to avoid wasteful excess capacity, and to maintain a favorable demand-supply imbalance conducive to high prices. And the distribution of vaccines was driven not by a strategic effort to suppress the disease but by a scramble to maximize monopoly rents: innovators prioritized buyers who offered to pay more and rejected those who, only marginally profitable, might erode the product price and seemed more useful spreading and prolonging the pandemic with potential emergence of new disease variants.

Fortunately, a suitable HIF pilot is always feasible. Featuring a single reward pool of ca. $100 million, such a pilot might invite innovators to submit proposals of how they might, with one of their existing pharmaceuticals, achieve additional health gains in some selected poor country or region. An expert team would select the four best proposals based on, inter alia, anticipated incremental health gains, prospects for broad, equitable access, susceptibility to reliable, consistent, and inexpensive health impact assessment, and promise of follow-on social value. Selected proponents – which might include non-commercial innovators such as DNDi and the TB Alliance – might then have three years for implementation. Thereafter, achieved health gains would be assessed – according to pre-agreed criteria, by an agency like the IQWIGDEval or IHME – and the reward pool be divided proportionately.[24] The pilot would show how innovators respond to the novel competitive impact rewards, would help refine impact assessment, and would indicate how well impact rewards work in generating health gains. With a successful pilot, an international agreement to establish the first impact fund would become a real possibility. In addition, the pilot would produce its own substantial health gains and health policy insights through the selected projects it monitors and rewards.

 

WRAP-UP

Thanks to the large inefficiencies of monopolies, a shift toward impact rewards, in appropriate sectors such as green-tech and pharma, can dramatically improve human lives and the well-being of our planet without cost to anyone. Making the business of innovation vastly more cost-effective, impact funds would produce a triple win: for innovators, for users of innovations, and for governments and taxpayers. Raising the social value of innovations developed, vastly extending their reach, and greatly reducing wasteful expenditures by patentees, impact funds could truly unshackle human progress and thereby promote human rights, poverty eradication, the 2030 Agenda of the Sustainable Development Goals, and a shared spirit of planetary solidarity. 

 

ENDNOTES

[1] TRIPS Agreement, https://www.wto.org/english/docs_e/legal_e/trips_e.htm, esp. Articles 27, 28 and 33. 

[2] The US alone annually grants some 15,000 patents directly related to climate change mitigation (https://stats.oecd.org/index.aspx?queryid=29068).

[3] It is estimated that air pollution alone causes some 8.7 million premature deaths annually, accounting for about 15% of all human deaths. See Vohra, Karn, and Alina Vodonos et al. (2021), “Global Mortality from Outdoor Fine Particle Pollution Generated by Fossil Fuel Combustion: Results from GEOS-Chem,” Environmental Research 195: 110754. https://doi.org/10.1016/j.envres.2021.110754

[4] Xiaomei Tan, Deborah Seligsohn, et al. (2010), Scaling up Low-Carbon Technology Deployment: Lessons from China. (Washington, DC: World Resources Institute), 7. http://pdf.wri.org/scaling_up_low_carbon_technology_deployment.pdf

[5] Ian Barnes (2016), The Prospect for HELE Power Plant Uptake in India. (London: IEA Clean Coal Centre), 4. https://usea.org/sites/default/files/The prospects for HELE power plant uptake in India - ccc271.pdf

[6] Converting 35% rather than 45% of the coal’s energy content into electricity. See Rosamund Pearce and Tom Prater (2020), “Mapped: the World’s Coal Power Plants.” (London: Carbon Brief). https://www.carbonbrief.org/mapped-worlds-coal-power-plants

[7] For example, sub-Saharan Africa’s electricity production will rise dramatically as its per capita consumption — currently under 2% of the US level — will catch up and its population will increase from the current 1.2 billion to about 4 billion by 2100.

[8] For ongoing work on the GIFT project, see https://globaljustice.yale.edu/green-impact-fund-technology.

[9] ‘Tonnes of CO2e averted’ is a widely used metric that weights different greenhouse gases according to their warming potential and their persistence in the Earth’s atmosphere. The ‘e’ stands for ‘equivalent’.

[10] Timperley, J. (2021). The Broken $100-Billion Promise of Climate Finance — and How to Fix it. Nature 20. https://www.nature.com/articles/d41586-021-02846-3.

[11] “Take urgent action to combat climate change and its impacts” and “strengthen the means of implementation and revitalize the global partnership for sustainable development.” https://sdgs.un.org/goals.

[12] Melissa Barber, Dzintars Gotham, Giten Khwairakpam, and Andrew Hill (2020), “Price of a Hepatitis C Cure: Cost of Production and Current Prices for Direct-Acting Antivirals in 50 Countries.” Journal of Virus Eradication 6, no. 3. https://doi.org/10.1016/j.jve.2020.06.001 

[13] Clinton Health Access Initiative (2020), “Hepatitis C Market Report.” https://3cdmh310dov3470e6x160esb-wpengine.netdna-ssl.com/wp-content/uploads/2020/05/Hepatitis-C-Market-Report_Issue-1_Web.pdf

[14] Arguably, cutting patients off from affordable access to life-saving drugs in this way constitutes a violation of their human rights. See Thomas Pogge (2009), “The Health Impact Fund and Its Justification by Appeal to Human Rights,” Journal of Social Philosophy 40, no. 4, 542–569. http://onlinelibrary.wiley.com/doi/10.1111/j.1467-9833.2009.01470.x/abstract

[15] Sean Flynn, Aidan Hollis, and Mike Palmedo (2009), “An Economic Justification for Open Access to Essential Medicine Patents in Developing Countries,” Journal of Law, Medicine and Ethics 37, no. 2, 184–208 at 187–188.

[16] Javad Moradpour and Aidan Hollis (2020), “Patient Income and Health Innovation,” Health Economics Letter. https://doi.org/10.1002/hec.4160

[17] See World Health Organization (n.d.), “Neglected Tropical Diseases.” https://www.who.int/health-topics/neglected-tropical-diseases#tab=tab_1.

[18] Our World in Data reports 2.56 million deaths from pneumonia in 2017 (https://ourworldindata.org/pneumonia), 1.53 million deaths from diarrheal diseases in 2019 (https://ourworldindata.org/causes-of-death), 1.18 million deaths from tuberculosis in 2019 (https://ourworldindata.org/grapher/tuberculosis-deaths?tab=chart&country=~OWID_WRL), 627,000 deaths from malaria in 2020 (https://ourworldindata.org/malaria) and 79,000 deaths from hepatitis in 2019 (https://ourworldindata.org/grapher/deaths-from-acute-hepatitis-by-cause).

[19] Frank Fenner, Donald Henderson, Isao Arita, Zdenek Jezek, and Ivan Danilovich Ladnyi (1988), Smallpox and its Eradication‎ (Geneva: World Health Organization). https://apps.who.int/iris/handle/10665/39485.

[20] To be sure, non-commercial innovators occasionally obtain funds to work on such diseases, leading to successes like the recent malaria vaccine developed at Oxford University:  https://www.theguardian.com/commentisfree/2021/apr/25/new-vaccine-success-for-oxford-is-truly-remarkable. But they rarely have enough money for a successful tripartite campaign of product development, large-scale product manufacture, and global product distribution.

[21] For more details, see Incentives for Global Health (n.d.), “Health Impact Fund.” https://www.healthimpactfund.org/en/

[22] For more detailed discussion, see Thomas Pogge (2012), “The Health Impact Fund: Enhancing Justice and Efficiency in Global Health,” in Journal of Human Development and Capabilities 13, no. 4 (2012), 537–559 at 550–552.

[23] See Michael Kremer and Rachel Glennerster (2004), Strong Medicine: Creating Incentives for Pharmaceutical Research on Neglected Diseases (Princeton: Princeton University Press); Médecins Sans Frontières Access Campaign (2020), “Analysis and Critique of the Advance Market Commitment (AMC) for Pneumococcal Conjugate Vaccines (PCVs) and Impact on Access” (MSF Briefing Document), https://msfaccess.org/sites/default/files/2020-06/Full-briefing-doc_Gavi-AMC-PCV-critique_MSF-AC.pdf; and Michael Kremer, Jonathan Levin, and Christopher M. Snyder (2020), “Designing Advance Market Commitments for New Vaccines,” https://scholar.harvard.edu/files/kremer/files/amc_design_36.pdf.

[24] Sophisticated methods of health technology assessment exist and are widely used, especially by national and private insurers, so the HIF and its pilot could draw on these methods. We have been in discussions about this with IHME and IQWIG.

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2 comments, sorted by Click to highlight new comments since: Today at 11:23 AM
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Hey Thomas, thanks for sharing this very interesting article. It seems like a well thought out proposal, and I really appreciated some of the finer details, like the endogenous nature of the reward. Overall I liked it a lot; the nature of comments of course is they tend towards the negative, so please don't take the below harshly!

My main concern with this proposal, which seems overcomeable, is the potential for fraudulent inflation of impact numbers by local officials in third world countries. 

In an ideal system where patients pay for their own treatment, this does not occur, because people only buy the drugs if they intend to use them. In a third party decider/payer system the issue is at least reduced, because even though you could bribe an official to order too many, at least his employer, who would be on the hook to pay, is incentivised to prevent fraud.

The situation here seems worse. As far as I can see, a drug developer could bribe some officials in an extremely poor and remote region (who need to be included in order to achieve global eradication) to say that a certain number of locals have been cured (or a certain amount of emissions avoided). This lie will benefit the drug developer, benefit the local officials, and not harm anyone they know or any organisation they are accountable to. The only loser is a faceless international pot of money that they are collectively conspiring to loot; hardly a novel situation in international aid.

Separately, and I don't think it affects your conclusion, I am not sure this analysis of the current system is correct:

Under the current monopoly regime, new pharmaceuticals that are just slightly better than existing alternatives can earn as much as first-in-class innovations; and duplicative products that do not improve the state-of-the-art at all can still capture a large market share, thereby garnering huge profits and reducing the rewards of a preceding break-through innovation.

It is true that, once they have launched, new drugs that offer only a slight improvement can earn as much as the origional drug (in cases where switching costs are low). However, once there are two drugs on the market, competition will generally significantly reduce the revenue either can earn. The innovator drug will have earned its higher profits during the period prior to the launch of the second drug. This time period might be short, but if so the innovator drug didn't have that large a counterfactual impact anyway.

Finally, and least importantly, I think your description of the breakthrough HCV cure sofosbuvir (Sovalid/Harvoni) is incorrect.

An example is sofosbuvir, an effective hepatitis C drug introduced in the U.S. in 2013 at $84,000 per course of treatment, 3000 times the estimated cost-based generic price of $28.

Something of a nit-pick, but while it is true that $84k was the list price, because of the convoluted nature of US drug regulations this was not the actual price Gilead sold it at. The average US price even for the first year was $60k, but it was always lower internationally and fell from there as competition entered the market and they quickly burned through the highest willingness-to-pay subpopulations.

More importantly, Sovaldi/Harvoni is not just an example, it is a uniquely extreme example; no other drug has had quite the impact it had, in terms of representing a massive improvement over the standard of care (a cure! rather than mere treatment) for a serious condition that affected a lot of people, where the prior standard of care treatment was extremely expensive, allowing for large total revenues. I haven't been a pharma analyst for several years know but to my knowledge essentially every other drug is significantly smaller.

In lower-income countries, patented medicines are often much cheaper but still widely unaffordable on the also much lower incomes there. In its first five years, sofosbuvir had reached only 5 million patients worldwide; the other 66 million remain infected and continue to spread the disease.[13] Such disease proliferation benefits the patentee who, were its new drug deployed in a global population-level strategy of disease eradication, would find its future sales decimated. Each year, hundreds of millions suffer, and millions die, from lack of access to pharmaceuticals that competing generic firms could and would supply quite cheaply if patent enforcement did not prevent them from doing so.

I think this is misleading. If we quote the full sentence from the report you cited, it is clear that the majority of those 66 million people did not even know they had the disease! 

Despite its high prevalence, morbidity and mortality, only 19 percent (~13.1 million) of people living with HCV knew their status in 2017 4 , and only 7 percent (~5 million) received treatment worldwide as of 2017. (link)

Nor do I think this failure-to-erradicate helped Gilead. In 2014 they made over $12bn in revenue from Harvoni/Sovaldi; by 2019 their total HCV revenue, which also includes some other things, had fallen to under $3bn. A rapid global eradication strategy might have been much better for Gilead, because it would have lead to high demand quickly, instead of a slower, lower level number of patients while competitor products entered the market and competed the price down.

In this case, the patent system did provide a product which could cure and, if used widely enough, erradicate the disease, but (largely government) payers were (irrationally) willing to pay more for treatments than they were for a strictly better outcome of a cure. The problem was myopia on behalf of payers, who cared about their one-year costs, neglecting the longer-term benefits of curing people, and egalitarian prejudices against paying high prices for high value. 

Hi Larks, a very big thank-you for your close reading and excellent comments on the Health Impact Fund (HIF) proposal. Let me go through them in order. 

1. You write that the HIF is vulnerable to “fraudulent inflation of impact numbers by local officials in third world countries.” Note that the HIF does create parties incentivized to prevent fraud, namely all the other innovators with HIF-registered products. If one registrant claims greater health gains than it actually achieved, then the payouts to other registrants are thereby diminished (the HIF’s disbursements are unaffected). Some of these competing registrants operate in the same countries and may well be able to spot fishy claims. The HIF’s audit staff could then check up on reported suspicious claims. Should fraud be detected, the HIF would trigger statutory penalties – and there would also be the sanction of public opinion: it would look truly awful if a pharmaceutical company’s claims to have achieved health gains among the world’s most impoverished populations turned out to be based on bogus evidence obtained through bribery. So I am confident that this sort of misconduct could be effectively deterred down to a trickle.  

2. You write that, under the current system, “once there are two [patented] drugs on the market, competition will generally significantly reduce the revenue either can earn.” I agree. My points were (i) that, with appearance of a patented competitor, the break-through drug will, under the current system, lose its advantage, and (ii) that this can greatly weaken incentives to swing for the fences i.e. to do R&D on possible break-through treatments. By contrast, the HIF preserves the advantage of the first-in-class product by treating it more generously than later copy cats. This is how: the health gains achieved with the break-through drug are always assessed against the standard of care prevailing when it entered the market – whereas the health gains achieved with later (also HIF-registered) copy cats are always assessed against a (higher) standard of care including the earlier breakthrough product.

3a. I accept on your word that the actual price charged for sofosbuvir in the US was often well below list price ($60k per course of treatment rather than $84k). That's "only" 2143 times the estimated cost-based generic price of $28, still a markup of 214,186%.

3b. I also accept that the majority of the 66 million who did not get sofosbuvir did not even know they had hepatitis C. But this is not a context-independent fact! Had there been an affordable cure, many more potentially hepatitis-C-infected people would have sought diagnosis; and had it been paid for health gains, Gilead would have made, and pushed for, concerted efforts to identify patients with hepatitis C (in order to improve the health of these patients and of those they might infect).

3c. Holding fixed how it was getting paid, Gilead would not have fared better with a strategy aimed at suppressing and eradicating hepatitis C. Pursuing such a strategy, it would indeed have sold much more product – but at very much lower prices and profit margins.

3d. I completely agree that the root problem lies with myopic and irrational payers. This is the central insight behind the HIF: the pharma industry would achieve vastly more for human health if some of its monopoly rents were replaced by impact rewards as defined.