August 16, 2009
Megan McArdle On Incentives For Medical Innovation

As long time readers know, I have a strong desire to reverse the aging process and live thousands of years until killed by a trauma (accident, murder, or other unavoidable event). I watch a lot of political developments from the standpoint of whether they will speed or slow down the rate of biomedical scientific and technological advance. For this reason I want to draw your attention to recent blog posts by The Atlantic writer Megan McArdle. Megan's primary objection to current legislation to change health care delivery is the danger that incentives could be lowered for developing new drugs and other treatments.

My objection is primarily, as I've said numerous times, that the government will destroy innovation.  It will do this by deciding what constitutes an acceptable standard of care, and refusing to fund treatment above that.  It will also start controlling prices.

Now, at this point in the discussion, some interlocutor starts chanting what I've come to think of as "the mantra": othercountriesspendlessandhavelongerlifespans.  Then they ask me how I can ignore the overwhelming evidence that national health care is superior to our terrible system.  Now, what's odd about this is that all of those countries do precisely what I am concerned about:  slap price controls on the inputs, particularly pharmaceuticals.  Their overwhelming evidence indicates that I am 100% correct that a government run system in the US will  destroy the last really profitable market for drugs and medical technology, and thereby cause the rate of medical innovation to slow to a crawl.

To which Matt rejoinders that all the Dutch insurance companies are private.  Indeed they are, but they're essentially tightly regulated utilities.  There's no market discovery of drug prices; instead, the prices are set by looking at an average of the rates paid by government systems in nearby countries.  The government decides what is reimburseable.  It further defines the basic health package that everyone gets, though as I understand it most people also purchase top-off insurance.  The supplemental insurance functions more like an actual insurance market.  As I understand it, there's considerable pressure to stop that.  And the markets are in peripheral services that mostly aren't reimbursed by health insurance here, either, like eyeglasses and dental. 

Megan argues that by a utilitarian calculus price controls and other interventions favored by the left will kill more people in the long run. This seems obviously correct to me.

I suspect that Holbo, and many of my interlocutors, are made intensely uncomfortable by the idea that their root assumption--that they are on the side of reducing human suffering and lengthening lifespans--might be wrong.  There are a bunch of ways you can deal with this disturbing possibility.  You can scream at me.  You can posit a highly speculative world in which government and academia suddenly, and for no apparent reason, get a lot better a inventing devices and mass-market drugs than they have so far proven.  You can claim, falsely, that government and academia already do all the work producing useful drugs.  You can assume that slashing pharma profits 80% will have no impact on their behavior, or at least, only change the behavior you want to change. 

Or you can bite the bullet and say, we should save lives now at the expense of lives later.  There's philisophic justification for that choice. But that opens up a whole can of worms about things like global warming.  It helps if you phrase it aggressively:  "How dare you suggest that someone should suffer now when we can treat them, so that someone who's not even born yet can live?" and don't think much about the equally inflammatory alternative formulation:  "How dare you suggest that billions and billions of people suffer and die for the sake of a few uninsured Americans right now?"  Geometric progressions are a bitch.  So is figuring out the right discount rate for the lives of future world citizens, as William Nordhaus and Nicholas Stern can attest.

Megan is right that countries with price controls are far smaller sources of incentives for new drug development than the American market. Price controls cut incentives in drug development just as they do in other markets. There's nothing special about health care that makes it less reliant on market incentives for innovation. In fact, given the regulatory obstacles and costs for new drug development the size of the incentives for new drug development must be huge to make new drug development happen.

The size of the incentives for drug development and other treatment development is what matters most to me in the health care debate. I'm not worried about whatever maladies I've developed to date. I am really worried about whatever disease I'm going to get some day for which there is no cure today. Most of you should share this same worry. Unless you have a fatal disease right now your primary concern should be over long run incentives. Drugs take many years to come to market. Incentives of today determine how much effort is made today to produce new drugs 10 years from now.

Think about your medical future the way I do: Something really bad will go wrong with you eventually that we can't cure or fix today. We can hope for more time before that day happens. Time gives us more treatments - especially if the incentives are there for more treatments. I hope that nothing goes seriously wrong in the next 20 years and so that when I do get something deadly my chances of getting a curative treatment will be much higher than today.

Right now the list of debilitating and fatal diseases associated with aging is quite long. Right now many diagnoses mean you are toast. Your stay in the life hotel is coming to an end. These are diseases that super-diagnosticians (e.g. the fictional Dr. House) can't do squat about. So I think thoughts like: Will my kidneys fail? Will I have to go on some artificial kidney machine that gradually messes up my metabolism? Will I have to live tethered to that machine much of the time with all sorts of activities off-limits? Then will I end up getting bone and other problems before dying? Or maybe my colon will develop Crohn's or IBD (inflammatory bowel disorder). Totally unfun according to someone I know with IBD. Don't get too far from a toilet.

But wait, there's plenty more. Will I get painful arthritis in my knees? Gotta say, people I know who have had knee surgery tell me they still suffer chronic knee pain. Chronic pain is something I am very sure I do not want to live with. My episodes with pain that have lasted days or weeks were very convincing on this point. I sure want pharma companies and venture capitalists on Sand Hill Road to see big dollar signs for coming up with ways to coax stem cells to make new knee joint materials. Will I get any number of cancers? I've helped a close relative die from cancer. I do not want that horrible horrible fate. I want a cure. I want pharma companies to see the potential for massive profits from producing a cure or two or three.

Then there's the brain. Will I develop dementia or Alzheimer's Disease? Slow death of my identity while I forget so many cherished memories and scientific understandings and friendships and insights? That's my idea of a living horror show. Slow brain death lasting over years. I want profit-seekers to save me from that fate.

I do not see a realistic substitute for the profit-seeking treatment developers. Sure, one can point to treatments developed totally without profit motive. But the vast majority of the drugs on the market today started out inside of profit-seeking corporations and their development was funded by corporations. Academia provides a lot of useful discoveries that enable new avenues of treatment development. But the role of academia is not a substitute for industry labs driven by the desire to bring products to market. Take for example the da Vinci surgical system which provides greater precision and Minimally Invasive Surgery (MIS). This is a product brought to market by Silicon Valley profit-seekers. It takes a profit-seeking corporation to do the product testing and development needed to make a commercial product. Parenthetically, about three quarters of the da Vinci systems sold to date were to US customers. US patients are deriving far more benefit from this technological advance than patients in Europe or Japan or other countries.

Megan sees the current health care reform bills in Congress as pushed by people who also want to destroy profit motives in medicine. I agree with her about not trusting people with their motives. They do not get what drives medical innovation and entrepreneurship.

At the heart of it, in most of these debates, both sides are saying "I don't want to go here because once I do, I'm afraid I'll end up there."  They don't trust the other side, and usually, they're right not to.  In this case, I think that the political logic of an expensive new health care plan will push us faster and further towards price controls on key inputs, and somewhat hamfisted "one-size-fits-all" standard-of-care recommendations.  I am reinforced in this belief by the fact that many of the people pushing health care reform are also enthusiastic proponents of . . . price controls on key inputs, and national standard-of-care recommendations.  I don't trust them when they ask me to focus on just this bill right here.

Other government interventions in health insurance have driven up costs. So lucky I do not live in New York state.

One has to ask on which side to err when controlling medical costs. Keep in mind not just the short term but also the long term costs. Long term costs depend most heavily on the rate of innovation.

The other reason I think the worries are legitimate is that as the government is on the hook for more medical costs, its incentives change. The fact is, it wouldn't be hard to manipulate a significant number of sick people into forgoing a lot of expensive care. The Obama administration's point, which is well taken, is that it's problematic to give doctors financial incentives to bias their advice towards treatment. The problem is, it's also problematic to give them, or their employers, incentives to bias their advice towards undertreatment. Every compensation scheme on the table does one or the other. And I think Americans are inherently more comfortable with a bias towards proaction than inaction, even if the latter is cheaper and more restful.

Megan thinks market rationing delivers better results than government rationing.

Robert Wright notes that "we already ration health care; we just let the market do the rationing."  This is a true point made by the proponents of health care reform.  But I'm not sure why it's supposed to be so interesting.  You could make this statement about any good:

"We already ration food; we just let the market do the rationing."
"We already ration gasoline; we just let the market do the rationing."
"We already ration cigarettes; we just let the market do the rationing."

And indeed, this was an argument that was made in favor of socialism.  (No, okay, I'm not calling you socialists!)  And yet, most of us realize that there are huge differences between price rationing and government rationing, and that the latter is usually much worse for everyone.  This is one of the things that most puzzles me about the health care debate:  statements that would strike almost anyone as stupid in the context of any other good suddenly become dazzling insights when they're applied to hip replacements and otitis media.

In spite of having said and excerpted all of the above obviously lots of facets of the health care debate have not been addressed in this one post or in Megan's posts. US health care spending is headed toward 20% of GDP and my sense of the rate of innovation acceleration we are getting for 15, 16, 17% of GDP is that we aren't getting anywhere near an optimal return on investment. Partly this is because a lot of health care spending goes for labor that is not easily automatable (at least not yet). Money spent on that labor does not lead to anywhere near as much treatment development as money spent on drugs. So a small fraction of total health care spending (that portion spent on drugs) delivers a bigger impact in terms of better future treatments.

In this post I do no offer a solution for this observation (though I have some ideas). I'm just saying that, geez, for such a large fraction of the GDP devoted to health care I'd really like to see a lot more progress in treating diseases. We still have no cures for all those diseases I mention above and many others I didn't list. The health care sector should be measured just as much by the rate of progress in developing new treatments as by the cost effectiveness and quality of delivery of current preventative care and current treatments.

Want still more to read on health care policy? Megan also praises pharmaceutical advertising for alerting her to the benefits of Ambien CR which has greatly improved her sleep quality. Also, Tyler Cowen takes a look at a paper comparing the efficacy of health care in different nations to extend life expectancies. Also, Alex Tabarrok looks at a paper that finds Consumer Driven Health Care Plans cut costs and improved use of preventative care. Health Savings Accounts with high deductible insurance provide an example of these sorts of plans. Also, this is an interesting paper: How Does The Quality Of Care Compare In Five Countries? Though one really can't usefully compare the US as a single country to other countries because we have people here on very different types of medical plans and living radically different lifestyles. European countries are much smaller and more homogeneous.

Update: Megan points out that in the current competitive market without price regulations the market leads the pharmaceutical companies to innovate. Click thru and read the whole thing. Our lives are at stake.

As for the second question, this is where I realize that liberals often really just do not grok what libertarians are about.  For them, this is a battle between people who like health care companies, and want to defend them, and people who like the government.  But I don't care about the pharmaceutical companies qua pharmaceutical companies.  The pharmaceutical companies are interested in what is good for pharmaceutical companies.  I am interest in what is good for society.

I am not under the delusion that those are necessarily the same thing.  "What's good for General Motors is good for America" was a Great Society slogan, not a libertarian, or even a conservative one.  Right now, pharmaceutical companies spend a great deal of effort on innovation because they have to in order to survive.  But if survival means ditching the R&D labs and churning out low-cost copies of things they've already invented, then I'm pretty sure that's what they'll do.  To paraphrase Adam Smith, it is not to the benevolence of pharma that I look, but to its self interest.  In the current system, that self interest means inventing new drugs. 

In other words, I'm not in favor of business.  I'm in favor of competition.

As Megan points out, a larger role for government will lead to pressures to cap prices which will kill innovation. No way are university labs going to compensate for reduced incentives in the private sector.

Update II: If you think that most drugs come from academic research read Derek Lowe who explains the central role of pharmaceutical companies in drug development. Without big pharma we'd see far fewer new drugs.

The persistent confusion over what's done in industry and what's done in academia has been one of my biggest lessons from running this blog. The topic just will not die. A few years ago, I ended up writing a long post on what exactly drug companies do in response to the "NIH discovers all the drugs" crowd, with several follow-ups (here, here, and here). But overall, Hercules had an easier time with the Hydra.

Now, there is drug discovery in academia (ask Dennis Liotta!), although not enough of it to run an industry. Lyrica is an example of a compound that came right out of the university labs, although it certainly had an interesting road to the market. And the topic of academic drug research has come up around here many times over the last few years. So I don't want to act as if there's no contribution at all past basic research in academia, because that's not true at all. But neither is it the case that pharma just swoops in, picks up the wonder drugs, and decides what color the package should be.

Since drug approval rates are declining the drug industry already faces a serious economic problem that should concern us all. If drug approval rates do not pick up then as existing drugs go off patent the amount of money available for drug development is going to decline.

Aside: why are drug approvals on the decline? I wonder if we've reached a point of declining returns on classical chemical compound drugs. Most of what we need to do to fix our bodies requires gene therapy, cell therapy, and nanomachines that all can carry out far more complex tasks than chemical compounds can do. Until these more advanced approaches become mature enough to move into widescale usage we might be looking at a down period for patented drug sales and drug development.

Share |      Randall Parker, 2009 August 16 07:06 PM  Policy Medical


Comments
Synergy6 said at August 16, 2009 8:24 PM:

"And yet, most of us realize that there are huge differences between price rationing and government rationing, and that the latter is usually much worse for everyone"

For gasoline or cigarettes, everyone (other than a few communitarians) accepts that how much you can consume should be limited by your income. Therefore, letting the market ration such goods is entirely sensible. However, most people (by which I mean, around the world) do not accept that the level of medical treatment you receive should be decided by your income. They do not accept that the rich man should be afforded a life-saving treatment while the poor man is not. They believe that, on a fundamental level, the value of human life is equal, and so the prolonging of that life should be as well. Of course, I'm aware that many in America do not share this viewpoint, and see the rich man's life as more valuable than the poor man's. C'est la vie. After all, if America wants to spend 20% of its GDP on vastly overpriced "first batches", the rest of the world isn't about to complain.

Mthson said at August 16, 2009 9:07 PM:

It's often glossed over that the US population's large proportion of underproducers throws off most comparative measures between countries.

The expectation here would be that if you compare the quality of healthcare received by the top half of the US and other nations, outcomes are better in the US. You could say that means people in the top half in countries outside of the US are basically paying a "health tax" in the sense of a tax paid with their health in order to subsidize the health of less productive people.

endri said at August 17, 2009 12:59 AM:

I agree that market incentives can't be matched but there is too much incentive to give the most expensive drug even though there is no extra benefit to the patient because they simply can. Although I also agree that increasing lifespan should be a priority so you can be 1000 years old, you also have to match that with people who are born on the lower income level who have to be in enough pain to be treated in ER. I feel that you have to have been part of that uninsured bottom 50 million in the US to actually understand why the poor man's pain deserves a basic level (ER is not basic).

There is no way the government should provide more then a basic level of treatment in the US which means you should be able to go to your doctor if you start to feel bad and not just wait until you are a hospital case. You should be able to have some drugs on this but with a budget of 1 trillion over 10 years so 100bn a year for 50 million people there is no way it will be able to afford anything but average treatments but that's a lot better then no treatment.

Synergy6 said at August 17, 2009 6:42 AM:

"You could say that means people in the top half in countries outside of the US are basically paying a "health tax" in the sense of a tax paid with their health in order to subsidize the health of less productive people."

You 'could' say it, because it's obviously true. A rich man will have paid far more in National Insurance contributions towards the NHS (for example) than a poor man, but they will be treated exactly the same at an NHS hospital. Of course, most people on this side of the pond don't see that as negative. If we could either extend all human life by 10 years, or extend the lives of the rich by 15 years and the poor by 5, we would obviously choose the former.

Randall Parker said at August 17, 2009 7:14 AM:

Synergy6,

But countries controlling the price of drugs in the long run are reducing the amount of life extension. There's a definite trade-off where countries are going for cheaper prices at the expense of causing more long term death.

A lot of people defend medical systems which do this as more moral. Well, they are killing more people in the long run. Yet these believe themselves more moral. I think they are not thinking thru the consequences of their actions.

endri,

The hit drugs that bring in more money fund many more drug development attempts. If any one pharma company hadn't had one of their hit drugs their drug development budget would be smaller today.

Kaleidic said at August 17, 2009 7:53 AM:

The solution is to separate R&D from production. Once a drug has been developed, the price should be set by cost of production plus a reasonable rate of profit. R&D should be paid from a separate fund with prizes for exceptional developments. The R&D fund should be based on global contributions based on GDP.

john said at August 17, 2009 8:46 AM:

Randall-
Why do you use only the positive examples from private industry? I doubt users of Viox would agree with your essential argument that all innovation is good. It is in the best interests of drug companies to get people to take drugs and to make a profit, not to provide care. They seem the same, but they are not. They need to create a market to sell their drugs, regardless of what the need would be.

I also think your thoughts would make a lot more sense if it was the insurers doing the innovating- but they are not. Having seen my insurance get progressively more expensive every year for progressively less coverage, is their main innovation getting me to pay more for what will eventually be nothing? That is not a system worth fighting for. You tell me innovation is the key, but I progressively pay more to get far less of it. So am I supposed to believe that this is for the good of society?

I would prefer a system with no insurance, public or private, in which I could just go to a doctor and pay the market rate. At least I would know what the cost is and wouldn't have to guess about coverage. If the doctor does a poor job, I take my money and go someplace else. That means a lot lower reimbursement rate for doctors though, seeing as my coffers can't compete with private insurance or the government. It also means that Pharma will not get much out of me either, so they will either have to lower their prices or not sell their product.

The individual loses in either case. What is the function of 3rd party health insurance again?

brainpik said at August 17, 2009 9:26 AM:

Oh for Pete's sake. It's socialism plain and simple. It cannot work and never has worked. Why? The information contained in the price is distorted beyond all recognition and thus the thousands of players cooperating to deliver care can't make the right choices.

If there were free markets in medicine and healthcare delivery, it would be exactly like computers, a doubling of cures, halving of times to market and general health and well-being for all.

Sic Semper Tyranis. Obama and Sebelius better be careful. They stay on this path and the 2nd American Revolution will be as much a shooting war as the first.

Synergy6 said at August 17, 2009 9:44 AM:

"But countries controlling the price of drugs in the long run are reducing the amount of life extension. There's a definite trade-off where countries are going for cheaper prices at the expense of causing more long term death."

Where is the evidence for this? I read the above article, and the articles it links to, but can't find any. It seems like your market fundamentalism requires as much faith as my moral compass.

"It cannot work and never has worked."

Yes, because most of the world's healthcare isn't provided along more "socialist" principles than US healthcare. Oh, wait. It is.

Engineer-Poet said at August 17, 2009 9:51 AM:

This goes right back to the life story of Dr. Samuel Gall (inventor of the gall bladder), who specialized in diseases of the rich and was able to retire at a young age (to a land that is no longer so inviting... but that brings reality into the joke).

I think the problem here is one of misplaced incentives.  Both Britain and Canada leave people with disabling conditions to wait months for treatment, costing huge amounts of productivity.  Meanwhile, the USA gives all kinds of care to people with advanced Alzheimer's so they don't die of something else before neurological deterioration does them in.  Life-extending treatments mean people collect retirement pensions longer and longer, bankrupting the system even sooner.

You wonder why we've got the situation we do?  Just ask "cui bono?"

Unfortunately, fixing things means breaking a whole bunch of rice bowls and getting too nanny-state for lots of people's tastes:

  • Drug and other medical companies should be paid for the amount of productivity they increase.  This may mean paying them over time, out of the tax revenues from the population whose lives are improved.
  • Individuals should be paid for improving their health and cutting their need for treatment.  This means eliminating the subsidies for corn farmers and taxing the foods full of fat, sugar and salt which are pushing real nutrition out of the American diet.  Incentives to bicycle instead of taking cars or riding buses, etc.
  • Taking life-extending treatments should come with a requirement to postpone government pensions.
If you don't line all of these things up, you wind up with some powerful interest which benefits from blocking improvements in your health.  We have lots of people benefitting from that now.  What's the solution?

Michael L said at August 17, 2009 10:51 AM:

and in the long run we are all... Cue John Maynard Keynes. I don't think that the specifics of what Obama is doing with healthcare is a good idea (AFAIK he is mostly expanding coverage and feeding the beast of medical establishment). Nevertheless, I find the pro-drug companies arguments of sky-high prices as price for innovation to be ridiculous at this particular time. Progress and innovation is great, but who says that we need this progress NOW at a cost that is clearly too steep in light of the ongoing depression? Why should those companies be the ones to decide that all this money should be extracted from the economy and spent on their pet research project NOW? Good management is all about tradeoffs, and perhaps it's time to do some temporary tradeoff - lose some innovative progress and gain some more affordable drugs. Obviously from libertarian standpoint it's sort of a confiscation of companies' property, but then so what? If Canada or Europe or India could likewise confiscate their property for decades through price controls, why can't America do it now when things are bad and getting worse economically? Desperate times call for desperate measures and all that.

That being said, another, no less pragmatic, take on the situation (and one that is more likely to get traction by default) would be to say, too bad for those who cannot afford drugs (or cannot figure out a way to reimport them), society will survive anyway. And it's true - back in 1950s we didn't have lots of wonderful drugs we have now, and somehow people managed, so yeah, they can manage again... More or less, with extra mortality among some categories of old and/or sick people that usually nobody cares about.

Which, incidentally, wouldn't change the fact that in such conditions medical companies will still not extract that tribute errr profit out of the impoverished America to pay for drug development. You cannot extract money which isn't there. But, maybe they can raise funds for research in Japan and so forth, so it's not like progress will just come to a halt, plus the depression will end eventually.

BBM said at August 17, 2009 11:04 AM:

Another HUGE point to note is that all of the national/government/tightly regulated plans in other countries simply could not exist in their current forms without the beneficial offshoots of the US system. I'm a surgeon and I've thought about this a lot. I support universal access to care but IMO there's not really a good answer.

The Canadian and European systems that are cited by government care advocates are directly and indirectly subsidized by the US taxpayer/consumer. Here's what I mean by that:

By using the monopoly purchasing power of their respective national systems, the socialized programs are able to force price deals on pharmaceutical companies that effectively cost shift the development, testing, entrepreneurial, and liability price tag to the only country in the world with the will (and means) to pay it... the USA.

As a result, the US market subsidizes new drug development for the rest of the world. This is also true of most new medical/surgical technology. Of course, we in the US benefit from it as well. However, we pay for it. More than our fair share by far. Many of these new medications and technologies are developed in the USA, but even the ones that are developed abroad are developed for the US market and because of the US market. These beneficial technologies become available to the entire world in time.

Sure, there is a lot of "waste" in the system (depending on how you define that term). We in the US try out many different technologies and medications, which are expensive and may have only minimal benefits. But that is how we find out what works.

My point here is that the situation that the EU and Canada enjoy is artificial; without the enormous direct and indirect support from the US market and taxpayer, the European-style social programs simply could not exist in their current forms. Even with this support, they are under constant budgetary pressure, which will only get worse as their population ages.

Hence, arguments that highlight how much we spend vs other countries based on (very) crude measures like life expectancy fail to impress me, because the socialized countries' plans depend on the US for much of their success. This is not to mention the fact that we spend a LOT of our healthcare dollars on quality of life issues... dollars that may not increase life expectancy.

BBM said at August 17, 2009 11:13 AM:

Other ways in which we subsidize other countries health plans:


Because the US provides international security, this allows the Canadian and EU systems to divert funds into their social programs that otherwise would have to go to defense. The US keeps open the sea lanes of communication, free of charge, allowing frictionless maritime trade. In general, this allows free trade in goods, services and energy. Of course, the US benefits from international stability, too... but we pay for it.

Imagine if Canada shared a border with Iran or North Korea... that might impact the amount they could spend on the health service. Canadian help is greatly appreciated in Afghanistan, but they also spend just over 1% of GDP on defense (it looks even worse if looked at as % of GDP per person).

The US also continues to provide security within the EU by basing troops there. Aside from the fact that this has allowed the EU to develop into its current state, basing troops there directly injects billions of dollars a year into the EU economy.

Finally, the US provides an enormous market for EU goods and services, generating economic activity that creates the tax revenues that fund their social programs. These are often high margin luxury goods that they would have trouble selling to their own populations. Again, we also benefit from this trade relationship, but on balance the EU derives more benefit. Canada shares a border with the largest economy in the world. Imagine if there was no US and they shared a border with Mexico instead. That might impact their economy substantially, and hence their ability to fund their plan (which is chronically strapped for cash as it is).


tommyvee said at August 17, 2009 4:17 PM:

The whole arguement in this post is based on the false premise that only private companies can research and develop medical technology.

But most of the medical researchers that I know are university-based, largely funded by NHS and other Federal research grants, with substantial state government financial support. If a tiny fraction of the billions spent on insurance company excessive compensation, un-neccesary paperwork, and bureaucratic attempts to avoid payment claims was instead expended as government-funded basic medical research and development with public/private partnerships, I believe medical science would advance faster because we would not be pouring trillions into the black hole of a dysfunctional US health system.

As an engineer who has worked several decades in product development, I have to wonder about the life-experiences of those who credulously believe that the private sector is always efficient and the government always inefficient (despite abundant evidence to the contrary). Most corporations are rife with waste, incompetence, empire-building, and strategic blunders. Those scientists and engineers that I know working in public sector R & D accept lower wages in order to pursue more fundamental knowledge, have meaningful work, and avoid the Dilbertian doublespeak nightmare of modern corporate groupthink and musical chairs.

Nick G said at August 17, 2009 4:27 PM:

BBM,

It makes the US sound rather like the head goose who provides a draft for the rest of the geese.

tommyvee said at August 17, 2009 4:36 PM:

"If there were free markets in medicine and healthcare delivery, it would be exactly like computers, a doubling of cures, halving of times to market and general health and well-being for all."

If all you have is a hammer, then the whole world looks like a nail. Trying to force the health care "market" into the Procrustean bed of Silicon Valley is ridiculously far-fetched.

Where is the analog in the computer market for
1) Denial of coverage due to existing conditions?
2) Recission of coverage when health problems occur?
3) Failure of insurance companies to maintain sufficient reserves to cover medical costs after collecting premiums?
4) Failure to cover many diseases and treatments due to confusing, voluminous, and unintelligible plan descriptions
5) Inability of individual customers to predict what care will be required when??

In a truly "free" market, insurance companies would have massive incentives to collect maximum premiums and then refuse to deliver care. Of course, this did and does occur, which is why insurance is regulated everywhere. Not because people like regulation, but because the "market" failed without it.
In an truly "free" and unrequlated insurance market, corporate executives would have every personal incentive to collect large premiums, pay themselves huge bonuses, bankrupt their companies, retire with their loot, and forget about paying any claims.
Even a good past history for a particular company would not protect against new management looting the claims reserves to line their pockets and stiff the customers. Without regulation, no insurance customer could be sure of what their premiums were buying.

All this is obviously self-evident, but somehow people make the mindless arguement that the market alone can fix healthcare, without thinking about what the real market dynamics would be (and were) in an unrequlated market. Markets require accurate information to function properly, and market actors in healthcare are inherently deprived of the information required. Healthcare requlation is a necessary effort to improve this inherent market failure.

If you are a market fundamentalist, then market failures are un-possible, but that is a religous rather than scientific stance.

Randall Parker said at August 17, 2009 5:49 PM:

tommyvee,

Market failures happen all the time. Certainly medicine is a great example. Buyers can't evaluate the quality of their care. Buyers can't choose providers if they've just been driven up to an emergency ward after an accident. There's not enough public data to allow comparison of providers.

Insurance: Yes, insurers do unethical things and so do some insurance buyers. It is a serious problem. We need improvements in rules for granting and revoking insurance.

But look at other systems. I know a Canadian who had to go to emergency wards for years because he couldn't get a regular G.P. since all the regular G.P.s have too many patients (at least in the part of southern Ontario where he lived). In Britain you can wait a long time (until death in many cases) for what is deemed as elective surgery. Never mind that lack of a new knee or hip socket will leave you sitting at home.

Health care regulation to prevent fraud isn't the same as price controls and obstacles to innovation. It is the latter I oppose.

Randall Parker said at August 17, 2009 6:43 PM:

john,

I did not say that all innovation is good.

I agree it is in the interest of drug companies to get people to take drugs. They are like car companies who want to get people to drive cars, bicycle companies who want to get people to ride bicycles, shoe companies who want to get people to wear shoes, and clothing companies that want to get people to wear clothing. They definitely want to sell their products.

Third party insurance: Its biggest value is there are multiple insurance companies rather than a single payer. If we had a single payer and that was the government they'd control prices. That's what single payers usually do. Lower mandated prices would lower profits. Lower profits would reduce incentives to develop new products. We'd get fewer new treatment products. We'd die sooner as a result. I would prefer to die later, much later.

Michael L,

The US economy is at about $14 trillion (maybe $13.8 trillion). That's not a depression.

tommyvee,

Yes, lots of researchers in academia. I appreciate the fine work they do and report on it here frequently. But when's the last time you bought a drug developed at Johns Hopkins or Harvard? They do occasionally produce something that goes to market. But most drugs come from drug company labs. Really. I am not making this up. You might find this a strange state of affairs given the tens of billions we spend per year for academic research. But there it is. Most drugs come from corporate labs. Makes me want to see the corporate labs grow in size.

BBM said at August 18, 2009 11:14 AM:

Nick,

I agree... but I'd characterize it as more than a draft.

The EU countries and Canada are rich countries. They should be able to afford to pay their fair share of development and entrapunerial (eg the market incentives to innovate) costs without shifting most of the costs to the US. Afterall, they are happy to utillize the fruits of that innovation.

Addison said at August 18, 2009 6:18 PM:

The obvious problem with the health care system is the nullification of the price mechanism in health care.

Period.

If you want to see people freak out, next time you visit a doctor, ask them for a good faith estimate of how much the visit and care are going to cost. If they suggest that you get a test, ask how much it will cost. Since I'm a PPO guy, I do that every time. The entire office goes into a panic. They don't know how much it will cost. Further, they have no way of finding out. (Still, they somehow miraculously figure it out when it comes time to bill you). The closest I got was one time, after 15 minutes of panic and telephone calls, they quoted me $280. The bill was for $1400. But because they always make you sign a "I will pay whatever you bill me" contract, you can't complain!

The medical establishment (I call it the Snakeoil Industrial Complex) will whine that the reason they can't give you a price is because they negotiate different prices with all the different insurance plans. The first step in health reform is to make price discrimination illegal: I.e., the price health providers charge for every type of service needs to be the same, no matter who the customer (this is the law in virtually every type of consumer product under existing anti-trust law. In the consumer world, if you want a discount, you need to be a coupon clipper. The reason for this rule is basic economics: If you allow price discrimination, the "market clearing" function, i.e. the sole mechanism by which free markets achieve efficiency over any other system, is obliterated.) If this were the law, the competition would be where it belongs, between health care providers who would have to compete on the price of each service. There would still be competition between insurance companies, but it would be based on their administrative efficiency, rather than their size and bargaining power.

As to "rationing," that is happening now, and will always happen. The question is who we want doing the rationing. On one hand, we could have the government do it, based on a set of iron-clad regulations. In this system, if the rules say grandma dies, grandma dies. This is not consistent with a free society, in my opinion. The other option is to have individuals make the choice, by their choice of insurance coverage or their decisions to purchase particular type of health care. I.e., if grandma want to pay big bucks for a policy that covers six months of intensive care at age 90, she and her heirs can knock themselves out. If she wants to pay less for a policy that only covers, say, 50% of this intensive care stint, that's fine too. And under this system, it will never be a question of "grandma doesn't get the operation." The statement would be "grandma can have whatever operation she wants. She just has to pay for it."

This leaves only the question of how to provide needed and reasonable health care to those who can't afford it. The fact is that, if the medical industry were reorganized as described above (i.e. like every other free market industry), the cost of care would drop by 50%, and the quality would skyrocket. For those of you who wanted to subsidize health insurance for the poor, we would have plenty of money net net to cover everyone on a means tested basis. I think this is a bad idea because it would destroy most philanthropic mechanisms, which are the best way to help the less fortunate, but I'm not going to get too excited about opposing it.

If we go the government subsidy route, simply replacing Medicare with a voucher program to help the poor buy private insurance would be the best route. Medicare needs to be ended as a big government insurance company. It is already clearly established as a financial disaster of unparalleled proportions in World History. As to the vouchers, they would have to only subsidize low deductible but otherwise basic insurance plans. The policy subsidized would have to have strict rules denying grandma's six months in the ICU or triple bypass surgery. This is the part the socialists don't like (i.e. poor people get only basic care for free), but the fact of the matter is that if inability to pay doesn't have a clear consequence regarding a particular industry, you destroy the market in that industry, and this leads inexorably to far worse consequences than the ones you are trying to prevent. I.e., instead on only the poor having basic care, EVERYONE (except Congress, of course) gets only basic care. That, of course, would be the ultimate result on a "single payer" system.

This is the only best solution. I hope someone reading is smart enough and in a position to do something about it.

Synergy6 said at August 18, 2009 9:57 PM:

@Addison, I agree with most of what you're saying, except the last paragraph. Far from "the ultimate result" in a single payer system being "EVERYONE only gets basic care", grandma gets as much time in the ICU as she needs without paying a dime. She gets her triple bypass surgery, whether she's the mother of Bill Gates or all her kids are dead.

Your alternative doesn't seem entirely logical. You say that it will never be a question of grandma not getting her operation, as she "just has to pay for it". That leaves the gaping question, what if she can't pay for it? I don't see how hoping for philanthropy is an inherently better solution than the one the rest of the developed world has chosen, i.e. the government makes sure grandma gets her operation, whatever her income. Just a thought.

Engineer-Poet said at August 19, 2009 2:04 PM:

More fodder on this subject, from The Atlantic:  How American health care killed my father.

bleh said at August 21, 2009 2:44 PM:

You have to realize that a completely private system is efficient only for those that are employed with coverage. This is really the definition of the debate. The unemployed or those forced into part-time work are simply attrition to this particular system. At no time does a private system guarantee coverage for those without the money for coverage. The market will always have citizens who either are downgraded or become obsolete due to innovation, and unlike a rusted machine we are bargaining with an individual who may be at the first step of an accumulating misery. One I am sure most people are not set up to manage even with a lifetime pension under the belt.

The very forces that spur extended life spans are at odds with the healthcare gauntlet that cannot deal with the spiral of illnesses that come from prolonged aging. This guarantee of increasing demand for healthcare as the individual's body breaks down is an event that health industry bureaucrats have stepped in to exploit to its fullest. They don't mind either since the reaper will always guarantee a fresh huddle of customers. The overall effect of their control on mortality is that they offer senior citizens an option: if you want to live, pay. This leaves the majority of people being forced to tap their life savings as the oligarch of insurance companies skirt around paying for the overpriced drugs the oligarch of Big Pharma is selling. This human commodity is one that will only grow in magnitude as we live longer. Living longer will expose us to more exotic geriatric illnesses and guarantee the health merchants new fodder. The problem is a never-ending gulf of care, the solution should be that the government subsidizes more medical schools and force em to graduate more doctors. Thus we'll have more competition between doctors, an easier path through med school and a more jobs available for our boomerang generation. Imagine that by obliterating the monopoly the AMA has on certifying doctors we can have many more caregivers in this country and reduce the costs of medicine until getting a health exam is on par with picking up chinese take out! Research will explode as well as all these doctors compete to gain the same salaries that their brethren enjoyed in the 90's. This monopoly is part of the reason why there's this rush to certify more nurses to the point of importing them from Africa. The nurses take less time to train, demand smaller salaries and do the same job as country physicians from the 40's.

The R&D that people so laud from private companies are really just iterations of old drugs and only a fraction of what is being developed through university grants. Big Pharma research is trapped in a tunnel vision that takes the path of least resistance against FDA approval. So this means that corporations will only research mainstay drugs that have the smallest likelihood of being rejected as a way to enhance that cost benefit ratio. The good that comes from government backed research grants is that they take risks on unknown factors. They can charge ahead on research that may not have a promising outcome upfront but could hold surprises for the backers. This is why we find most of the promising new cancer treatments are coming from garage shop hobbyists working with a university grant, rather from Dow, Johnson & Johnson etc.. Government backed research takes risks where many companies will not.

Valkyrie said at August 21, 2009 9:30 PM:

"As long time readers know, I have a strong desire to reverse the aging process and live thousands of years until killed by a trauma (accident, murder, or other unavoidable event). I watch a lot of political developments from the standpoint of whether they will speed or slow down the rate of biomedical scientific and technological advance."


Right, that's why you supported Obama. For his promise to double science funding over ten years; he's already doing that with massive investment in R&D in the stimulus and his first budget I think. More (gasp - government!) money so you can live longer and happier, especially with much of that funding going to alternative energy so we can avert catastrophic global warming and stop sending money to saudi arabia, so everybody can stop sending money to saudi arabia actually as the technology advances.

You even volunteered to work on his campaign, right Randall? LOL.

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