Right now, senators, inventors, and tech companies are squabbling about how to reform the patent system to encourage more innovation. Some version of the embattled patent-reform legislation is expected to pass next month, and stakeholders are preparing for a gory fight over all sorts of itty-bitty nitty-gritties, such as how to calculate damages for patent infringement.
Meanwhile, some scholars and politicians are proposing something far more radical: They want to junk, rather than just rejigger, the patent system. Instead of handing out patent monopolies, they say, the government should offer cash prizes for inventions. In an ideal world, this would lead to cheaper products and motivate more research and development in fields that are unprofitable but socially valuable—such as new treatments for diseases that affect poor people. This solution may seem extreme, but targeting certain elements of the idea to particular inventions would be both politically feasible and entrepreneurially effective.
Patents are supposed to motivate innovation by guaranteeing monopolies on sales of inventions. Let’s imagine, for example, that you invent and patent a vaccine for malaria. For 20 years, no one can compete with you in selling your invention to your customers.
The problem with malaria drugs, though, is that few manufacturers want to compete over your (almost entirely poor, almost entirely African) clientele. The few that do—mostly nonprofits and the governments of developing countries—can’t afford to pay the colossal licensing fees you’d need to cover your $1.2 billion research and development costs. As a result, inventors like you, or big drug companies like Merck and Pfizer, aren’t developing drugs for poor people. Like any other profit-driven industry, drug companies devote their resources to products that earn them money. In fact, in the most oft-cited case where a major pharmaceutical company developed a drug just for poor Africans, the drug was initially intended to treat an ailment with much deeper pockets: worms in domesticated animals (PDF).
What if the reward for innovation were an upfront cash prize, independent of the market for the invention? This is what Sen. Bernie Sanders, I-Vt., is proposing in a bill that’s escaped the notice of the heavyweights fighting over the patent-reform legislation. Sanders’ bill would eliminate drug monopolies; instead, all medical developments would automatically enter the public domain, so more companies could manufacture each new drug. With increased manufacturing competition and zero licensing fees, drug prices should, theoretically, plummet.
It’s an enticing idea, and one that’s not original to Sanders. Perhaps because it relies on using market forces to motivate socially conscious entrepreneurship, politicians and scholars from all over the political spectrum have had their eyes on prizes. This past year alone, John Edwards (PDF), Lindsey Graham, Hillary Clinton, Newt Gingrich, and Nobel laureate Joseph Stiglitz, among others, have each suggested prize systems for medical and environmental inventions. And there are well-known precedents for this scheme: Over the past few centuries, prizes have been designated for a longitude-measuring device (announced 1714, for up to 20,000 British pounds), a nonstop flight from New York to Paris (announced 1919, for $25,000; eventually awarded to Charles Lindbergh), and private space travel (announced 1996, the $10 million X-Prize).
The successful prizes—that is, those that found a winner—tended to have a few features in common. They were usually for solutions to specific, clearly defined problems, rather than being part of a blanket system to reward all innovations. They also allotted a generous amount of time for the feat to be accomplished before the prize expired (if it expired at all); they offered high rewards that presumably outweighed the costs of research as well as the profits that could be earned from diverting resources into alternate endeavors; and they were high-profile, guaranteeing the prizewinner fame as well as fortune.
But there were failures, too—most notably the wholesale prize systems offered by the Soviet Union (set up in 1919, for virtually all inventions) and the U.S. Patent Compensation Board (established in 1946 for private innovations in atomic energy, which couldn’t be patented for national security reasons). By most accounts, these initiatives failed to generate much entrepreneurial creativity because the pots weren’t big enough to motivate investment in multiple large-scale research programs. Perhaps also because they were so generalized, they didn’t seem to attract the same attention to whatever problems they were trying to solve.
These two failings would likely afflict the industrywide prizes-not-patents system Sanders proposes. That is, if it ever survived the U.S. drug lobby’s reflexive defense of its precious business model. Even if the bill could pass, its $80 billion annual price tag would make the prize fund difficult to sustain. Inventors and venture capitalists would have little reason to believe that the government would make good on its prize promises.
The good news is we don’t need to punt the whole patent system to promote research for neglected diseases or other worthy causes. Instead of setting up an industrywide prize system, a few reputable charities (or a government agency with a brilliant PR team and an ironclad escrow account) should offer attractive prizes for solutions to carefully chosen problems. After all, if a malaria-vaccine prize could match or even surpass the expected profits for a weight-loss/hair-growth/allergy drug, companies would follow the money. And if the prize were given on condition of forgoing a patent, the drugs could still be manufactured royalty-free. As for which unprofitable causes to target, these types of prizes may be most helpful for problems that look the most hopeless. (Research grants, after all, are the traditional way of subsidizing worthy but unprofitable causes, but they are less useful than prizes in areas where there are no promising leads on which specific research or researchers will succeed.)
One of the best ideas in the Sanders bill could be adapted to this more-targeted system of prizes. The legislation proposes an interesting way to solve the problem of incremental drug development. The development of a new drug tends to happen in small steps, often contributed by different companies. Under the traditional patent system, there’s seldom incentive to do the expensive initial legwork, since a newcomer could reverse-engineer your drug, improve upon it slightly, and push you out of the market. One alternative is to offer an advanced market commitment, in which a government or nonprofit guarantees purchase of a minimum number of doses. But with AMCs, such as the one the Gates Foundation promised for a pneumococcal-disease vaccine, there’s no incentive to make those incremental improvements.
The Sanders solution rewards both the pioneer and the newcomer, who must share prizes every year over the course of a decade, based on an annual recalculation of how many people (or quality-adjusted life years) each drug is responsible for saving. Here’s how this system might be applied to a prize for curing malaria: Let’s say Company A developed an AIDS treatment that cured some percentage of the disease’s victims; at first it would receive the entire payout from the prize fund every year. But Company B would get a share if it figured out a way to improve the formula. If the new drug were twice as effective as the original, the two companies would split the annual prize 50-50 every year thereafter.
Sanders’ bill reminds us that adapting incentives to specific industries’ research processes and business models is key. This observation explains why the lawmakers brokering the comprehensive patent-reform legislation are being drawn and quartered by different industries that want different provisions suited to their very different business models. There may be no all-encompassing solution to bring morality to the inherently amoral marketplace. But there are niches where—through private charities or more targeted legislation—we can create new markets that steer the entrepreneurial spirit toward the social good.