Australia has a similar mechanism in the Pharmaceutical Benefits Scheme. Drugs are selected based on cost-effectiveness analysis and subsidised price is negotiated with pharmaceutical companies.
If anything, Australia is quite generous to pharmaceutical companies. New Zealand's Pharmaceutical Management Agency has much less negotiating power but still manages to obtain substantially lower prices.
For myself I can't help but wonder if lump-sum licensing might not be more effective. Pharmaceuticals are a bit like software: very high R&D cost, but the marginal cost to manufacture is very small. A one-time payment to sink a large chunk of R&D for a drug might be quicker and easier than guessing at a price. On the other hand, I have no experience in health economics, so it's possible this is a terrible idea.
> For myself I can't help but wonder if lump-sum licensing might not be more effective. Pharmaceuticals are a bit like software: very high R&D cost, but the marginal cost to manufacture is very small. A one-time payment to sink a large chunk of R&D for a drug might be quicker and easier than guessing at a price.
I think they're similar but not quite the same. A prize is offered in advance of a solution, a lump-sum license is after the solution is developed.
On reflection I like prizes better, especially if there are multiple tiers (first to reach the target gets the most prize money, second gets less, etc). You want to ensure that multiple pharmaceuticals are developed independently, in case one of them needs to be pulled from the market.
Prizes seem like they'd be even less efficient. Basically trying to guess the cost to R&D a new drug, with the added risk of not receiving the prize if you're to late or not quite effective enough to meet the threshold.
I see the benefit for things like a covid vaccine where the economic benefit is so large we can afford to drop exorbinant sums. But what's the right prize for a newer better lipitor or xanax, or a treatment for malaria or Huntington's?
You have to guess at the return on being first to market anyhow. If anything, if there are multiple tiers of prizes on offer, then the risk is lower overall.
A healthcare system will typically have a good idea what it needs, whereas a pharmaceutical company will rightly enough focus on what will make the most profit.
Put another way: you don't need to set prizes for every drug. A better treatment for malaria is not going to make much money, because most of the patients will be in less-developed countries. But if you produce a side-effect free drug to reverse baldness, you will absolutely mint it by first selling into wealthier countries at very high prices to "skim the market", then lowering it over time.
Prizes would work better for low-profit/high-impact, for the rest you can mostly rely on pharmaceutical companies to rationally pursue their best interests.
This is a great discussion. I'd push back on the idea that prizes should be used for treatments like side-effect free drugs to reverse baldness, because the market for that is large enough that even in a regime without patents, R&D costs can be recuperated. There's just so much revenue to be had there.
The real value of medical patents (and this is something we've strayed far from) is in incentivizing expensive R&D for ultra-rare diseases. There are diseases that afflict < 1% of the population, there's hardly any revenue to be made in serving that customer base, especially relative to the R&D input necessary. It's stuff like that which can really benefit from prizes. It also presupposes that the prize-awarding authority knows which types of R&D fall under that bucket and which do not, and you get into a quasi-central-planning territory, but that holds true even in a world where pharma patents were only awarded to inventors of such rare-disease drugs.
If anything, Australia is quite generous to pharmaceutical companies. New Zealand's Pharmaceutical Management Agency has much less negotiating power but still manages to obtain substantially lower prices.
For myself I can't help but wonder if lump-sum licensing might not be more effective. Pharmaceuticals are a bit like software: very high R&D cost, but the marginal cost to manufacture is very small. A one-time payment to sink a large chunk of R&D for a drug might be quicker and easier than guessing at a price. On the other hand, I have no experience in health economics, so it's possible this is a terrible idea.