06/10/2011 04:14 pm ET Updated Aug 10, 2011

Using Prizes to Promote Life Saving Health Tools

In these times of tight budgeting, the U.S. government, foundations and private companies are exploring a new idea: awarding prizes for the development of innovative drugs, vaccines and tests for the world's biggest health problems. This would mean spending money only when there is a new product that will actually make a difference in the lives of millions.

Having stimulated breakthroughs in areas as diverse as mathematics, agriculture and space flight in the past, prizes are having a resurgence. A variety of actors -- including the U.S. government -- are exploring their potential in many contexts, including in the health field.

At the end of last year, the America Competes Act granted broad prize authority to federal agencies. But will these agencies respond by backing price competitions? In what circumstances will companies and other innovators invest real money in pursuing a prize? And what distinguishes a prize that will work from one that won't?

The Results for Development Institute (R4D) just finished a review of proposals to offer a prize for a specific purpose: to spur the development of better diagnostic tests for tuberculosis, a disease that kills millions each year. By analyzing whether this specific idea would work, we learned quite a bit about what works with regards to targeted prizes in general.

The X PRIZE Foundation and a coalition of four countries (Bolivia, Barbados, Bangladesh and Suriname), supported by Knowledge Ecology International and Médecins Sans Frontières, have independently proposed prizes for new TB tests. These tests are meant to replace an inferior method of diagnosis that has not been updated for a century in most resource-poor areas. Cash rewards would be given to companies that develop new TB tests that meet a set of specifications for accuracy, cost and ease of use.

We assessed the two proposals in detail, studied documents, and interviewed TB experts and diagnostic manufacturing firms.

Our research showed that a strong case could be made for prizes -- but not in all cases. In some situations, an old-fashioned grant may be the best approach. The design of prizes matters too. For example, the size of the incentive is critical. Too small a prize for too great a risk won't work. For a new TB test, we found that a prize would need to exceed $20 million to attract a large number of innovative biopharmaceutical firms.

The firms most likely to respond to this kind of incentive are established biotech companies -- rather than new start-ups or the biggest firms -- because they have the flexibility to pursue these types of prize arrangements and have the resources to invest in hopes of a big payoff.

Biotechnology firms are also more likely to provide the type of breakthrough innovation needed to develop a new TB test and might see a prize contest as an opportunity to validate their technologies. Because these firms may not be able to take a product all the way through costly clinical trials, they might be more interested in pursuing a series of smaller prizes (e.g. $5-10 million) for achieving defined milestones rather than a single big prize for a finished product.

Overall, prizes are useful when there's a sense that you don't know the way forward to solve a problem and when there are a lot of potential problem solvers out there to engage. Another consideration is whether a product has market potential. If it does, as is the case with tests for TB, a prize may be necessary to spur innovation, but it may not need to be as large as it would be if there were little or no market -- a situation that holds for many urgent health needs, such the creation of treatments for African sleeping sickness.

Our report builds a "decision tree," designed to help those who are considering creating a prize to think through whether this is the right tool for their situation.

We expect that discussions on whether to set up prizes for global health technologies will be taking place in government offices, foundation conferences and biotech board rooms in the coming months. Those around the table should take a look at our report and use it as a resource for making their decisions.

David de Ferranti is President of Results for Development Institute.