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Creating a Market for QALYs

- March 30, 2012

Yesterday we had the pleasure of entertaining Thomas Pogge for a speaker series on global governance Kate McNamara and I have been running. Professor Pogge has been working for a while now on an exceptionally important question: how can you create incentives for pharmaceutical companies to invent and deliver medicines that most increase QALYs (Quality-Adjusted Life Years) around the globe? The problem is simple but severe: unequal distribution of resources mean that pharmaceutical companies often have incentives to invent and market medicines that make fewer rich people slightly better off as opposed to saving as many QALYs as possible.

Prizes are a  popular solution to this conundrum. If companies can win a big enough prize for developing an unpatented malaria drug, they may just have enough incentives to invest in such a drug. There are, however, important downsides to this. Prize committees have to establish pretty clear ex ante criteria what would constitute a prize-winning drug. This means that companies have incentives to invent drugs that meet these criteria, which is not necessarily the same as drugs that increase QALYs. Presumably, companies are in the best position to understand how they could contribute most efficiently to increasing QALYs. Moreover, prizes are awarded when drugs are invented rather than when QALYs are reduced. This puts the onus on clinical trials and provides few incentives to care about adequate manufacturing, delivery, and distribution of drugs.

The idea that Pogge has been shopping around is that of a Health Impact Fund (HIF). Companies can register drugs for ten years. During that period they maintain intellectual property rights but they agree to sell the drug at cost and are compensated from the fund ($6 billion is the target) based on the estimated improvement their drugs have made to  QALYs in participating countries. After that period, they agree to surrender their intellectual property rights. Participating governments and private foundations are responsible for contributing to the fund.

It’s an important idea that has attracted many prominent scholars, politicians, and policy makers to its Advisory Board, including Jim Yong Kim, the nominee to become World Bank President. There are a lot of nuances to the plan that are important to understand when evaluating its merits. The main theoretical upside is that this would create a market where companies are rewarded for their actual contributions to a socially desirable good. A drug that promises a great deal but that doesn’t deliver receives no reward. This gives companies incentives to look beyond trials and invest in the delivery and distribution of drugs.

There are clearly pitfalls too. For starters, evaluating effectiveness won’t be easy and the system for doing so could potentially be gamed. Some on the left don’t like it because it leaves the existing intellectual property rights system in tact. Some on the right worry that it creates a subsidized market with products that are substitutes for drugs within the traditional intellectual property rights regime, thus undermining the latter. Nevertheless, it strikes me that the HIF is the right way to think about this problem. Unfortunately, so far it has not been sufficiently successful in attracting donors. Perhaps markets for QALYs can be created in more politically palatable ways too, such as through tax credits that depend on QALY reduction. Thoughts?


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