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Prize Fund

In 1927 the Orteig Prize inspired Charles Lindbergh to find backers and make the first solo flight across the Atlantic. That flight changed forever the way people and industry thought about the once formidable ocean barrier. Today, a group of economists and research scientists believe similar incentives can help slow down the rising cost of health care in the US and accelerate innovation of life saving medicines.

The idea is a Medical Innovation Prize Fund to provide affordable medicines and stimulate innovation of needed medicines.

Medicine – No. 1 in Inflation

The cost of medicine is the fastest inflating component of America’s staggering $18,000 per family annual health care cost. American spending for medicine quadrupled since 1994. The Congressional Budget Office reported drug expenditures by the Department of Defense rose 100% in the last two years.

Ominous effects of drug hyper inflation surround us. Busloads of seniors throng to Canada and Mexico seeking affordable medicines. Several States have legalized foreign drug mail order to give their residents cost relief. Sadly, many of the 45 million uninsured Americans aren’t filling their prescriptions. Astronomical prices for new cancer medicines, for example, lead to de facto rationing by insurance companies.

Pharmaceutical companies justify rocketing drug prices in TV ads pointing to the need to fund research for new drugs.

Drug Innovation is Stagnating

But despite the high cost of new medicines, major drug companies actually invest very little in new drug development. Less than 10 percent of industry revenues, according to IRS reports, are actually invested in drug development. These companies spend even less on creating products that are actually better than existing medicines. The Food and Drug Administration finds 7 out of 10 new drugs provide little or no therapeutic gain over existing drugs.

And once new drugs hit the market, pharmaceutical companies spend more on marketing than they did on research. While TV is rife with seductive drug ads, many billions more are actually spent on lobbying our doctors and legislators. Canada, Great Britain and many developed countries do not allow the massive and wasteful consumer marketing expense.

The system is broken, unsustainable and needs reform.

Prize Funds – A Long History of Innovation

Prize Funds can help. History has been shaped by prize funds. The Longitude Prize Fund, established in 1714, solved the era’s most vexing challenge. Most recently the “X” space prize fund resulted in the world’s first private space flight. In 1999 the National Academy of Sciences produced a study analyzing the effectiveness of prize funds. Very quickly after, the US military established a prize fund for robotics and NASA established prizes for space exploration technology that are very successful.

Prizes not High Prices

The proposed Medical Innovation Prize Fund seeks to separate the market for innovation from the market for medicines. Under this approach, drug innovators would be paid directly rather than given twenty year patent monopolies.

The Prize Fund will award innovators $ 60 billion per year, five times what patent owners now receive in royalties. The resulting lowered cost of medicines would create net savings of $ 80 Billion annually shared by consumers, employers and governments.

The Prize Fund would be allocated to anyone who developed a new medicine within the past ten years, with payments based upon evidence of the incremental health care benefits to patients. The Prize Fund would also provide dedicated funding for priorities such as global infectious diseases and a vaccine for AIDS.

Under this new paradigm, drug prices would plummet. Every new medicine will be a generic. Like most products we buy, competition will drive prices closer to manufacturing costs. This will expand access to medicines and eliminate the problem of insurance companies using restrictive formularies based on drug prices rather than efficacy.

Prize Fund = Increased Innovation

R&D investment will focus on truly innovative new medicines that are actually better than existing drugs. Innovators will also focus on solutions for “orphan” diseases and new emerging global infections, like SARS.

The Medical Innovation Prize Fund provides a powerful and efficient incentive to innovators of new drugs. Prizes will be based on evidence of incremental therapeutic benefits to patients not clever TV ads and another “me too” products.

By eliminating inefficiencies, the Medical Innovation Prize Fund constructs a new balanced business model that results in increased R&D targeted on patient health needs and affordable medicines.


The Prize Fund is the brainchild of James Love of KEI and has been introduced as legislation by Senator Bernie Sanders of Vermont as HR 417. Congressman Sanders won the US Senate race in the 2006 election. He has a long history of working on health care reform and spear headed the move in Congress to approve importation of generic drugs from Canada among his many initiatives. KEI continues to be a leader in generating information and ideas on prizes and innovation.