To Fight Pandemics, Reward Research; An outbreak of avian flu in Asia raises questions about national preparedness for pandemics. A reward system for medical innovators would be a step in the right direction

May 4, 2013

To Fight Pandemics, Reward Research


THAT frightening word “pandemic” is back in the news. A strain of avian influenza has infected people in China, with a death toll of more than 25 as of late last week. The outbreak raises renewed questions about how to prepare for possible risks, should the strain become more easily communicable or should other deadly variations arise.

Our current health care policies are not optimal for dealing with pandemics. The central problem is that these policies neglect what economists call “public goods”: items and services that benefit many people and can’t easily be withheld from those who don’t pay for them directly.

Protection against communicable diseases is a core example of a public good, as is basic scientific research, which can yield new ideas that may be spread at very low additional cost. (In contrast, Medicare, which is publicly financed, has some elements of a public good, but any particular expenditure tends to benefit an individual receiving treatment, rather than being spread over a number of beneficiaries.)

One obvious step forward would be to exempt biomedical research from cuts of the current federal budget sequestration. Research and development grants are a way to pay potential innovators up front — an important move, as an innovator can’t always charge high-enough prices for the value of its remedies when they’re actually needed.If a pandemic became a major issue in the United States, demand for remedies would surge far beyond the level associated with a typical seasonal flu outbreak, and permitting high prices would be unpopular — and perhaps unfair. The threat of contagion also makes it crucial to spread the net of protection as widely as possible, which again suggests low prices.

Yet it is crucial to have some reward system in place for medical innovators. Well in advance of a pandemic, research needs to be done, and vaccine capacity and drug distribution facilities need to be built up. In the H.I.V./AIDS crisis, for instance, the United States was caught flat-footed — and an appropriate response has taken decades, in part because we were not prepared. Without government financing for such public goods, the capacity wouldn’t be there if a new pandemic produced a surge in demand. This would amount to an institutional failure.

The government could also take another, more unusual step: it could promise to pay lucrative prices for the patents on drugs and vaccines that prove useful in dealing with pandemics. The point of buying the patent is to distribute the remedy, if needed, as widely and as cheaply as possible. If the pandemic never occurs, the reward wouldn’t have to be paid. But the very promise of such a reward might induce suppliers to take the risk of increasing capacity in advance.

Without such a government promise, private patents could easily lead to very high prices and limited distribution, as has already occurred for some cancer drugs, which are being sold to patients for more than $100,000 a year.

If anyone doubted a government pledge to pay big money for the rights to remedies, the patent’s value could be established by a competitive auction. Michael Kremer, a Harvard economics professor, outlined the procedure for such an auction in his research paper “Patent Buyouts.”

The government should resist the strong temptation to skimp on rewards. Many health care breakthroughs come through university research programs and government grants, but bringing an innovation to fruition and managing wide and rapid distribution usually requires the profit-seeking private sector. In any single instance, the government could save money by confiscating rights, but in the longer run this would discourage the search for additional remedies.

If anything, the American government — or, better yet, a consortium of governments — should pay more for pandemic remedies than what market-based auctions would yield. That’s because, if a major pandemic does arise, other countries may not respect intellectual property rights as they scramble to copy a drug or vaccine for domestic distribution. To encourage innovations, policy makers need to bolster the expectation of rewards.

How many drugs should we cover with such prizes, and then distribute free or at minimal charge? It’s an interesting but perhaps insoluble moral question. But in the meantime, economics can offer practical advice. If the remedy is a public good, as is the case in fighting a communicable disease, the value of widespread treatment will make cheap distribution a good idea.

Unfortunately, the United States lacks strong political coalitions for many beneficial public health measures. The Democratic Party has focused on insurance coverage and Medicaid expansion as political issues, while often wishing to lower prices of drugs or to weaken patent protection. The Obama administration’s new budget lowers spending on pharmaceuticals by an estimated $164 billion over 10 years, mostly through bargaining down Medicare drug prices. That makes it hard for the Democrats to embrace lucrative rewards for pharmaceutical companies or vaccine producers.

Nor can we expect much on pandemic preparation from the current Republican Party, which has been focusing its fiscal conservatism on discretionary spending. That means disproportionate cuts for public health and research and development. This decision can be seen as at odds with a true conservative philosophy, which usually embraces the provision of public goods like a strong military and general national security. Such goods can also serve the purpose of protecting against bioterror.

OVER all, the American government seems to be turning its back on its traditional role of producing and investing in national public goods. If there is any consistent tendency in recent government spending, it is that spending on entitlements like Social Security and Medicare — which provide mostly private benefits — is rising and that investment and spending on national public goods is falling.

As a budget category, “government consumption and gross investment” is a proxy for many kinds of public goods spending. As a share of gross domestic product, it has fallen to less than 19 percent, from a peak of 24 percent in the 1980s, with no expected reversal in sight. Yet total government spending is expected to increase because of income transfers and entitlements. Neither political party seems able to halt that logic or even cares to make an issue of it.

Focusing government on the production of public goods may sound like a trivial issue, too obvious to be worth a mention. But, in fact, we have been failing at it, and the consequences could be serious indeed.

Tyler Cowen is a professor of economics at George Mason University.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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