Sunday, February 11, 2007

Keeping Bounty Hunters Honest

Greetings, fellow nerds.

Two posts ago I showed how terribly inefficient big pharmaceutical companies are at finding treatments which actually help people. Less than 7% of what you pay for medicine funds useful research and development. In the last post, I outlined an incentive program whereby research companies get compensation proportional to the good they do us, so the incentive is to do work that actually benefits humanity. Today I'm going to show a few refinements to the last post's incentive program which make it more practical.

Refinement #1: What Counts as "Cured?"

Sometimes the success of a treatment can't be reduced to cured/not cured. In these cases, you'd probably replace the "% cured" number in the example I gave (the one which resulted in a $2 billion reward - see last post for details) with a fixed formula, possibly including prevalence of side effects, time for the treatment to work, cost/complexity of the treatment, or other factors. Health organizations get to decide what counts as success, and the researchers who best achieve it get the most award money.

The same disease might even have multiple prizes if desired: one whose formula emphasized quick recovery while the other's formula emphasized the absence of side effects. Complexity isn't necessary, but might be appropriate in some circumstances.

Skepticism Built-in: Incentives for Thorough Studies

It would be a good idea to reward based on the bottom of the 99% confidence interval of the study, so you would have to be statistically sure (at the 99 in 100 level) that the new treatment was better than the old treatment, and claims would tend to be understated. (This is to prevent companies from designing weak studies with few subjects. If you do many of these weak studies, a few of them will, by chance, show the new treatment to be better.) This measure would also provide an incentive for drug companies to do thorough drug evaluation, since the better the study statistics are, the smaller the confidence interval and the more companies get paid. Companies falsifying results would be dealt with just as they are in today's system.

Avoiding Getting Scooped Without Rewarding Pharmasquatting

It's also a good idea to allow a company to be locked in to a certain treatment/disease pair without competition for a limited time: you don't want to have to rush clinical trials to keep the competition from scooping you. I propose that you be able to take out two-year-long exclusive rents for each trial phase of any specific treatment/disease pair combination. For example, a company could pay (say) $100,000 for the exclusive right to do phase II testing of a new treatment. If it looked promising at the end of two years, they would get an exclusive offer to try phase III testing for (say) $500,000 for two years.

The $100,000 and $500,000 figures probably should be linked to the size of the incentive pot to discourage pharmasquatting (the pharmacological equivalent to cybersquatting: essentially leasing large blocks of treatment-malady combinations in the hopes that someone who does real research will buy the exclusive rights off you). If you made the fees big enough that randomly choosing treatment-disease pairs results in an expected loss, nobody will pharmasquat.

Harness Prediction Markets

Once research starts, these leases would have a value which reflects the probability that a certain therapy-illness combination proves fruitful. Allowing these leases to be tradable (and allowing the possibility of dividing them into shares) would instantly generate a prediction market in therapies, harnessing the full power of the free market to finance medical research. It might not be true that the best treatment discovery companies start out with access to the best funding; selling shares in treatment possibilities would be an efficient way of raising capital and of gaging the expected success of new treatments coming through.

Bounties, Ethics and Intellectual Property Law

Right now there's a huge debate over the ethics of withholding life-saving treatments from those who cannot afford the licensing fees. It's a really tough issue: is it OK to demand that people die for the sake of the survival of a company which produces life-saving treatments? If the bounty system were implemented, there'd be no issue over who has to pay what to whom to use life-saving knowledge: as soon as it's discovered, (as long as you are within the group of nations/HMOs that pay their dues - my great hope is that this group would quickly swell to encompass the whole world) you can use the treatment.

Another great advantage to the bounty system is that there would no longer be a need to enforce medical patents. In general, it's a good idea to replace negative reenforcement systems with positive reenforcement proportional to the good done, since it means you don't have to police the whole world.


The bounty system for new treatment discovery gives incentives for medical researchers to find ways to treat illnesses. It can coexist in a world with the current patent-protection paradigm, although if it works half as well as I expect I doubt many people won't join up.

There are probably more refinements to add to the bounty system, and there may be a few flaws in it that I haven't seen. If you think of anything I haven't mentioned (pro, con or refinement) regarding the bounty system, please leave a comment below. Thanks!

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