Online mechanisms decision tree


1	Category	Question	Answer	Grants	Prizes	Patents	Remuneration Rights	Footnotes

2	Funding	Where will the money come from?	Governments/Philanthropists. Prizes, grants and remuneration rights are generally funded by governments and philanthropists. Under all three mechanisms, innovators are rewarded from a fund which can be drawn from taxation or donations. Examples include the X-Prizes which are funded philanthropically, the Longitude Prize which is funded by the UK government, the Wellcome Trust which is a large philanthropy administering grants, and the Research Councils in the UK which administer grants from the government.	✓	✓		✓
3	Funding	Where will the money come from?	Consumers. Patents are funded by the consumers who purchase the drug. Innovators are rewarded via the additional sale price they can charge thanks to the market exclusivity granted to them via a patent.[1] It is important to note that in this case, consumers refers to those who pay for the drug, be they patients, insurers or governments. The purchaser of the drug is not necessarily the person who uses it.			✓		[1] See Scotchmer, Innovation and Incentives, p. 2.
4	Risk	Who will bear the risk of failed innovation?	Governments/philanthropists. With grants, the risk of failed innovation is born by governments or philanthropists. Innovators are rewarded upfront and unconditionally, so if a project fails, the grant giver loses out.[2]	✓				[2] See Ravvin, “Incentivizing Access and Innovation for Essential Medicines”, p1. 115-116; Hecht, Wilson, and Palriwala, “Improving Health R&d Financing for Developing Countries”, pp. 977-978.
5	Risk	Who will bear the risk of failed innovation?	Innovators. With patents, prizes and remuneration rights the risk of failed innovation is born by innovators. These funding mechanisms reward innovators conditionally on the achievement of a particular research outcome. Every time a project fails, the costs are borne by the innovators themselves, as they are not eligible for compensation through any of these mechanisms.[3]		✓	✓	✓	[3] See Finkelstein and Temin, Reasonable Rx, pp. 132-134; Hollis and Pogge, The Health Impact Fund: Making New Medicines Accessible for All, pp. 84, 91; Dalton, “Should You Fund Research into Tropical Diseases?”, pp. 41-43.
6	Information	Do you have a lot of information on innovation in this space?	Yes. Prizes and grants work well when the funder has a lot of information about the innovation being incentivised. There are two aspects to this information: knowing in advance which innovations will be successful, and knowing in advance what successful innovation would look like. If a funder could have perfect information about which innovations would be successful, then grants would be a very efficient way to incentivise innovation. One could simply give money to the projects that would be most successful. In a scenario where a funder was unsure which projects would be successful, but did have good information on what success would look like, then they would be able to specify the precise criteria necessary for a prize.[4]	✓	✓			[4] See Hollis and Pogge, The Health Impact Fund: Making New Medicines Accessible for All, p. 101; Wei, “Should Prizes Replace Patents - A Critique of the Medical Innovation Prize Act of 2005,” p. 33.
7	Information		No. Where less information is available, patents and remuneration rights are more suitable. Patents and remuneration rights do not require funders to know in advance what the desired innovation will look like or which projects will succeed, as they reward innovators once they have achieved a generic class of outcome (in the case of patents, something that is original, patentable and has sufficient inventive step).[5]			✓	✓	[5] See Hollis and Pogge, The Health Impact Fund: Making New Medicines Accessible for All, pp. 84, 91, 103.
8	Innovation	At which stage of the pipeline is more innovation needed?	Late stage. Patents, prizes and remuneration rights are good at incentivising late stage research. The risks involved in late stage research are less than those in early stage research: many failures have already been made, which reduces the solution space. This means that innovators are more likely to be willing to take on the risks of late stage research. In addition, late stage research usually has clearly defined outputs. This makes it possible to delimit which innovation is whose, something that is essential to the operation of patents, prizes and remuneration rights.[6]		✓	✓	✓	[6] Hoffman and So, “Assessing 15 Proposals for Promoting Innovation and Access to Medicines Globally,” p. 439.
9		At which stage of the pipeline is more innovation needed?	Early stage. For early stage research, grants offer a more suitable incentive. There are a number of reasons for this. The risks of early stage research are very high, and lots of projects do not produce any usable results. It is therefore important that the government absorb some of this risk, otherwise it would not be attractive to innovators. Moreover, early stage research can have very diffuse effects which are hard to observe and operate over long timeframes. This makes it difficult to delimit innovations and what they owe to earlier research. Unconditional upfront funding which does not depend on being able to clearly define the outcomes of a project is therefore more suited to early stage research.[7]	✓				[7] See Stiglitz, “Economic Foundations of Intellectual Property Rights;” Hecht, Wilson, and Palriwala, “Improving Health R&d Financing for Developing Countries,” p. 978.
10		What kind of innovators work on the problems you want to solve?	Large companies. Prizes offer a particularly good incentive for large companies. Large companies have the funds to undertake innovation when there is a small probability of a very large reward, in the form of a prize. It is also true that milestone prizes can incentivise smaller companies too, as the risks are smaller.[8] An example of a type of innovation which is particularly undertaken by large companies is vaccines, which require complex machinery and expertise to make.		✓			[8] Dalton, “Should You Fund Research into Tropical Diseases?”, pp. 41-43.
11			Both. Grants offer upfront and unconditional funding, so reducing the risks for small and large companies alike.[9] Patents and remuneration rights also incentivise both small and large companies. Both mechanisms provide funding upon achievement of an innovation outcome, which favours larger companies with deep pockets who can cope with risk. However, smaller companies can also sell their right to remuneration or to a patent. This allows larger companies to absorb risk for smaller companies.	✓		✓	✓	[9] Renwick, Brogan, and Mossialos, “A Systematic Review and Critical Assessment of Incentive Strategies for Discovery and Development of Novel Antibiotics,” p. 3.
12		Can the impacts of innovation in this space be measured?	Yes. Often health impacts can be measured, for example by using a metric like a Quality Adjusted Life Year. Remuneration rights are the funding mechanism which links incentives most directly to health impacts, and so are the most effective mechanism in such a scenario. The real reason that we want to fund pharmaceutical innovation is that we want to improve people's health: we care about health impact. Where these are directly observable or can be estimated reasonably accurately, then linking remuneration directly to health impacts is the most straightforward way to incentivise the innovation we are seeking.[10]				✓	[10] See Hollis and Pogge, The Health Impact Fund: Making New Medicines Accessible for All.
13		Can the impacts of innovation in this space be measured?	No. When impacts cannot be measured, prizes, patents and grants are more suitable. In some cases, health impact may be very difficult to measure, for example where the research in question is early stage and has a diffuse impact on lots of areas of health. To get around this problem, patents, prizes and grants use proxies for health impact. Patents reward innovators based on sales, which are a proxy for the scale of a health problem. Funders set prize parameters to approximate the impacts they are seeking. Grants are slightly different: they fund research whose impacts may be too diffuse to be observed.	✓	✓	✓
14	Markets	Is there a strong market for the products that will be funded?	Yes. Patents work best where there are strong markets, as rewards are dependent on sales. Where lots of people want and can afford a drug, this creates a strong incentive for innovators to create it. This means that patents work well for innovations that target large and wealthy populations. An example of a disease area where there is a strong market for drugs is cancer, which affects both rich and poor people. A different kind of example is male pattern baldness, which has a large wealthy market.			✓
15			No. Where there are weak markets, prizes and remuneration rights are more suitable. Even if a particular health problem is very widespread, if it only affects poor people then patents will offer a weak incentive to innovators. They will not be able to recoup the costs of innovation if consumers cannot afford to pay the markup. Prizes and remuneration rights solve this problem, as innovators' rewards are independant of sales.[11] An example of a disease area with a weak market is Neglected Tropical Diseases like Chagas disease, which mainly affect poor people.		✓		✓	[11] On delinkage, see Wirtz et al., “Essential Medicines for Universal Health Coverage,” p. 456.
16		Is price discrimination easy in the markets for the products that will be incentivised?	Yes. Patents work well where price discrimination is easy - where markets can be segmented accurately so that different prices can be set for people of different means. If perfect price discrimination were possible, then everyone who needed a drug would be able to buy it at a price they could afford, while innovators recouped their investments from wealthy buyers. If you imagine the price mark-up enabled by market exclusivity as a consumer tax, then price discrimination is progressive taxation.[12]			✓		[12] Scotchmer, Innovation and Incentives, p. 37.
17			No. Where price discrimination is hard, prizes and remuneration rights are more suitable. Prizes and remuneration rights reward innovators irrespective of sale price. As health is a public good, we care that all those who need a drug can afford to buy it. Where price discrimination is not possible or only partially possible, more efficient access is provided when the innovator's reward is separated from the sale price.[13]		✓		✓	[13] See Scotchmer, Innovation and Incentives, p. 37; Love and Hubbard, “The Big Idea,” pp. 1548-1550; Love and Hubbard, “Prizes for Innovation of New Medicines and Vaccines,” p. 162.
18		Is there a last mile problem?	Yes. Remuneration rights can solve last mile problems, where incentivising distribution is the final weak link in the chain from early research to patient treatment. Because remuneration rights reward innovators proportionate to the health impact of their innovations, they provide a direct incentive to promote distribution to all affected populations.[14]				✓	[14] Hollis and Pogge, The Health Impact Fund: Making New Medicines Accessible for All, p. 6.
19		Is there a last mile problem?	No. Prizes and patents are less able to solve last mile problems. While adjustments can be made to prizes and patents to try to ameliorate last mile problems, in their basic form these funding mechanisms do not incentivise distribution. In the case of patents, although sales are incentivised, because hard-to-reach populations tend to be poor, the incentive to solve distribution problems is weak.[15]		✓	✓		[15] Ravvin, “Incentivizing Access and Innovation for Essential Medicines,” pp. 113, 119.
20
21	Bibliography
22	Scotchmer, Suzanne. Innovation and Incentives. Cambridge, Mass. ; London: MIT Press, 2004.
23	Hecht, Robert, Paul Wilson, and Amrita Palriwala. “Improving Health R&d Financing for Developing Countries: A Menu of Innovative Policy Options.” Health Affairs (Project Hope) 28, no. 4 (2009): 974–85. doi:10.1377/hlthaff.28.4.974.
24	Ravvin, Michael. “Incentivizing Access and Innovation for Essential Medicines: A Survey of the Problem and Proposed Solutions.” Public Health Ethics 1, no. 2 (July 1, 2008): 110–23. doi:10.1093/phe/phn017.
25	Finkelstein, Stan N. Reasonable Rx: Solving the Drug Price Crisis. Upper Saddle River, N.J.: FT Press/Pearson Education, 2008.
26	Hollis, Aidan, and Thomas Pogge. The Health Impact Fund: Making New Medicines Accessible for All. Incentives for Global Health, 2008. http://healthimpactfund.org/wp-content/uploads/2015/12/hif_book.pdf.
27	Dalton, Max. “Should You Fund Research into Tropical Diseases?” Accessed June 25, 2017. https://docs.google.com/document/d/1Jmp1LQEem9E29ynSrqYrkiCsFFMrvyZLPqPl3Itdaak/edit?usp=sharing&usp=embed_facebook.
28	Wei, Marlynn. “Should Prizes Replace Patents - A Critique of the Medical Innovation Prize Act of 2005.” Boston University Journal of Science & Technology Law 13 (2007): 25.
29	Hoffman, Steven J., and Karen So. “Assessing 15 Proposals for Promoting Innovation and Access to Medicines Globally.” Annals of Global Health, Tropical Medicine in the Era of Global Connectivity, 80, no. 6 (November 1, 2014): 432–43. doi:10.1016/j.aogh…
30	Stiglitz, Joseph E. “Economic Foundations of Intellectual Property Rights.” Duke Law Journal 57, no. 6 (2008): 1693–1724. doi:10.2307/40040630.
31	Renwick, Matthew, David M. Brogan, and Elias Mossialos. “A Systematic Review and Critical Assessment of Incentive Strategies for Discovery and Development of Novel Antibiotics,” 2015. http://eprints.lse.ac.uk/64852/1/Mossialos_systematic_review_and_critic
32	Wirtz, Veronika J., Hans V. Hogerzeil, Andrew L. Gray, Maryam Bigdeli, Cornelis P. de Joncheere, Margaret A. Ewen, Martha Gyansa-Lutterodt, et al. “Essential Medicines for Universal Health Coverage.” The Lancet 389, no. 10067 (2017): 403–76. https://doi.org/10.1016/S0140-6736(16)31599-9.
33	Love, James, and Tim Hubbard. “Prizes for Innovation of New Medicines and Vaccines.” Annals of Health Law 18, no. 2 (2009): 155–86, 8 p. preceding i.
34	Love, James, and Tim Hubbard. “The Big Idea: Prizes to Stimulate R&(and)D for New Medicines.” Chicago-Kent Law Review 82 (2007): 1519.