Health Impact Fund

1. Health Impact Fund Aidan Hollis University of Calgary, Canada January 28 2008

2. Prizes work well, but… • Prizes solve the deadweight loss (“access”) problem, and can be directed to solve important problems, but -- • as Davis and Davis 2004 note: • “Due to problems of asymmetric information, it may be difficult to set the appropriate size of the reward, and/or to pick the most qualified contestant. Rewards may also be arbitrary…” • And difficult to set a prize for everything!

3. The problem of prize size • Ex ante, we don’t know the social value of an innovation. • Ex ante, we don’t know how much it will cost to develop an innovation. • We don’t know, for a given amount of cost, what the probability of success would have been.

4. So setting a prize amount in advance is guesswork! but there may be a way around this problem…

5. A prize for health impact • Suppose that the thing you actually value is the health impact of a drug • And suppose that you can measure this, perhaps imperfectly, in terms of QALYs (Quality-adjusted life-years) after the product has been introduced. • Then, there is a prize mechanism that will offer suitable prizes without guessing.

6. A mechanism • Fix a total reward amount to be paid annually, funded by governments (e.g. 5bn euros). • Firms can get a share of the reward if they set their product price equal to production cost. • Each product obtains a share of the total reward equal to its share of health impact over a period of say 10 years.

7. Optional or mandatory • If mandatory, this is similar to the proposal embodied in S. 2210 of Senator Sanders. • An optional version of this gives firms the right either (a) to set the price of the product at a pre-determined low level and to receive payments from the prize fund, or (b) to exploit their usual patent rights. • This is the Health Impact Fund to be proposed by “Incentives for Global Health” • I explore the properties of the optional system here.

8. Optionality means • Much less money in funding to start with • Doesn’t overturn the existing system • Doesn’t achieve as much as the Sanders proposal. • But, automatically sets the prize per product in a reasonable range.

9. Setting the prize amount • The amount per firm is “market”-driven. • Firms compete to obtain a share of the total payout, based on their own private information about costs and probability of success. • The payment per firm is proportional to health impact. • Eg: A product with 2% of the total health impact receives 2% of the fund’s payout. • The payment per QALY is comparable to the reward per QALY under the patent system, since firms can choose either the patent system or payment from the fund.

10. Efficient payment amount • Note that the relative payment per product is proportional to health impact, which is exactly as desired. • And (because it is optional) the absolute value is set by the possibility of substitution between the patent and prize systems. • If the payment per QALY in the HIF is too high, more firms enter and dilute the fund.

11. Room for growth? • If the system appeared to be working well, increased funding could allow the system to expand. • The characteristics of such a system would increasingly be similar to the Sanders proposal as the total amount of the prize fund increased • If the system appeared to be working poorly, it could be cancelled, with notice.

12. What products would be rewarded under this system? • Firms with products which had relatively high health impact but small profitability from exploitation of a patent monopoly would choose to be rewarded under this system. • This clearly includes drugs for diseases prevalent mainly in low- and medium-income countries. • Products with relatively small global health impact but high profitability from exploitation of a patent monopoly would choose to exploit their patent.

13. Summary • An optional reward mechanism granting cash payments for patented drug innovations with prices set at production cost solves the problem of choosing a prize: firms make the choice themselves based on private information about costs, probability of success, and expected health impact.

14. Issues for discussion • Require firms to offer open license for generic production or price below some limit? • Fixed fund or fixed payment per QALY? • Problem of measuring health impact • Problem of setting the right baseline technology

15. License or price control? • Two options for qualification to receive payments from the Health Impact Fund • Offer open license for all relevant patents • Or agree to maximum price • The latter • requires the price to be set somewhat arbitrarily • May not achieve lowest cost of production • Is attractive to firms ideologically committed to IP

16. Why fixed fund instead of fixed payment per QALY • Benefit of fixed payment per QALY is reduction of risk for firms • But entails more risk for funders • Fixed fund uses market-type mechanism to set price per QALY • payment in line with what is available in patent system because of substitutability • Better monitoring; less conflict between fund and innovators.

17. Measuring health impact • HIF would use estimates of effectiveness obtained from clinical trials when drugs were first introduced. • Once the drug was in use, epidemiological studies of health effects could be applied. • These are likely to lead to much more investment in comparative effectiveness studies, and more debate and lobbying. • Need a limited appeals process.

18. Baseline technology • Need to set a baseline for determining improvement. • May be technology as of 2 years before introduction of a given product. • If further back, more likely to have multiple firms with similar technologies, therefore competing promotional expenditures. • If further back, less risk.

19. How much funding? • Commitment to fund 2-5bn euros per year, increasing at 3% a year, starting in 2012. • This commitment to be spread between developed countries and to a much smaller extent, medium income countries.

20. Who gets the money? • Innovators holding valid patents on registered drugs and vaccines, who agree to charge a price fixed roughly at production cost.

21. How much do they get? • The registrant of each drug receives a share of the prize fund equal to the share of health improvements attributable to that drug. • For example, suppose that • The measured effects of a particular drug is 10,000 life years saved. • The total effect of all drugs in the system is 1,000,000 life years saved. • Then the drug would obtain 1% of the fund for that year.

22. Who would determine health effects of a drug? • An appointed expert Health Impact Assessment Committee. • It would be instructed to use best available methods to estimate health impact. • It would be required to publish its decisions with reasons.

23. How would this help? • Prices for drugs in the system would be low. • Innovators would be rewarded for valuable innovation. The larger the health impact, the greater would be the reward.

24. How many drugs would this system pay for? • If developing a new drug costs 500m euros, 2bn euros a year would add enough funding to support 4 new drugs a year on an on-going basis. • It is likely that the cost of developing drugs for “neglected” diseases is relatively low.

25. Intellectual Property • The proposed system requires no changes. • Patentees could continue in exactly the same way as before, but with a restriction on their pricing.

26. Patents Fairly efficient incentives High prices Summary Sanders prize fund • Veryefficientincentives • Low prices • Complete overhaul of system AMCs • Effective • But limited to specific well-understood products Health Impact Fund • Very efficient incentives only for drugs in the system • Low prices for drugs in system • Automatically calibrated rewards • Incremental implementation

27. HIF vs. AMCs • Main difference from AMCs. • Payments based on QALYs per unit, estimated afterwards, instead of before. • No pre-specified technical requirements. • Thus this mechanism can deal with any new medicine, not just those pre-specified.