Prizes are better patents – contains costs AND avoids downfalls of trade-secrets

Alternatively, we can side‐​step these difficulties by moving to a prize system to reward pharmaceutical innovation. The competition spurred by a prize regime would also make it much harder for drug companies to set inflated prices. Under a prize regime, drug companies could only charge the marginal cost of production and payers could even run an auction to determine which manufacturer would have the right to supply any given drug to their beneficiaries.

Substituting prizes for patents would also make it possible to rationalize the financial incentives for developing new drugs. Currently, expected prices and sales volumes determine the strength of these incentives. This arrangement encourages pharmaceutical companies to create new cancer treatments that retail for hundreds of thousands or even millions of dollars despite extending patients’ lives only briefly. By contrast, it gives the drug makers little reason to develop new antibiotics with the potential to save lives because doctors will use the new antibiotics only when all previously existing medications fail. By linking financial rewards to delivered benefits, prizes will focus researchers on drugs that are needed.

A prize system will also eliminate the need for programs that use the prospect of earning monopoly rents and tax breaks to encourage researchers to develop treatments for uncommon diseases and establish the efficacy and safety of drugs that were on the market before testing requirements were imposed. Pharmaceutical companies have gamed these programs before and will do so again, but a prize system would render such stratagems useless.

A prize system has the potential to revolutionize the way public and private funds are used across the board, for all types of inventions. Because universities would no longer be able to patent discoveries made with public funds, as they have since the enactment of Bayh–Dole Act, grants funded with tax dollars could require open access to all results, thereby eliminating trade‐​secret protections as well. Expensive acquisitions of spinoffs would disappear, along with the resulting whopping private returns on research undertaken with public funds. The change would also facilitate cooperation among scientists because there would be little to gain by keeping secrets from others.

With all publicly funded basic research in the public domain, private entrepreneurs would be free to take advantage of new discoveries when trying to develop the treatments for which prizes are on offer. Presumably, prizes would offer lucrative compensation to talented researchers who reach the goal before others. But researchers would have only their talents to sell and private entities would bear the costs and risks associated with the process of turning basic research into marketable drugs. Consumers would continue to fund research, but they would buy the resulting drugs far more cheaply.