Public and private sector organisations across the world are working on vaccines and medicines to fight the coronavirus. What kinds of incentives are most effective in promoting the development of new medical technologies and the rapid manufacture of tests and treatments?
As the health and economic costs of the pandemic continue to grow, there is an urgent need for better medical technologies to fight the disease. Many laboratories and companies across the world are working on vaccines and drug treatments.
How best can these organisations be given the incentives to develop effective technologies rapidly? And what is the most effective way to encourage rapid manufacture of large quantities of new vaccines and treatments, as well as scaling up production of existing technologies such as tests?
What does evidence from economic research tell us?
- Larger markets and higher expected revenue encourage firms to invest in research and development (R&D) and increase innovation.
- The patent system is designed to encourage medical breakthroughs by preventing other firms from producing the technology and competing down prices. But the high prices that result from this system slow down access to the technology for low-income populations.
- Public or philanthropic grant spending on medical research also increases the rate of medical breakthroughs. Science and medical research are risky so spending on research should support many independent efforts.
- The most effective approach will involve ‘push’ subsidies for early-stage, risky work and ‘pull’ incentives to guarantee demand for successful technologies.
- It is necessary to encourage investment in manufacturing capacity at the same time as R&D to ensure that effective vaccines, treatments and tests can be scaled up quickly.
How reliable is the evidence?
There is a well-established body of peer-reviewed research that shows a causal relationship between demand for treatments and medical innovation.
One study shows that when demographic shifts increase the expected market size for some drug categories, innovation in these drugs increases (Acemoglu and Linn, 2004). Another finds that when public health insurance for elderly people in the United States expanded to cover drugs, innovation of new drugs increased (Blume-Kohout and Sood, 2013). And a third shows that increases in the market size for vaccines driven by new guidelines and expansion of insurance coverage increases innovation in vaccines (Finkelstein, 2004).
The patent system is designed to encourage firms to innovate by preventing other firms from producing the new technology during the life of the patent, allowing the innovator firm to charge high prices. But these high prices mean that populations who could benefit from the technology are not able to afford it.
This problem is particularly important for infectious diseases like Covid-19, since there are gains to others (known as ‘positive externalities’) from people getting vaccinated. The patent system can generate other efficiency problems: for example, research shows that it encourages firms to invest disproportionately in technologies that result in rapid payoffs over technologies such as vaccines that take longer to develop (Budish et al, 2015).
Given the huge level of need, countries have begun to try to take steps to limit patent protection for medical technology required to combat the coronavirus. For example, Canada has passed a compulsory licensing bill. But such actions run the risk of discouraging investment in potential treatments and vaccines.
‘Advance market commitments’ (AMCs) involve one or more large funders committing to purchase a minimum quantity of a technology at a set price, to try to encourage innovation and the ramping up of supply while ensuring that low-income populations get access to the technology. There is some evidence that a pilot AMC for pneumococcal vaccines accelerated access, but drawing causal conclusions about the effectiveness of the AMC is challenging without a convincing counterfactual (Kremer et al, 2020).
There is also research investigating the relationship between public spending on research and innovation. One study finds that increases in funding from the US National Institutes of Health (NIH) to a disease area increase subsequent patents filed in the private sector (Azoulay et al, 2018).
A concern with subsidising research directly is that it is hard for the funder to identify which projects are likely to be the successful ones. One study finds a strong correlation between the scores given to proposals by evaluators and the quality of subsequent research (Li and Agha, 2015). The most effective approach for encouraging innovation is likely to involve both grants and subsidies for trials of promising technologies, as well as clear commitments on spending for effective technologies that come to market.
The body of research evidence on the relationship between supply shortages of existing products is less well established. One study shows that a reduction in the price paid for some drugs by public insurance in the United States resulted in lower investment in manufacturing and distribution capacity and more frequent supply shortages (Yurukoglu et al, 2017). The shortages of test kits, ventilators and personal protective equipment observed so far in this pandemic indicate that there could be acute supply shortages for medical breakthroughs.
What else do we need to know?
The key question is how much governments and other funders should spend on medical breakthroughs to combat Covid-19, and how this should this be allocated between vaccines and therapeutics, and between subsidising trials for candidate technologies versus guaranteeing funding for technologies proven to be successful.
As well as hundreds of thousands of lives lost, the pandemic has also generated economic devastation, with the International Monetary Fund projecting a 3% decline in global GDP in 2020. A recent column in the New York Times by Susan Athey, Michael Kremer and colleagues argues that based on health and economic losses, the US government alone should commit to spending $70 billion on an AMC for coronavirus vaccines.
There are important questions around the design of incentives: for example how should payment be linked to the effectiveness and safety profile of vaccines and treatments?
Where can I read more?
Beat COVID-19 through innovation: Pierre Azoulay and Benjamin Jones on how to allocate funding for coronavirus breakthroughs, focusing on grant funding.
In the race for a coronavirus vaccine, we must go big. Really, really big: Susan Athey, Michael Kremer and colleagues say we should commit tens of billions towards a programme.
How to make sure the market delivers a COVID-19 vaccine: a Center for Global Development commentary on how to encourage R&D.
Financing and Scaling Innovation for the COVID Fight: A Closer Look at Demand-Side Incentives for a Vaccine: a Center for Global Development note providing more detail on how to design an advance purchase commitment.
Responding to Covid-19 – a once-in-a-century pandemic?: Bill Gates explains the need for international cooperation of trials of therapeutics and the need to fund manufacturing capacity as well as trials.
Who are experts on this question?
- Kalipso Chalkidou at the Center for Global Development and Adrian Towse at the Office of Health Economics are working on the design of an advance market commitment to finance a coronavirus vaccination.
- Margaret Kyle, Chair in Intellectual Property and Markets for Technology at MINES ParisTech.
- Michael Kremer at Harvard University
- Panos Kanavos, Associate Professor of International Health Policy in the Department of Health Policy at LSE
- Ken Shadlen, Professor of Development Studies and Head of Department in the Department of International Development at LSE
