Thursday, July 30, 2020

How should policymakers use “pull” mechanisms to improve COVID-19 innovation incentives?

As we have emphasized throughout this COVID-19 blog post series, even though patent law historically has been the primary field in which legal scholars consider questions of innovation policy, governments use a wide variety of policies to incentivize and allocate access to new innovations. One of the key dimensions for comparing these different policies is when the incentive occurs. Under ex ante or “push” policies such as grants or R&D tax incentives, innovators receive funding early in the research process, before the results are known; for ex post or “pull” policies such as patents or prizes, only successful projects receive a reward. 

In a recent talk for the Iowa Innovation, Business & Law Center’s speaker series on COVID-19 innovation policy, one of us (RS) explained why pull mechanisms are very effective innovation policy levers to achieve the kind of clear technological goals presented by the pandemic. Here, we will unpack these ideas and explain how lawmakers should be adjusting these policies to bring this crisis to a more rapid close.

How do pull mechanisms affect innovation?

Pull mechanisms are anything that changes the expected ex post reward for an invention, including policies that change the effective market size. Potential innovators, knowing of the enhanced rewards, are more likely to devote higher innovative effort toward a desired goal. By creating rewards on the back end, these mechanisms “pull” innovative effort toward a goal, as opposed to mechanisms that provide resources for innovation on the front end (like grants) that “push” innovative effort forward. 

Pull mechanisms can come in many forms. Innovation prizes—also known as inducement prizes—are a well-known pull mechanism, typically offering a reward for a specified outcome. The famed Longitude Prize (established 1714) drove efforts to develop an accurate clock in the 18th century, and a new Longitude Prize today offers rewards for antibiotic-conserving innovation. Other examples range from Napoleon’s 1795 prize for a method of sterile canning to DARPA’s 2004 prize for a self-driving car. Much of Zorina Khan’s work has focused on this history of prizes as pull incentives. Changing the expected payoff for a given innovation can have a significant effect on R&D efforts. Although empirical scholars have not been able to show that stronger patent rights increase research investments, a robust literature demonstrates that expected market size affects innovation for patented products in the pharmaceutical industry

Along these lines, advance market commitments (AMCs) are market-based prizes that aim to directly and explicitly increase the eventual market for a product (or at least to specify it in advance). In an AMC, a funder commits to buy a certain amount of a product that meets certain specifications at a particular price—before the product has been developed. This sort of commitment can reduce uncertainty about whether there will be adequate demand for the product. AMCs have most prominently been recommended as a tool to drive vaccine development, and a $1.5 billion AMC for pneumococcal disease resulted in the immunization of over 180 million children. 

Less obviously, reimbursement through health insurance functions similarly to market-based prizes by increasing market rewards for health technology, such that proposals like “Medicare for All” are substantial innovation subsidies. Empirical work has shown that these policies do in fact change innovative effort. Covering new technologies or recommending their adoption can spur innovation, as shown in groundbreaking work by Amy Finkelstein in the vaccine context. Subsequent work by Margaret Blume-Kohout and Neeraj Sood has shown that the passage of Medicare Part D, which covers drugs for Medicare recipients, increased pharmaceutical R&D in drugs for the elderly. (Changes aren’t always government-driven; Leila Agha, Soomi Kim, and Danielle Li showed in a new working paper that closed formularies, wherein some drugs won’t be reimbursed in a class that already has adequate substitutes, pull innovative effort toward more scientifically novel research in classes without pre-existing therapies.)

How has the government used pull incentives to address the pandemic so far?

When faced with an innovation policy problem for which market rewards seem insufficient—like a global pandemic—Congress can raise or allocate funds distributable upon the success of some event or with certain conditions attached, thereby creating prize-like funding for specific goals. For COVID-19, part of the CARES Act contains prize-like inducements for industry. These include mandatory insurance coverage for SARS-CoV-2 tests (thereby expanding the tests’ market), the elimination of reimbursement restrictions on many telehealth visits that previously depressed the market for such services, and a commitment to purchasing a successful COVID-19 vaccine. With respect to vaccines, several recent proposals from congressional policymakers have focused on calibrating the government’s payout for a successful vaccine—most recently $25 billion. (Perhaps as a sign of government pull incentives’ paucity relative to push incentives, The New York Times labeled this move “unusual.”) 

Aside from Congress, federal and state agencies can also direct funds to prizes. While the primary incentive mechanism for federal agencies like NIH is ex ante grant distribution, Congress made clear in 2010 that federal agencies have authority to spend their appropriations on ex post prizes. And a 2011 report from the National Economic Council, Council of Economic Advisers, and Office of Science and Technology Policy further encouraged agencies to do so. An increasing number of agencies now post prize competitions at, although prizes remain a small part of agencies’ overall innovation policy portfolio. NIH, to its credit, recently created a national innovation initiative for COVID-19 diagnostics.

Government purchasing and reimbursement can also act as a strong, innovation-forward prize, increasing the market size for goods and service. Reimbursement from the Centers for Medicare and Medicare (CMS) for health technologies and services operates in just this fashion, encouraging the development of technologies by, essentially, subsidizing (and increasing) payment. For COVID-19, we suggested back in April that CMS should increase its reimbursement limits for scalable COVID-19 testing (such as at-home testing) as an incentive to encourage the development of new testing technologies. CMS has done just that, increasing its reimbursement level to $100 per test. Given the urgency of the COVID-19 pandemic, pull incentives with quick payouts—such as prizes and purchases—are likely to be useful both for patients and industry.    

How should policymakers improve the use of pull mechanisms for COVID-19 innovation?

The use of pull mechanisms to address the many innovation challenges of COVID-19 is certainly a positive development. However, even greater involvement from policymakers is needed now. In our view, policymakers should consider making it clear that they will deploy additional pull incentives as needed in three key areas: diagnostics, therapeutics, and vaccines.

Despite the NIH’s positive efforts to establish a prize-like innovation subsidy for diagnostics and CMS’s focus on establishing a substantial reimbursement rate for high-throughput COVID-19 testing, the nation still faces a shortage of diagnostic tests. In many areas of the country, laboratory testing capacity is at its breaking point, and patients sometimes wait ten days or more for test results. This is far too long to permit meaningful contact tracing and isolation, preventing cities and states from identifying and stopping new clusters of the disease. 

Additional pull incentives might help companies develop more capacity or deploy existing capacity in smarter ways. For instance, diagnostic test companies might be assured of equivalent reimbursement for using pooled testing, which would enable them to stretch existing resources many times farther. As another option, CMS might condition reimbursement for diagnostic tests on prompt completion of the test and return of its results to the patient involved, as a test returned more than a few days after it is taken begins to lose its clinical utility.

Similarly, although it might be assumed that insurance would pay for the administration of new drugs for the treatment of COVID-19, existing reimbursement policy may inadvertently create additional barriers that need to be addressed by policymakers. This is particularly true for hospitalized Medicare patients. For such patients, Medicare pays hospitals a particular flat rate based on their diagnosis. This inpatient reimbursement system is intended to encourage cost-effective care, limiting incentives to provide marginal procedures or tests, but it also may limit hospitals’ ability to administer costly drugs. We have written about the FDA’s emergency use authorization for remdesivir, which Gilead will soon be selling for $3,120 per course. That is a large fraction of the amount a hospital will receive for a hospitalized Medicare COVID-19 patient with no other complications or comorbidities, and there is reason to be concerned that hospitals may need to limit the use of remdesivir for financial reasons. 

Policymakers have existing tools they could use to address these financial disincentives. As one option, CMS might publicly signal that it would seek to use the existing new technology add-on payment (NTAP) program to provide additional reimbursement for costly COVID-19 therapies meeting a particular level of efficacy. Established by Congress in 2000, NTAP gives CMS the authority to provide additional payments for the use of new medical technologies in the inpatient setting.

As noted above, the federal government has already begun investing large amounts of money in a prize-like way to encourage the development of new vaccines against COVID-19, and dozens of vaccines are already in human trials, just a few months after the virus was identified and sequenced. But at least two aspects of the vaccine race could still be supported. First, it is important to encourage vaccine firms to pre-build the customized manufacturing facilities, even before their products have demonstrated clinical efficacy, to ensure that patients can begin to access these products as soon as their efficacy has been demonstrated in clinical trials. At least some of the above funding is dedicated for this purpose. But second, it will be critical to encourage companies not only to develop new vaccines, but to ensure that as many people have access to those vaccines as possible. 

As one of us has written, implementing a prize that is tied to the number of patients vaccinated—similar to the case of the AMC described above—would enable the government to encourage both outcomes. Importantly, doing so would be tied to the vaccine manufacturer’s demonstration of a particular level of efficacy around the vaccine—something that the FDA’s recent release of a guidance document on the subject should ensure. Our existing reimbursement structure might also be deployed for this purpose, if the government were to commit to a profitable reimbursement rate in advance. 

This post is part of a series on COVID-19 innovation law and policy. Author order is rotated with each post.

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