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Sanders has proposed these bills multiple times, most recently, I believe, in 2017. But for some reason they have not gotten any traction in Congress. Perhaps there is something about the idea of the government handing out billion-dollar prizes—potentially to Big Pharma—that rubs people the wrong way when they first hear it. But of course the government already gives out billions of dollars a year supporting early stage research; the beauty of the prize approach is that the taxpayer only has to pay out when the solution in question has in fact been discovered.

Currently, we rely almost entirely on the patent system to stimulate and channel drug research.108 What adjustments should we make in the patent system if a prize system were introduced?

There are three possible answers to this question. This first is: none. Neither the content nor the coverage of the patent system should be altered at all. The prize system would thus be cumulative, offering drug developers rewards in addition to those they could receive by patenting their creations.

So far, I have developed a prize system that is likely to be both simpler to implement and more flexible than the prize proposals that other commentators have offered. In addition, the Article has shown that establishing a prize fund as an adjunct to the patent system is likely to have greater benefits than costs, especially because a relatively small fund will tend to induce actions with the highest ratio of social benefit to private cost.584 This conclusion, however, leaves much unanswered, especially given the argument that it may be better to adopt a prize system for a specific purpose than for patents or intellectual property in general. 585 Even a modest prize fund experiment seems more likely to come as a response to a specific need than from a generalized desire to tweak our intellectual property institutions. This Part describes several potential applications from a wide range of possibilities, with two principal considerations dictating the choice of examples. First, the examples all reflect current controversies and problems, illustrating how prize systems might be used to address specific issues of contemporary concern. Second, and more importantly, each of the examples presents different challenges, showing both the potential flexibility of prize systems and how they might be modified depending on the purposes for which they are used.

Recent scholars have made great strides in advancing the perennial patents-prizes debate by largely dismantling the putative divide between the two means of advancing innovation. Yet, there remain important differences between the two systems regarding follow-on invention and commercialization. Specifically, the property rules of patent law provide unique benefits and impose unique costs that differentiate patent from prize systems. Nonetheless, my critique should not obscure the important ramifications of these scholars’ analyses. Rather than being stark alternatives, patents and prizes can often serve as complementary tools to enhance the social aim of innovation.

The point of this paper is to assess the proposals for patent prizes in light of practicality and public choice concerns, and to propose a workable prize system. Of course, it is easy to criticize as impractical any alternative to the patent system based on prizes that approximate social value. I believe the public choice issues are more fundamental. Prize systems introduce a point in the patent process where political actors can distort the decision on the amount of the prize and the patentee’s decision to accept the prize. Such an entry point encourages distortionary investments. Confiscation of patentees is likely under the prize system where patents are put into the public domain. The alternative I propose would award a prize in addition to the patent. No patents would go into the public domain except upon expiration. The patent-plus-prize system minimizes public choice costs and aligns private and social incentives to innovate.

But why stop with neglected diseases? The same considerations presumably should prompt us to extend the competition to all new pharmaceutical projects, or all medical innovations. For that matter, why not include all kinds of potentially patentable innovation – or even innovations of sorts traditionally managed by the copyright system, such as musical compositions or sound recordings, as one of us has elsewhere proposed?50 Although a prize system that broad might indeed be socially optimal, two considerations argue against its adoption.

First, there are some significant advantages of administrability in restricting the scope of the system to pharmaceuticals. Any prize system faces two major evaluative tasks: determining the extent of the technical advance held out by a candidate innovation and placing a social value on that technical advance (with each of these involving a number of sub-components). A number of factors combine to make these tasks significantly more tractable for innovations that take the form of pharmaceutical products than for other sorts of innovation: (1) The requirement of FDA-mandated testing of pharmaceutical products provides an appropriate filter for identifying prize candidates. Eligibility could be limited to drugs sufficiently different from existing treatments as to require clinical testing before general public use. This relieves the prize system from having to undertake a detailed examination of whether a candidate represents a genuine technical advance.51 (2) The ready availability of expert assessments of the safety and efficacy of new products, by FDA-type agencies and other bodies,52 provides a strong foundation for the prize system’s more longterm and nuanced assessments. (3) To translate technical advances into health benefits, the prize system can rely on well-developed health utility metrics such as DALYs (disability adjusted life years).53 (4) Measuring the overall health impact of pharmaceuticals though far from simple, is manageable. At least a rough approximation can be obtained by estimating (a) the number of doses that are effectively administered to patients and (b) the therapeutic benefits of those doses (with suitable modifications to encompass network effects from vaccines).54 By contrast, health benefits of many other types of innovation – such as improvements to drug delivery systems, infrastructural prevention technologies, or publichealth initiatives – are much harder to measure. (5) Although placing a non-market based social value on innovative advances will always be controversial, it is less so in the case of pharmaceuticals, since putting a non-subjective dollar value on health benefits is, for a number of reasons, increasingly widely accepted as necessary.55

Currently, we rely almost entirely on the patent system to stimulate and channel drug research.108 What adjustments should we make in the patent system if a prize system were introduced?

There are three possible answers to this question. This first is: none. Neither the content nor the coverage of the patent system should be altered at all. The prize system would thus be cumulative, offering drug developers rewards in addition to those they could receive by patenting their creations.

There are significant “public choice costs” under either of the optional prize plans. By this I mean there are risks of inappropriate transfers to patentees2 – that is, looting – and of confiscation of patentees, through the conduct of or through the omissions of government agents, sometimes working at the behest of private agents. I will argue that the confiscation risk appears to dominate.

The public choice costs point to a broader set of constraints that should be incorporated into any analysis of the patent system. There are rational actors operating at all levels, from patentees to licensees, and government actors. A discretionary prize system, where the government awards prizes and no enforceable patents, would invite lobbying and third-party interference in the determination of the award. Even in a prize process effectively shielded from third-party interference, government would confiscate patents on a regular basis.

The prize system lacks all of the key features of the patent system – exclusion, transferability, disclosure, certification, standardization, and divisibility. Without these fundamental elements a market for inventions would be highly constrained and less efficient. Demsetz (1969) identifies IP rights as critical for reducing transaction costs in markets for invention. Epstein (2010) emphasizes the importance of IP property rights in disseminating protected information.

Replacing patents with prizes would be analogous to replacing corporate securities with prizes for investors. Such investment prizes would not finance corporations because they would provide neither return of principle nor return on principle. Invention prizes would not stimulate invention and innovation because they would not provide economic returns for inventors, innovators or investors in complementary assets. Just as investment prizes could not replace financial markets, so invention prizes cannot replace the market for inventions.

Government prizes for inventors would fail to fulfill the functions of IP in product markets. Markets determine the value of goods and services through interaction of supply and demand, and the same applies to inventions. John Stuart Mill (1848, p. 932) explains this clearly: “the reward conferred by it depends upon the invention’s being found useful, and the greater the usefulness, the greater the reward; and because it is paid by the very persons to whom the service is rendered, the consumers of the commodity.”33

The impact of prizes is sharply limited by their size, scope, and nature.

• Prizes large enough to truly replace patents as incentives for the development of innovative new products in many cutting-edge and highly regulated fields would impose significant up-front costs on taxpayers. According to some studies, it can cost as much as $500 million to $800 million just to secure FDA approval of a new medical treatment, let alone cover fixed research and development costs.

Prizes and patent pools clearly have served and can operate as useful supplements to patents in certain narrow circumstances. They have and, no doubt, will continue to evolve and be improved over time. But they must be used on a supplementary and voluntary basis with terms and conditions that are clear and agreed to by all affected parties. By so tightly managing and controlling innovation outcomes, prizes and patent pools are unlikely to incentivize, reward, and deliver the breakthrough technologies, treatments, and inventions necessary to solve global environment, public health, and other challenges. Indeed, if prizes and patent pools were inherently superior to patents alone, they would have already delivered groundbreaking innovative medicines and commercially available environmental technologies. That they have not, despite long histories, widespread knowledge of their uses, and recent attempts, is perhaps the surest testament to their limitations.

A prize system without property rights for inventors would eliminate the allocative and dynamic efficiencies of the market for inventions. Inventors would lose innovative control over their inventions, thus eliminating incentives to allocate inventions to the highest-value uses. Lack of innovative control would eliminate incentives to continually develop inventions, to commercialize inventions, to introduce innovations based on inventions and to invest in complementary assets.

A government prize system would diminish private incentives for commercialization of inventions. Kieff’s (2001) emphasizes the importance of markets in stimulating commercialization of inventions. Public ownership or common ownership of inventions would eliminate private incentives for the commercialization of inventions, as Kieff (2001) explains (see also Abramowicz, 2003). Common ownership of inventions also would diminish incentives for innovation to develop products, manufacturing processes, and transaction techniques based on those inventions. Additionally, common ownership would diminish marketing of products that embody inventions.

Government agencies would replace decentralized markets with centralized allocation. Government agencies are not well equipped to run market places. Health insurance exchanges are an example of government market place design.29 Government allocation of goods and services often entails high administrative costs, significant transaction costs, and allocative inefficiencies.30 Historical evidence suggests that state and federal regulation led to considerable allocative and dynamic inefficiencies in markets for electric power, natural gas, telecommunications, railroads, trucking, and airlines.31 Increased regulation in health care can be expected to generate similar allocative and dynamic inefficiencies.32

Public commercialization and innovation would generate insurmountable problems of economic planning. Exercising command and control over economic activity has led to significant problems in socialist economies. The collapse of socialist economies such as the Soviet Union provides sufficient evidence that even the operation of traditional technologies by governments is not feasible. The diffusion of new technologies and management of innovation generally are beyond the scope of government administration.

Governments are not very good at commercializing and diffusing inventions. The failure of government diffusion of technology is illustrated by the major benefits that resulted from the Bayh-Dole Act. The Bayh-Dole Act illustrates how markets diffuse innovations and governments do not. The U.S. government provides research grants to universities, non-profit organizations, and small businesses. However, the incentives for invention provided by such grants are accompanied by markets for invention, which provide additional incentives for commercialization and innovation. This was recognized by the Bayh-Dole Act, which permits organizations that receive federal government funding to own inventions rather than transferring ownership to the government.34

There already is a government system for transferring technology in government labs to the private sector.27 This system would need to be expanded to accommodate technology generated by prize competitions. Such an expansion would require additional administrative costs, which would require additional tax revenues and economic distortions. Another concern with such large-scale administrative systems for government prizes and public technology transfers is that they are costly to dismantle, often taking on a life of their own. The effects on markets for inventions could be very difficult to reverse, causing long-term damage to markets for invention.28

A government prize system would diminish private incentives for commercialization of inventions. Kieff’s (2001) emphasizes the importance of markets in stimulating commercialization of inventions. Public ownership or common ownership of inventions would eliminate private incentives for the commercialization of inventions, as Kieff (2001) explains (see also Abramowicz, 2003). Common ownership of inventions also would diminish incentives for innovation to develop products, manufacturing processes, and transaction techniques based on those inventions. Additionally, common ownership would diminish marketing of products that embody inventions.

Prize advocates assume that central planners would be able to achieve greater allocative efficiency than competitive markets for inventions and innovation. Governments are likely to provide rewards to cronies of politicians, lobbyists, political donors, or ideological allies. A government prize system would encourage rent seeking to obtain prizes, diverting resources away from invention and innovation and toward political influence. Government agencies also are likely to pursue objectives other than allocative efficiency, such as subsidies for groups of voters, increases in employment, income redistribution, regional economic growth, industrial policy, and support for political causes.

Historical evidence casts doubt on prizes systems as sources of invention and innovation. According to Khan (2014a) “the historical record shows that administered prize systems tend to be associated with the potential for bias or corruption, unpredictable methods of allocation and outcomes, as well as other deficiencies attendant on a nonmarket orientation.” Khan (2011) studies inventors in Britain and the U.S. during the transition from the First to the Second Industrial Revolutions and finds that because prizes are less systematic than patents, they offer lower expected benefits for inventors. Khan (2013a) considers a sample of exhibits and premiums at U.S. industrial fairs between 1837 and 1874 and finds that prize winners tended to belong to privileged social groups, with prizes awarded less systematically than patents and unrelated to various proxies for the productivity of the innovation.37

Khan (2014c) provides a critically important historical comparison of the effects of patents and prizes on technology diffusion. She compares patented inventions with inventions that were submitted for prizes at annual industrial fairs of the American Institute of New York in the 19th century. Khan finds that patents promote much greater spatial diffusion of innovations than prizes. Additionally, Khan’s research shows that patents had large and significant effects on unpatented innovations in contiguous and adjacent counties, in contrast to limited geographic effects of prize-winning inventions.

The current system for supporting innovation in the area of medical technologies is costly, inefficient, and leads to underutilization of new inventions, as well as unequal access. It is possible to do a better job of managing the current system, but it is also possible to radically refashion the approach, to provide for more innovation and more access, at a smaller cost. Unlike other reforms in the health care sector that rely upon rationing of access to control costs, the use of prizes to reward innovation would expand access and increase investments in areas where innovation is most important. It is not easy to change existing systems of innovation, but neither is it easy not to change. It is difficult to imagine a more expensive system of innovation that produces so little in terms of new medicines and vaccines. A reform of the reward system for new medicines has enormous potential to enhance innovation and access, not only in the United States, but everywhere. Those who object to change should have the burden of justifying the costly system of monopolies that we struggle with today.