How Markets Work

184 thoughts on “How Markets Work”

1. Q. Momma, why can’t grandma get the same care for her illness that she used to?
   A. Because Congress took away her Medicare managed plan so that you can go to the doctor. Now hush and have another cigarette because the country needs 22 million new smokers to pay for it as well.

2. Actually, the Medicare managed plan costs MORE than traditional Medicare, and the choice of providers is MORE LIMITED in the Medicare+Choice plans than in traditional Medicare.
   http://www.familiesusa.org/assets/pdfs/private_plansca60.pdf
   P.S. Grandma’s prescriptions also cost more than they need to because the Medicare Part D coverage is statutorily prohibited from negotiating prices with pharmaceutical companies.

3. Actually, the Medicare managed plan costs MORE than traditional Medicare, and the choice of providers is MORE LIMITED in the Medicare+Choice plans than in traditional Medicare.
   http://www.familiesusa.org/assets/pdfs/private_plansca60.pdf
   P.S. Grandma’s prescriptions also cost more than they need to because the Medicare Part D coverage is statutorily prohibited from negotiating prices with pharmaceutical companies.

4. I now see the error of my ways. Thank you.

5. Q: Why do I argue with strawmen?
   A: It is easier, and makes you feel better.

6. You know, Rand put out a lot of chaf with her wheat, but one thing she was definately right about: Ridicule deserves to be considered a distinct logical falacy. Wake me when you’ve got some reasoned arguments.

7. Fair enough Seb — but do you care to defend the performance of markets in insuring working class families? How long do we have to wait before we recognize that this isn’t a context where they work very well.
   Frankly, I’m tired of making children remain sick while we wait for abstract theories about supply and demand to impose themselves on reality. Lots of kids are sick — and markets aren’t working at all.

8. Q: How many law and economics professors does it take to change a light bulb?
   A: None, the market will take care of itself.

9. Ridicule deserves to be considered a distinct logical falacy.
   an intellectual defense of humorlessness! it’s a wonder more people don’t sign up for her philosophistry.

10. You know, Rand put out a lot of chaf with her wheat, but one thing she was definately right about: Ridicule deserves to be considered a distinct logical falacy.
    One she used a lot, right?
    How about you, Brett, will you give up ridicule for Lent this year?

11. What I can never get out of my mind when reading these sorts of discussions is just how much it costs to buy medical insurance in the US. From what I gather, someone in my situation (mid 40s, married with 3 young children, no major known illnesses, both self-employed but me doing most of the breadwinning) would need to find somewhere around $10,000 per year to insure my family. That makes no sense when looking at the median and average incomes that Hilzoy posted about a while ago. It’s flat out nuts.
    I/we make a good living, have a comfortable life with few to no financial worries, and even with the (supposedly) high Canadian tax rates we pay less than $10k in federal and territorial income taxes a year. And for that we get not only reasonably comprehensive medical coverage but also details like a justice system, roads, and the Van Doos patrolling Kandahar. Now that’s efficiency!

12. Fair enough Seb — but do you care to defend the performance of markets in insuring working class families?
    The market distortion no one ever talks about in health care is the laws about who may and may not provide medical care.
    Now, don’t get me wrong — I’m a libertarian, but not such of one that I’m saying that doing brain surgery should be as easy as setting up a lemonade stand. There are some occasions when requiring years of medical school is appropriate, and other occasions where I’m more dubious.
    But if you’re going to attack free markets, at least recognize that health care is not a free market. If all the doctors are charging too much for some procedure, I can’t just decide to compete with them in any meaningful way (i.e., without committing to many years for a major career change).
    “Low barriers to entry” are a pretty basic requirement for a market.

13. Cleek, humor does have it’s place in rhetoric, and goes especially well with reducto type arguments. However, when, as here, it’s forced to carry the entire load, it represents nothing more than an effort to carry the day without bothering to marshal facts or arguments, purely by getting people to laugh too hard to think.
    I don’t have a lot of respect for efforts to win arguments by discouraging people from thinking. And that’s so whether you try to do it by making them laugh, cry, scream with anger, or what have you. The extent of our capacity for reason is really all that separates us from the other primates, if you’re going to use this sort of technique to win arguments, maybe you should try out throwing feces, too.

14. Look folks, I know the subject is addressed here in a snarkalicious way.
    But there is indeed an issue. And if your only rebuttal is to point out the snark then perhaps you need to look inward for the strawman.

15. maybe you should try out throwing feces, too
    I think I recall a few threads where that prevailed. 😉

16. How do I defend “performance of markets in insuring working class families”. I’m not particularly sure that medical insurance in the US as actually practiced is as much a market failure as it is a government-caused insurance failure. The federal government has encouraged a linkage between health insurance and employers that doesn’t well serve the subset of working class families which depend on jobs without multi-year stability. State governments have made it almost impossible to provide low cost insurance with limited but basic coverage.
    Neither of those are ‘market failures’. Both are in fact government failures which come as unintended consequences from government manipulations of the market.
    But I’m no market absolutist. I realize that there really do exist people who really can’t afford basic medical care. I do however object to the idea that the only way to cover such people involves subsidizing the care for 80% of people who can afford it–so I’m not convinced that expressing the problem of “some people can’t afford it” leads neatly to “universal care”.
    So my #1 choice would be to have basic care for poor people expanded to the point where we effectively don’t have anyone who isn’t uninsured.
    This has problems with cut-offs and the like but probably wouldn’t choke off research. I don’t think the cut-offs problem is at all insurmountable–you could have a sliding scale of payments as your income grows but….
    My #2 choice would be to provide a non-cutting edge standard of care (I think 7ish years old is about right, but I’m not wedded to it) to everyone who elects for it, but allow/encourage everyone else to get a plan that would cover everything, including modern things (perhaps with a tax rebate up to the level of cost for the basic plan). There could be an exception for new treatments that are less expensive than the old ones (providing an incentive to cut costs for things near the bubble). This would allow innovation to run out unimpeded, but leave no one uncovered. A large part of the problem with skyrocketing costs is magical expectations–a desire to have ever better technology without having anyone pay for it. This kind of plan tries to attack that expectation directly while providing the uninsured with MUCH better care than they had previously.
    I’m not at all for a true ‘universal’ plan which occupies the field. I’m very sure that it would dramatically slow innovation. You can’t solve the free rider problem by having everyone free ride.
    Now that is the seed of a non-strawman discussion about markets and health care in the United States. If you want to talk about that or other non-strawman discussions, I’ll be happy to oblige.
    But personally I’m not encouraged to start a discussion that essentially begins: “conservatives obviously hate poor people and hope they die”.

17. Seb,
    Regarding your second option, can you clarify what constitutes a “treatment”? If I have a medical condition that can only be treated by a expensive 5 year old drug and new research indicates a simple life style change that alleviates my condition, is my doctor permitted to explain that to me?

18. If we’re going to discuss changes to the healthcare system in this country, would it be possible to structure the discussion in terms of incremental steps rather than describing whole new systems that magically pop out of nowhere?
    Realistically, we cannot have a flag day where we replace the US healthcare system in one fell swoop. Changes are going to have to be incremental. So, it might keep everyone more honest to describe their proposals as a sequence of incremental steps with explanations about how at each step along the way, specific problems are solved.
    Just a thought…

19. I don’t know that we need innovation in medicine as much as we need medicine to be more broadly available.
    And when you consider that innovation itself has been strangled by the Bush admin (think gene lines), it’s not like we are getting the one at the expense of the other. We’re not. What we’re getting is more opportunities to sell (buy, if you are a consumer – and who isn’t?) more drugs and more expensive procedures.
    Jake

20. However, when, as here, it’s forced to carry the entire load, it represents nothing more than an effort to carry the day without bothering to marshal facts or arguments, purely by getting people to laugh too hard to think.
    if you’re not thinking about the economic and health care debate that support it, then publius’ post makes little sense at all; the humor is based in those underlying discussions. he didn’t just say “free market ideologues eat poo!” and leave it at that.
    —-
    “var extra_happy = Math.floor(1000000000 * Math.random()); document.write(‘ ” ? someone’s php is leaking.

21. “If I have a medical condition that can only be treated by a expensive 5 year old drug and new research indicates a simple life style change that alleviates my condition, is my doctor permitted to explain that to me?”
    That sounds to me like the kind of exception which would fall under my: “There could be an exception for new treatments that are less expensive than the old ones”. I don’t see what would prevent a doctor from noting a free-to-the-government lifestyle change.

22. “And when you consider that innovation itself has been strangled by the Bush admin (think gene lines), it’s not like we are getting the one at the expense of the other.”
    This is almost an entirely different topic, so I probably shouldn’t respond at all. But we should be clear in the criticism. Bush didn’t make the research illegal, he made it not federally funded. It can be privately funded or state funded. And in fact is in both cases.

23. I find the idea that a doctor would apply a current standard of medicine to one patient and a 7-year-old standard to another utterly bizarre.
    One, it’s certainly a violation of the doctor’s ethical standard. Autism and dementia-type diseases are exploding in this country. Can you honestly imagine a doctor telling the wife of an Alzeihmer patient that she needs to wait 7 years for his medicine, or pay the “market” price?
    Moving from medical ethics to legal standards, it’s certainly malpractice. The federal government would have to invoke the Supremacy clause to override an area long regulated by the States. (See Raich and the application of the Controlled Substances Act to the states.)
    Moving to political reality, no legislator could possibly vote for such a bill. The AARP alone would have the clout to prevent the creation of a Second Class of citizens.
    I first saw the idea of tiered classes of health care in Fredick Pohl books. That’s where it should stay.

24. This is almost an entirely different topic, so I probably shouldn’t respond at all. But we should be clear in the criticism.

    Well, yes…it was a decision about science based without any reference to the science involved.

25. But we should be clear in the criticism. Bush didn’t make the research illegal, he made it not federally funded.
    a policy which affects research labs in profound ways, since facilities at a single institution are typically shared between groups doing different kinds of research. but the federal law makes such arrangements difficult.

26. Not to pile on, but the stem cell policy was also completely incoherent: if using stem cells is wrong, then no one (including privately funded labs) should be doing so.

27. “Can you honestly imagine a doctor telling the wife of an Alzeihmer patient that she needs to wait 7 years for his medicine, or pay the “market” price?”
    Can I imagine a car salesman selling one customer a Chevette, and another a Lexus? Yeah, so in the case you propose, also yeah. State of the art medicine for everyone would bankrupt the world to provide to everyone in just North America. The only way to avoid some people getting care others can’t afford is by denying people with more money care they CAN afford. Basicly murdering one person so that another feels better about dying.
    That said, Sebastian is right, the health care market isn’t remotely a free market, and the guild status of doctors is just part of that. We KNOW artificially suppressing the supply of people allowed to practice even basic medicine drives up the cost, so why permit it?

28. That sounds to me like the kind of exception which would fall under my: “There could be an exception for new treatments that are less expensive than the old ones”.

    Right. And then of course there’s the exception for a totally new treatment (say, gene therapy for Parkinson’s or cystic fibrosis) that could nevertheless save/improve a lot of lives for not a lot of money.
    And then there’s the exception for super-expensive, super-risky procedures (multiple organ transplants, artificial hearts…) that nevertheless happen to be more than 7-years old.
    Or…Maybe we could just forget about the arbitrary 7-year thing? Just have a qualified panel of experts meet every now and then and draw up a proper formulary?

29. “Can you honestly imagine a doctor telling the wife of an Alzeihmer patient that she needs to wait 7 years for his medicine, or pay the “market” price?”
    I suppose we could cut out the market price and make everyone wait 15 years for the discovery. Is that better? You can’t just assume the innovations and work from there. And who precisely are we talking about here? We are talking about people WHO DON’T HAVE MEDICAL INSURANCE AT ALL NOW. Right?
    Look people, the government already spends almost as much in GDP for health care as other countries. There may be marginal savings to be had by centralizing, but there aren’t enormous savings to be had. The key drivers of increasing cost are high levels of innovation and high levels of end-of-life care.
    You can’t avoid tradeoffs just by wishing them away or by declaring them ‘immoral’. Right now we have tradeoffs that are pretty much random in some areas and which could be made better. We could get lots of increased medical access without seriously hurting medical innovation.
    Any formulary avoids the highest tech innovations unless they are also cheap. That is true now, that is true in France, that is true in the UK, that is true in Canada. Appealing to ‘standard of care’ doesn’t change that.

30. Francis,
    I think Seb’s proposal becomes a little clearer when stated in terms of what treatments a provider will cover rather than what treatments a doctor will prescribe. In such a world, doctors could prescribe any treatment they wanted, but you could only get certain types of treatments paid for, and would thus discuss that with your doctor.
    It doesn’t seem like such a system would violate the hippocratic oath or constitute malpractice; after all, doctors today tell patients that they need treatments that they cannot get…

31. One other factor here is that it’s not just that the doctor’s “guild” has a monopoly on providing medical care, but also that, IIRC, the number doctors churned out by U.S. medical schools has not kept pace with our population increases (again, IIRC).

32. But personally I’m not encouraged to start a discussion that essentially begins: “conservatives obviously hate poor people and hope they die”.
    But no one said that. In fact, in the post Publius linked to, I made it clear that I think the people who push for these policies generally mean well. But they’re essentially engaging in an experiment where children suffer the consequences of their failed hypotheses.
    It’s absolutely true that we don’t have a true market system here in the U.S., but most of the non-market features were added to the system to address obvious market failures.
    To take the most obvious example, we have Medicare because private insurance would be totally unaffordable to most elderly people (because they consume LOTS of health care and therefore insurance companies don’t want to have anything to do with them).
    We have an employer mandate system because employers are more sophisticated parties and better able to negotiate favorable terms and bulk rates (thus lowering costs). And employers are in a better position to demand that all their employees be covered. If the heath care market was individualized, it would be far easier for insurers to cherry-pick who they cover. It would also be easier for companies to discriminate and charge disparate rates based on things like risk factors, genetic attributes, existing conditions, medical history, etc.
    Remember, health care isn’t like other insurance markets. In the home insurance market, the only risk factor insurance companies can look to is geography, and people can choose where they want to live. In the car insurance market, insurance companies look at your driving record, which is largely of your own making. And when people are too risky to be insurable (blind, seizure-prone, fond of drunk driving, etc.) we generally view it as a good thing that they are not behind the wheel.
    But when it comes to health insurance, companies have literally mountains of data to look at in determing your risk. And most of them are completely out of your control. If the market was left alone, it would simply not be possible for many people to acquire affordable insurance. They would be uninsurable. Companies would cherrypick like mad. And unlike with car insurance, the consequence of being uninsurable is not that you have to ride the bus, it’s that you die or go bankrupt.
    That’s why the health care insurance industry has to be so heavily regulated.
    We also long ago realized that we need regulations regarding what insurance policies must cover because otherwise they would market barebones policies that don’t cover much and employers would buy the cheapest policies (and many individuals would as well, not realizing that important things are not covered).
    There are countless other examples. The point, though, is that we don’t have a “true market” for health care in this country because over the years we have spotted a number of obvious market failures and have tried to correct them.

33. I don’t think that a shortage of doctors or their compensation is a major factor in the size or escalation of our health care system costs. This is from a letter Uwe Reinhardt wrote to the NY Times:
    “In “Sending Back the Doctor’s Bill” (Week in Review, July 29), you compare the incomes of American physicians with those earned by doctors in other countries and suggest that American doctors seem overpaid. A more relevant benchmark, however, would seem to be the earnings of the American talent pool from which American doctors must be recruited.
    Any college graduate bright enough to get into medical school surely would be able to get a high-paying job on Wall Street. The obverse is not necessarily true. Against that benchmark, every American doctor can be said to be sorely underpaid.
    Besides, cutting doctors’ take-home pay would not really solve the American cost crisis. The total amount Americans pay their physicians collectively represents only about 20 percent of total national health spending. Of this total, close to half is absorbed by the physicians’ practice expenses, including malpractice premiums, but excluding the amortization of college and medical-school debt.
    This makes the physicians’ collective take-home pay only about 10 percent of total national health spending. If we somehow managed to cut that take-home pay by, say, 20 percent, we would reduce total national health spending by only 2 percent, in return for a wholly demoralized medical profession to which we so often look to save our lives. It strikes me as a poor strategy.
    Physicians are the central decision makers in health care. A superior strategy might be to pay them very well for helping us reduce unwarranted health spending elsewhere.”
    And we DO spend more both per capita, and as a % of GDP than other developed nations on health care:
    Per capita expenditures:
    US: $5711
    Canada: $2998
    France: $3048
    Germany: $2983
    Sweden: $2745
    UK: $2317
    Health care expenditures/GDP:
    US: .152
    Canada: .099
    France: .104
    Germany: .108
    Sweden: .093
    UK: .078
    http://www.kff.org/insurance/snapshot/chcm010307oth.cfm

34. “But no one said that. In fact, in the post Publius linked to, I made it clear that I think the people who push for these policies generally mean well.”
    The Q&A pretty much said that, and that is what I responded to.
    And people who want to enact universal health care without paying any attention whatsoever to medical innovation questions generally mean well too. Which is why I’m raising the issues, rather than calling liberals misguided idiots and making fun of strawmen versions of their views.
    “We have an employer mandate system because employers are more sophisticated parties and better able to negotiate favorable terms and bulk rates (thus lowering costs).”
    This is the kind of story that sounds very plausible, but is nevertheless false. We have an employer/health care link largely because during WWII there were strict wage controls, and many companies were having trouble getting the right employees when they couldn’t compete on price. They had to compete on other dimensions, and health care was one of them. It sticks around for
    The employer-health care link isn’t supported for economic reasons by pretty much anyone serious on the left or the right. It makes for unlikeable gaps in coverage, and just isn’t a good system.
    “If the market was left alone, it would simply not be possible for many people to acquire affordable insurance. They would be uninsurable. Companies would cherrypick like mad.”
    If you look around on marignalrevolution there are a couple of posts on this topic which strongly suggest that cherrypicking is not a major market effect. You can lock in long term life insurance, the same could be done with medical if we wanted to set up the system that way. And you might note that my proposal isn’t effected much by this objection.
    “We also long ago realized that we need regulations regarding what insurance policies must cover because otherwise they would market barebones policies that don’t cover much and employers would buy the cheapest policies (and many individuals would as well, not realizing that important things are not covered).”
    This is almost self-refuting. Most employers offer well above the cheapest bare bones policies as is. And it certainly hasn’t been established that it bad to have less-than bleeding edge policies–in fact that will be a certainty under any universal system.

35. “You can lock in long term life insurance, the same could be done with medical if we wanted to set up the system that way.”
    Except that these are not comparable, since morbidity is a lot more volatile than mortality. And rating is allowed on life insurance; allowing for comparable mark-up to reflect individual risk in health insurance would put its cost out of reach for a significant portion of the population. The frequency of claims is also important because it creates constraints on the capital position of insurers in a way that life insurance doesn’t. Among other important differences.

36. Seb,
    For the record, I do health policy and bioethics for a living, and I have been following the discussion in the comments here with interest. You raise a lot of important points, many of which I agree (and I am an unabashed liberal in favor of UHC), but not this one:
    If you look around on marignalrevolution there are a couple of posts on this topic which strongly suggest that cherrypicking is not a major market effect. You can lock in long term life insurance, the same could be done with medical if we wanted to set up the system that way.
    The ardent libertarian focus of MR makes it a not entirely trustworthy source for this observation. It doesn’t mean they’re wrong, of course, only that we should take this claim with a grain of salt.
    And my own opinion is that this is an implausible view. Why, in a less regulated market, would health insurers voluntarily choose to include high risk subscribers in their pools? That doesn’t make any financial sense, and shockingly enough (for economists, that is) does not remotely reflect real world practices.
    Can you give some reasons why you (or the bloggers at MR, for whom I have great respect even while I seriously disagree with their views on health policy) have faith that in a free market, health insurers would be happy to include high-risk persons in their insurance pools?
    Even if we were to mandate coverage — a policy I’m guessing you are not likely to support — there’s still every incentive for insurers to identify and exclude or severly limit coverage for high risk subscribers.
    Your comparison between life insurance and health insurance is totally inapt, as life insurance is basically an investment vehicle, which is why life insurers continually raise the jaundiced eye of the SEC for essentially selling unauthorized securities.
    Health insurance is a completely different animal for a variety of reasons. Long term life insurance almost by definition begins with low risk subscribers because the vast majority are young and healthy when they begin to pay in. In addition, the payouts on life insurance are, at least compared to health insurance, relatively stable and predictable, and so the information asymmetries that so petrify health insurers are not quite as perilous for life insurers.
    All that said, you try getting life insurance if you are a 65-year-old diabetic, and see how fortunate you are. The same pressures that would make health insurance difficult to procure would make life insurance virtually impossible to get absent high premiums.
    Finally, why isn’t your proposal effected much by this objection?

37. “for comparable mark-up to reflect individual risk in health insurance would put its cost out of reach for a significant portion of the population.”
    Which is essentially your way of stating that you want health ‘insurance’ to be a wealth redistribution mechanism. You don’t want people with genuinely poor health to be paying more for their medical care than people who are, by luck or good lifestyle, much healthier.
    Understandable, I suppose, but this is not a function of insurance, which aims, as classically understood, to convert a particular individual’s 1% chance per year of a $1000 expense into a predictable $10/year expense. And which if it functions perfectly, on average doesn’t transfer wealth at all.
    So, let the market charge normal, actuarially justifiable rates for insurance, taking into account all available information, and then have an explicit welfare program to buy the insurance for the unusually sick/poor. Or is the problem here that you think it would be politically infeasible to make the wealth transfer that visible?

38. “Why, in a less regulated market, would health insurers voluntarily choose to include high risk subscribers in their pools?”
    The answer to this is so trivially obvious it beggars the imagination that anyone would ask it: Because in a less regulated market, insurers can charge high risk subscribers higher premiums.

39. Actually, it’s essentially my way of saying that health care doesn’t belong in that universe of goods/commodities provided by the *insurance* marketplace, for exactly the reason you outline.
    Speaking as someone in the insurance profession, I can see that, in terms of health “insurance”, the insurance companies add nothing of value. The cherry-picking, cost-shifting and delaying of payment is just the visible part of the faulty foundation on which commercial insurance is laid.
    If it can’t effectively spread the risk, whether because of the large asymmetries in health we’re talking about, or for other reasons, what do we need it for? I just don’t see what value it adds.
    What I want is some way whereby someone getting sick doesn’t subject them and/or their family to financial ruin.
    Your proposal for subsidies to help people buy private insurance doesn’t get rid of the extra cost, it just shifts the cost of ONLY the sick to the government. The poor are already on a plan that costs less than private insurance – Medicaid.

40. Brett,
    The answer to this is so trivially obvious it beggars the imagination that anyone would ask it: Because in a less regulated market, insurers can charge high risk subscribers higher premiums.
    Do you honestly think your interlocutors are stupid? Do you seriously believe I do not understand that insurers can charge high risk subscribers higher premiums?
    This doesn’t get the free marketist very far at all, because such subscribers very often cannot become subscribers at all because they cannot afford high premiums. They are priced out of the insurance market, which creates the very access to care problem we are discussing.
    Also, track the issue we were referring to, please. Sebastian asserted that a free insurance market would NOT result in insurers cherrypicking low-risk subscribers. This is, of course, exactly what they would do, and one of the means that they do so is by charging stratospherically high premiums for high risk subscribers.
    This, BTW, is also simply wrong:
    don’t want people with genuinely poor health to be paying more for their medical care than people who are, by luck or good lifestyle, much healthier.
    Understandable, I suppose, but this is not a function of insurance
    Classical HEALTH insurance does exactly this. The point of departure of social health insurance going back to Bismark was to make sure that health is not distributed according to desert. Accordingly, it is absolutely the case that a person may pay significantly more into the system than they will ever take out of it, or that others will receive significantly more than they ever put into it.
    It is understandable why libertarians hate it so, but this absolutely was the function of traditional social health insurance until commercial insurers entered the picture. Deborah Stone has a great article on this.
    I think you sometimes get a hard time here in the comments, Brett, so it’s understandable you take the tone you often do in the comments, but the principle of charity suggests your arguments would be much stronger if you did not assume your interlocutors are morons.

41. “Your proposal for subsidies to help people buy private insurance doesn’t get rid of the extra cost, it just shifts the cost of ONLY the sick to the government. The poor are already on a plan that costs less than private insurance – Medicaid.”
    How so? People who want access to cutting edge technology will be paying for insurance, those who don’t will let the government provide. I strongly suspect that will encourage lots of people to bother with insurance.
    Have we all lost sight of the fact that there are actual insurance companies now which actually provide care to people now? You seem to be arguing be arguing that insurance companies which provide medical care cannot actually exist. I assure you, I have a health care policy which is very good right now. It is indeed pricey, and there you are.

42. “Accordingly, it is absolutely the case that a person may pay significantly more into the system than they will ever take out of it, or that others will receive significantly more than they ever put into it.”
    Daniel,
    I would also add that the same economic principle, via different application, is at work in life insurance. That is, if one dies *early*, he or she takes (net PV) more out of the system than he or she put in. The opposite is the case if one dies *late*.

43. Sebastian,
    I assure you, I have a health care policy which is very good right now. It is indeed pricey, and there you are.
    But that’s the whole point. There are surely going to be some class of persons for whom health insurance would be unaffordable. Many, but not all of these persons are likely to be high-risk.
    So, unless we presume that every person for whom such private insurance is unaffordable is undeserving of coverage for health care, we have a policy problem. This, I presume, is why you are not a market absolutist, but I am still waiting to hear (from anyone, not necessarily you) how providing more market freedoms in the arena of health care will resolve this problem.
    Sometimes I wish more health policy thinkers and economists had really listened to Kenneth Arrow when he said over 30 years ago that markets are a terrible way to allocate health care because health care goods and services and health in general are so unlike other commodities.

44. The insurance companies are not providing any *care*. They are processing premiums and making payments. They are neither consumers nor sellers, just intermediaries.
    There are things your insurer doesn’t cover, no? Things like “cutting edge” and “experimental”. Have you analyzed the science behind each of their decisions to cover or not cover and are satisfied that they are based on sound science rather than insurance company microeconomics? Are you not free to pay extra above your premiums out of your own pocket for these things?
    What it comes down to is that we are going to have rationing in one way or another; we already have it. What a single payer plan would do is make it more likely that it is decided in a rational, economic matter what it maximizes our utility to cover universally. If you want and can pay extra for other things, you’re welcome to.

45. Something that I think needs to be considered is the health risk variance that a single individual will experience over a lifetime. It seems that people tend to take a mental snapshot of the population at a given moment in time, forgeting that the old were once young and the young will someday be old. Pooling the old and the young together is in no way unfair over time, because when you are young you may be putting more into the system than you will likely get out, but the inverse will be true when you are old. You, over time, have effectively paid for yourself. Your old self is not “stealing” from the young who coexist with your old self, but from your young self.

46. “There are things your insurer doesn’t cover, no? Things like “cutting edge” and “experimental”.”
    Absolutely. And other policies provide more or less access to that.
    Which is PRECISELY what I’m advocating. I’m suggesting that the government provide the floor of health care for everyone. I’m proposing that we do so in such a way as to not kill off the innovation machine which has made it non-ridiculous to say things like “what if an Alzheimers drug just came out and the government won’t provide it for seven years.”
    And by the way it isn’t at all obvious that the government won’t pay for an Alzheimers drug even at pretty darn high prices because it is likely to be much cheaper than paying for the care for the last 3-4 years of Alzheimers decline.
    My point is that by making it explicit that the government will often not pay for newer technologies, we encourage people to go into plans that will pay–continuing to spur advancement at the current very high pace. But we also provide a very high level of care for people who don’t have ANY now.
    Rationing happens under all systems. I’m suggesting that we create one which fulfills two important desires–the desire that all people have access to a high level of health care, and that the definition of a high level of health care continues to be raised at a very quick pace.
    Most of the discussion here wants to assume that ignoring the innovation question means that anything universal health care does is unlikely to change innovation levels. That seems VERY unlikely.

47. Sebastian, I like your ideas. You’re thinking about the underlying problems.
    I like the idea of government-funded health care for all residents. Allow any alternatives anybody wants to try — if you can get people to pay you to play the flute over their belly and literally put smoke up their *ss and such, then go ahead.
    When you accept the official health care you accept that you’re an experimental subject. For any treatment they might give you the default or they might try something they have reason to think is better, where “better” means more effective treatment or cheaper treatment or both. Don’t continue a new treatment beyond the point it looks worse in either way, or more expense than the improved results justify.
    Let the drug companies go ahead and sell their patented medicines to people who’ll pay for them, and keep careful records of how well they do. When the patents expire, use the generic versions for the general public if the test results are good enough.
    Keep careful records for the epidemiologists. Public health is worth a lot more than the money we’ve put into it. Nobody but the government puts much money into public health because nobody else has the incentive.
    We could make a good start toward providing improved healthcare for the whole population for considerably less than we pay now for part. With a change in emphasis we might learn to do a lot of preventive medicine. Sometimes it’s a lot cheaper to keep people from getting sick than to treat them after they get sick.
    Maybe the gateway function could be done partly by computerised interviews. Get to the website and punch in your symptoms, and they do triage. Get a lot of the useful information ahead of time. Persuade people to provide symptoms even when the victims don’t think it’s worth visiting the doctor, and more of the epidemiology might work out.

48. the definition of a high level of health care continues to be raised at a very quick pace
    I for one certainly wouldn’t want to live in a world in which only one Viagra clone was developed as opposed to the bountiful orgy of innovation we currently inhabit where we have two Viagra clones available and more no doubt in development.

49. Sebastian: Look people, the government already spends almost as much in GDP for health care as other countries.
    As the US government spends far more of its GDP on health care than any of the industrialized nations, I have to wonder where this impression you have came from.
    There may be marginal savings to be had by centralizing, but there aren’t enormous savings to be had.
    If the US spent the same proportion of its GDP on health care as, say, Canada does, then the savings would be a bit more than marginal (15.2% vs 9.9%).

50. Sebastian,
    It’s perfectly fair to try to adopt policies that would maximize both access to care and innovation (though there’s an obvious tension between them), and I actually don’t disagree all that much with your proposal.
    I have a question, however. You are presuming in your focus on innovation that such innovation has a significant impact on health. Studies of population health, however, almost uniformly show that public health and preventive medicine, which currently receive less than 5% of all health care dollars spent in the U.S., would have a far, far greater effect on mortality than acute care, including innovation.
    Of course, there is little money to be made in public health and preventive medicine, which is why industry doesn’t “waste” much time funding it. This leads to a second question, which is that I’m genuinely puzzled that innovation is so important to you, given your (absolutely correct) surmise that technology costs are a significant component of rising health care expenditures (as much as 40%).
    One primary factor driving such innovation is the fact that a lot of people make a helluva lot of money off of such innovation. It is far less clear that such innovation will have a dramatic impact on health.

51. Wow, a substantive discussion has broken out. Sebastian, I appreciate your response to my first comment and concede that you make some good points. I think, however, that you understate the degree to which the current level of government intervention in the health care market was directly necessitated by various critical failures of that market. We didn’t just wake up one day with our current patchwork, quasi-market system. Various measures and regulations were implemented over time in order to fix specific problems with our system brought about by market failures.
    Furthermore, I think you greatly overstate the relationship between our system of healthcare and incentives for innovation of new technology and drugs. Universal systems purchase the very same technologies and drugs that market systems do. If I create a new drug or new medical device, I’m going to make a whole lot of money selling it in Europe, Asia, Canada, Australia and every other universal system. The U.S. accounts for about a third of the global market for medical goods, which is huge and growing rapidly. If we were to convert to a single-payer system tomorrow, there would still be a massive global market for new drugs and technologies, more than enough to incentivize innovation. To deny that is to ignore the power of the market, not to embrace it.
    Moreover, a significant percentage of medical innovation (particularly the big breakthroughs) are the result of government-funded or charitable grants, not industry research. Drug companies are cautious with their R&D money and prefer to fund incremental steps that focus on common chronic ailments (Clariton Ultra!).
    Finally, the biggest factor effecting innovation is the state patent law. Slight adjustments in patent laws have a far greater impact on innovation than the socialist/free market breakdown of all the world’s health care systems. The key variables are the lengths of patents and the degree of incremental innovation reguired to qualify for a new patent. A drug company is only as good as its next patentable drug, so they will always have incentive to spend heavily on R&D. And if you make it harder for them to patent slightly modified drugs, you increase their incentive to come up with genuinely new ones.
    Anyway, I’ve rambled on long enough, but I think that drug companies have been remarkably successful in convincing libertarians and conservatives that any marginal decrease in their profit potential will cripple innovation. But that’s just not true. It’s industry propoganda. When patent laws were eased to allow more competition from generic drugs, that cut into pharma profits, but it actually led to more R&D spending.

52. “Sebastian: Look people, the government already spends almost as much in GDP for health care as other countries.
    As the US government spends far more of its GDP on health care than any of the industrialized nations, I have to wonder where this impression you have came from.”
    I think you’re confusing two different things. The United States people spend far more of their GDP (counting both private and public expenditures) on health care.
    The United States federal government ALONE spends almost as much (in percentage of GDP) on health care for the approximately 27% of the total population that it covers as Canada spends on covering the entire population.
    To cover the remaining 50ish percent (I have a bit more trouble getting precise numbers because it doesn’t involve government expenditures) that is covered by insurance costs a bit more than the government spends on its 27%. This isn’t an entirely fair comparison because Medicare has lots of end of life people.
    But the fact remains that the federal government already spends almost as much on health care (covering 27% of the population and leaving a large number of completely uninsured) as France does to cover the whole population.

53. Sebastian, I like your ideas. You’re thinking about the underlying problems.

    Ditto. I may not agree with everything you come up with, but then again, who does? It’s enough to get me to change some of my own thinking.

54. “One primary factor driving such innovation is the fact that a lot of people make a helluva lot of money off of such innovation. It is far less clear that such innovation will have a dramatic impact on health.”
    If that were true, why are so many here resistant to my 7-year old technology proposal? If you are correct, it would make a big difference anyway.

55. AL: Thanks for contributing here. One question:
    Furthermore, I think you greatly overstate the relationship between our system of healthcare and incentives for innovation of new technology and drugs. Universal systems purchase the very same technologies and drugs that market systems do. If I create a new drug or new medical device, I’m going to make a whole lot of money selling it in Europe, Asia, Canada, Australia and every other universal system.
    Who is going to be the innovator though when the government decides “we’ll pay you 5% over production costs and not a penny more”? The billions you spent on R&D? Too bad. We’ll give you Oh, $1.50 per dose.

56. I think you’re confusing two different things.
    Yes, you’re right. I realized that about two seconds after posting. Thanks.

57. “Universal systems purchase the very same technologies and drugs that market systems do. If I create a new drug or new medical device, I’m going to make a whole lot of money selling it in Europe, Asia, Canada, Australia and every other universal system. The U.S. accounts for about a third of the global market for medical goods, which is huge and growing rapidly. If we were to convert to a single-payer system tomorrow, there would still be a massive global market for new drugs and technologies, more than enough to incentivize innovation. To deny that is to ignore the power of the market, not to embrace it.”
    I’m afraid this is false both in the particulars and in the theme. If you create a new drug you will make lots of money on the margin by selling in Asia and Europe and Canada. That will be because making a small amount of money per pill (above production cost) is better than making none. You won’t be making back your research costs for that drug, much less all your failed drugs. You make that up in the US market.
    The US is about a third of the market for *all* drugs and devices (in numbers of pills and devices sold). It is almost half for new drugs and devices–often more depending on the particulars. And the prices here are what pays for the research costs. The rest of the world is free riding off our research profits. That is unfortunate, but I don’t know much about how to change that. My point in bringing it up is not to lambaste Europe or whine about the US, but only to point out that we can’t just assume that if we adopt an identical system to France that it will have no effect on innovation. If the sole major payer tries to adopt the stance of a free rider, the whole system breaks down.

58. Who is going to be the innovator though when the government decides “we’ll pay you 5% over production costs and not a penny more”?
    If this were to happen then yes, innovation would dry up. Fortunately, most governments understand that, and are not about to strangle the industry.

59. It is almost half for new drugs and devices–often more depending on the particulars. And the prices here are what pays for the research costs. The rest of the world is free riding off our research profits.
    If this is true, then it occurs to me that the US should regulate the prices lower in the US and let the rest of the world pay its fair share.

60. “If this is true, then it occurs to me that the US should regulate the prices lower in the US and let the rest of the world pay its fair share.”
    How will that work? If companies could get more out of Canada, don’t you think they would already be doing it? In the 1980s Canada threatened to break patents if drug companies wouldn’t sell at the cost Canada wanted. Why wouldn’t they just do that?
    One way we’ve tried to get that to work is by setting up trade programs protecting patents. That idea isn’t particularly popular among most of the liberals who inhabit the comments section here.
    And to those who say they like my ideas even if they don’t agree, thanks. Sometimes it feels like a dump-on-conservatives fest ’round here so a little encouragement goes a long way.
    And I’ll try to stay civil. 😉

61. Regarding pharma profit. I note that Pfizer’s drug Atorvastatin brought in $12.2 billion globally in 2005. I would hope that the R&D for the drug was a bit less than that.

62. Ah, I see from the same year (2005), Pzizer spent a total of $7.4 billion in R&D for all its potential products.
    Now I’m looking for their GL statement.

63. Pfizer reported profits of $11.4 billion for 2005.
    I can’t seem to find a breakdown of non-USA profits though.

64. “Regarding pharma profit. I note that Pfizer’s drug Atorvastatin brought in $12.2 billion globally in 2005.”
    That is a weird thing to just throw out there. Are you going to tell us the production cost (non R&D, just the cost to actually make the pills)? The shipping costs? Administrative overhead? Ongoing FDA compliance costs? I’m sure/hope that lots is profit, but certainly not anything like ‘all’.
    As for R&D, don’t forget to add the cost of acquiring biotech firms–essentially outsourced early research. I could be wrong, but I’m pretty sure that doesn’t show up in the R&D line item.

65. I think the free-riding problem is overstated. Because of the limited duration of patents, drug companies have a business model that requires constant innovation. Like I said, they are only as solid as their next big drug. We have passed legislation in the past that has cut into pharma profits significantly (e.g., laws allowing for more competition from generics). The reduced profits did not result in cuts in R&D spending. Quite the opposite.
    Yes, it is conceivably possible that the U.S. government could collude with other governments to utterly strangle the industry. But that’s highly unlikely (just look at how successful the pharma lobby was in structuring Medicare Part D). If the U.S. switched to a universal system like every other first world country, it would likely cut into pharma profits in the short term. But there would still be a massive, and growing, global market for drugs. There would still be plenty of incentive to innovate and create new drugs. Like I said, innovation is the central feature of the business model of these companies. They can’t not innovate. The second they stop, they go under.

66. The United States federal government ALONE spends almost as much (in percentage of GDP) on health care for the approximately 27% of the total population that it covers as Canada spends on covering the entire population.
    To make the US and Canadian GDP components comparable, I think you have to include ALL US government spending on health care: Medicare, Medicaid (including state and local), military, prisons (both state and federal), and employees (federal, state, and local). Not that it changes your point — by any reasonable measure, the US is paying for “socialized” medicine, we’re just getting a really, really bad version of it.
    Note that several countries — Switzerland and Japan for example — run their payments through private insurance companies. However, they do NOT allow them to take the 15% of every dollar that seems to stick to the hands of the US insurance companies.

67. I’m popping in and out, since real life is annoyingly intruding. However, fwiw: Medicare was started in large part because a lot of old people became unable to get insurance. Not unable to afford; unable to get. And this is because (second point, for Brett): it is not the case that insurers are willing to sell insurance to anyone, but just charge a higher price for higher risks. There are people they are unwilling to insure at all, and these people can get insurance, when they can, only because of various government-sponsored programs.
    Moreover, you don’t have to be all that risky to become one of these people. If insurers had a 100% certain, guaranteed-by-God sense of how risky you were, then I bet the market would respond appropriately. As things are, insurers do not have any kind of certainty about how risky you are, and since most money that’s spent on health care is spent on a small group of people, they really, really do not want to be stuck paying for those people. Thus, if you show any signs of possibly being one, you will often not be sold insurance at all.

68. Just saw your third comment. Atorvastatin brought in $12.2 billion. It isn’t their only drug. Profits were only $11.4 billion. They are obviously spending lots of money on lots of things. (And to anticipate the marketing objection, realize that companies rarely enjoy marketing unless it can increase revenue more than the marketing cost. So if you reduce marketing costs, sales dollars is very likely to decrease MORE. In terms of social utility–hooray. In terms of overall profit (spurring development) it probably doesn’t change the picture greatly, but to the extent it does the change is likely to be negative.

69. How will that work? If companies could get more out of Canada, don’t you think they would already be doing it? In the 1980s Canada threatened to break patents if drug companies wouldn’t sell at the cost Canada wanted. Why wouldn’t they just do that?
    WTO retaliatory measures?

70. “We have passed legislation in the past that has cut into pharma profits significantly (e.g., laws allowing for more competition from generics).”
    What exactly are you talking about here? You’ve said it twice, and for the life of me I’m having trouble figuring out what or when this was. Are you talking post patent? I know we changed the rules so that post-patent, generic companies could do certain things that didn’t get exactly the same drug, but which allowed them to avoid going through the whole FDA process again. But that is post-patent, so I’m not sure what you are talking about.

71. “WTO retaliatory measures?”
    Not likely at all under the current patent understanding. (I think impossible, but I’m hedging slightly).

72. They are obviously spending lots of money on lots of things.
    Yes they are. But 11 billion dollars is a pretty healthy annual profit margin, I would think.

73. Not likely at all under the current patent understanding.
    Then I guess the real question is why, if lower prices are the aim, has the Canadian government not simply invalidated the patents anyway?

74. I should just mention, Sebastian, that I’m not trying to nibble you to death here with these comments. I’m just not familiar with many of the facts around this issue.

75. One way we’ve tried to get that to work is by setting up trade programs protecting patents. That idea isn’t particularly popular among most of the liberals who inhabit the comments section here.
    Well, I think it’s one thing for the US to force highly restrictive IP regimes on, say, sub-saharan Africa in the midst of the AIDS epidemic, and quite another for us to try to get first world countries to go along (not to mention our closest neighbor and, IIRC, largest trading partner).
    That said, I’m sympathetic to the “the US is funding worldwide drug R&D” – although I would be more sympathetic to the pharmas if they weren’t constantly (i) gaming the patent system (though a recent SCOTUS decision may change that); and (ii) transfer pricing their way out of U.S. taxes.

76. “Then I guess the real question is why, if lower prices are the aim, has the Canadian government not simply invalidated the patents anyway?”
    Because they are getting them at close to marginal price. There isn’t any reason to stir up any hint of trouble at all when you aren’t going to be saving any money by doing so. Right now they could break the patents and not get much better prices. Why bother?
    “Yes they are. But 11 billion dollars is a pretty healthy annual profit margin, I would think.”
    Compared to what? For their capitalization that is healthy but not amazing. And compared to what is a very important question. Drug creation is a risky venture. If you can make the same profit at a lower risk business, you won’t be making drugs.
    Anonymous Liberal: “Like I said, innovation is the central feature of the business model of these companies. They can’t not innovate. The second they stop, they go under.”
    Yes. If they can’t recoup their research costs, they can’t do research. The fact that they go under if they stop innovating does not change it. All you are saying here is that if they can’t recoup their research costs they are going under. I know that. It is in fact a large part of my point.

77. “Well, I think it’s one thing for the US to force highly restrictive IP regimes on, say, sub-saharan Africa in the midst of the AIDS epidemic, and quite another for us to try to get first world countries to go along”
    The last time I saw the objections about IP raised here it involved the South Korean trade deal and efforts in Australia.

78. What exactly are you talking about here? You’ve said it twice, and for the life of me I’m having trouble figuring out what or when this was. Are you talking post patent? I know we changed the rules so that post-patent, generic companies could do certain things that didn’t get exactly the same drug, but which allowed them to avoid going through the whole FDA process again. But that is post-patent, so I’m not sure what you are talking about.
    You’re right. I said patent laws in my first comment, but what I was referring to are legislative moves that lowered obstacles to generic drugs entering the market. Things like allowing them to bypass the FDA process and states repealing anti-substitution laws. I’m having trouble locating it, but just recently I read an article comparing the growth in generic competition and the amount spent on R&D by big pharma, and the conclusion was that R&D spending had gone up as generic competition increased.

79. Sebastian, the biggest part of the expense for new drugs is the testing. Say you start with a chemist who takes an existing drug and figures out that he can add an acetyl group. He wonders whether that would have an effect. It’s pretty cheap for him to get the idea, and reasonably cheap for him to synthesise the new drug and confirm that his idea worked. At that point you go to animal testing, first to show it isn’t very toxic and second to find an animal model of the disease you hope to treat and see how well it works there. This costs more. Then there’s human tests, which are very expensive. And by this point you get a strong incentive for the pharma company to fudge the data. They’ve spent, say, half the expense already. If the results come out marginal they lose it. A moderate amount of fudging can make the difference between something that’s no better than the older treatment versus something that’s worth advertising.
    Suppose we transfer those testing costs to government. The animal experiments don’t take tremendous expertise, we could have giant facilities to do them, with technicians supervising partly-automated handling. That could be either government facilities or private contractors with random government inspection. It could be done mostly double-blind.
    And government is far better equipped to do human studies. The government would have hundreds of millions of test subjects available, with far better medical histories than commercial companies can get for prison or cheap third-world samples. The incentive would be to try new drugs particularly for conditions that we can’t adequately treat already, as it should be, as opposed to “better” treatment for well-heeled market share. And things the government chooses not to test (or rejects as probably inadequate) could still be tested by private companies and marketed under patent to whoever will buy.
    I don’t see quick innovation as a giant value, actually. For some things we have a tendency to come up with new inadequately-tested procedures just a little faster than they can be rejected. Like, we get a new treatment for clogged arteries to the heart, and it takes 5 years for the statisticians to show that it doesn’t actually lead to improved survival. But in the meantime we have 5 years worth of new treatments and it will take 5 years to show that they don’t give an improvement on average either….
    We need a level of innovation that we can pay for. If the top 0.01% of the population can afford to pay for a lot more innovation all for themselves, that’s OK with me but I don’t want to pay it for them.

80. If there is a “guild” for doctors, or a high bar for entry, or whatever, I see this as a good thing. I don’t want any guy off the street providing my health, I want someone thoroughly trained and tested. If that screws with “market forces”, I’m OK with that. Practicality trumps philosophy any day.

81. Yes. If they can’t recoup their research costs, they can’t do research. The fact that they go under if they stop innovating does not change it. All you are saying here is that if they can’t recoup their research costs they are going under. I know that. It is in fact a large part of my point.
    I completly agree, but I think you’re drastically overstating the fragility of the pharmaceutical market. If the U.S. market goes universal, there will still be a massive global market for pharmaceutical products (of which we’ll still be a big part) and there will still plenty of companies trying to make money in that market.

82. The last time I saw the objections about IP raised here it involved the South Korean trade deal and efforts in Australia.
    I should have been more restrictive in my comment and referred to “patent regimes with respect to prescription drugs.”
    But RE the prior discussion, were the objections to the currently ridiculous US copyright regime being imposed on such countries, or related to drug patents, or both/some combination?
    I really do think if the U.S. gov’t said to the G7 plus a few others “look, we’re tired of subsidizing you free-riders, so here’s what’s going to happen, we’re going to pay significantly less and each of you is going to pay marginally more, and we’ll all go on our merry way,” and meant it, it would happen (or, at least, before the whole Iraq thing it might have). We could back it up with a threat to remove our security umbrella if we had to (which we should do in certain respects anyway).
    Okay that last paragraph was just pure pontification w/o thinking about it, but that’s what these here intertubes are for.

83. “Say you start with a chemist who takes an existing drug and figures out that he can add an acetyl group. He wonders whether that would have an effect. It’s pretty cheap for him to get the idea, and reasonably cheap for him to synthesise the new drug and confirm that his idea worked.”
    This is wrong. In many cases synthesizing it isn’t cheap. And in almost no cases, confirming that ‘it works’ is cheap. The in vitro portion of discovering useful pharmaceuticals is horrific.
    “The animal experiments don’t take tremendous expertise, we could have giant facilities to do them, with technicians supervising partly-automated handling.”
    You’re completely wrong here. The animal testing takes an enormous amount of expertise. A constant worry among research scientists is that the in vitro work isn’t panning out because of poor in vivo work (though some of that is probably excuse making).
    And we all know that the human testing is amazingly expensive.
    Your government theory is subject to a serious choice problem. In the market, anyone who has a good idea and can find funding can research it. Especially early on, people closest to the project make funding decisions. The exact opposite will be true with government grant writing or whatever. The government can do good R&D (look at the space program) but it can’t do cheap good cheap R&D (again look at the space program). If you are looking for cost savings under the government when it comes to research, I don’t see any reason to believe you are going to find them.

84. “If the U.S. market goes universal, there will still be a massive global market for pharmaceutical products (of which we’ll still be a big part) and there will still plenty of companies trying to make money in that market.”
    Yes like the toothpick market–good sales, cheap prices, not lots of innovation. If you can’t pay for the innovation, it doesn’t matter how big the market is. If it is going to cost $50 billion to create an effective Alzheimers drug and you can only charge $500 a year per patient no one is going to spend 10 years trying to make it.
    Saying that they *need* to innovate to survive does nothing to help them survive if you make innovation something that they can’t pay for.

85. “I really do think if the U.S. gov’t said to the G7 plus a few others “look, we’re tired of subsidizing you free-riders, so here’s what’s going to happen, we’re going to pay significantly less and each of you is going to pay marginally more, and we’ll all go on our merry way,” and meant it, it would happen”
    I don’t really think so. Clinton pushed in that direction and got absolutely nowhere.

86. One other point, and I’d love to see some data on this if anyone has it. While pharmaceutical companies make a disproportionate amount of money selling their drugs in the U.S. (compared to other markets), I suspect that they also pay quite a bit more in marketing and sales. There are so many intermediaries here (wholesalers, HMOs, health plans, etc.) and a lot of money has to be spent wooing them and getting them to put drugs in favorable positions on their formularies. In other countries there are fewer gatekeepers that need to be wooed. If the U.S. adopted a similar system, the same would be true here, thereby reducing the need to spend money on this stuff.
    I don’t know if this difference would be enough to significantly affect the overall equation, but I’d love to see what the data says.

87. Saying that they *need* to innovate to survive does nothing to help them survive if you make innovation something that they can’t pay for.
    I never thought I’d say these words in my life, but I think you have too little faith in the power of the market. If the U.S. joins the rest of the world in adopting a universal system, it will not kill drug innovation. The profits that can be made on the global market are more than big enough to recoup research costs. The pharma industry will not take its ball and go home if we implement universal healthcare.
    Moreover, you’re still ignoring the fact that much of the innovation we see is the result of governmental or charitable grants, not industry-funded R&D. We can always take steps to increase such funding if necessary.

88. Sebastian Holsclaw @ August 22, 2007 at 04:33 PM: I’m suggesting that the government provide the floor of health care for everyone.
    I’m confused (not the first time, I know). How is this different than Universal Coverage?

89. AL, I already talked about that above, 6:02. 😉
    I think it almost can’t change the underlying dynamics unless the pharma companies are losing money on marketing (spending more on marketing than they gain on sales). But if that were true, they could just stop.

90. “The profits that can be made on the global market are more than big enough to recoup research costs.”
    This is a statement of fact, and it is wrong. The profits that can currently be made on the global market are not even close to breaking even on research costs.
    “Moreover, you’re still ignoring the fact that much of the innovation we see is the result of governmental or charitable grants, not industry-funded R&D.”
    I’m not ignoring it, you’re overstating it. Much basic science comes from the type of research you are talking about. Very little applied research does. I strongly reccommend reading Derek Lowe Look at the catagories on the right hand side and see what interests you. He has a many posts that are directly on that point. Try “Academia (vs. Industry)”.

91. Jeff, it is described as my #2 choice in my 12:47 post.

92. I think it almost can’t change the underlying dynamics unless the pharma companies are losing money on marketing (spending more on marketing than they gain on sales). But if that were true, they could just stop.
    I don’t think that’s true. The statistics that people like yourself cite regarding the breakdown of the global pharmaceutical market are based on gross sales. If it’s true (and I think it is) that companies have to spend significantly more marketing money per sale here in the U.S. (because of the structure of our system), then the U.S. share of the market is actually overstated. The money saved by reduced marketing costs in a universal system would, if I’m right, offset some of lost sales dollars.

93. This is wrong. In many cases synthesizing it isn’t cheap. And in almost no cases, confirming that ‘it works’ is cheap.
    This is (constructively) wrong. Why should we design drugs that are extremely expensive to synthesise? We have more cheap drugs available than we can test.
    By ‘it works’ I meant the synthesis process. It’s reasonably cheap to find out what yield you got of the desired product. Finding out whether you have a method to make a new untested drug reasonably cheaply is itself not all that expensive.
    “The animal experiments don’t take tremendous expertise, we could have giant facilities to do them, with technicians supervising partly-automated handling.”
    You’re completely wrong here. The animal testing takes an enormous amount of expertise.
    The animal toxicity testing does not take tremendous expertise. It just doesn’t.
    Animal testing on some related animal disease is far more problematical. We don’t do that for veterinary purposes, we do it to predict whether the drug will be effective in humans. This not only takes tremendous expertise, it doesn’t work. If the animal tests come out not-so-good you can punt at that point and avoid the expense of human testing. That’s all it’s good for.
    But if you’re the US government, testing on humans isn’t that expensive. You’re already keeping the records. You already have your victims lined up, with their disclaimers signed. It’s no big deal to do it double-blind. The only concern is that while you’ve done animal toxicity testing that implies the drug probably won’t hurt people, you haven’t done the usually-inconclusive animal testing that ideally would indicate that the new drug might work better in humans than existing drugs. This is not a useful expense, except that it’s required of pharmaceutical companies and they can use it to decide to punt. Again, I claim that this kind of expertise is similar to the expertise required of a horse-race tout or a political pundit.
    And we all know that the human testing is amazingly expensive.
    For pharma companies it’s both expensive and a moral hazard. For government it’s neither.
    In the market, anyone who has a good idea and can find funding can research it.
    In the research community, anyone who has a good idea and can find funding can research it.
    The government can do good R&D (look at the space program) but it can’t do cheap good cheap R&D (again look at the space program).
    The space program was designed to spare no expense to minimise casualties. The unmanned space program has some nice success stories about good cheap R&D.
    Pharma research is as expensive as it is partly because it has to jump through US government hoops designed to minimise harm to humans. One result is to put up great big entry barriers into this market. Only giant bureaucratic corporations can play. It *might* be that any other system would be as bad or worse, but that isn’t certain.

94. “The money saved by reduced marketing costs in a universal system would, if I’m right, offset some of lost sales dollars.”
    It absolutely would offset many lost sales dollars, but if marketing were negative (more per excess pill than they got out of selling the pill) they wouldn’t do it. So universalizing might save overall dollars, but it would still squeeze profit–effecting research.
    I suspect it isn’t a significant difference, but any difference would be the direction you don’t want.
    And if we wanted to save money that way, we could just kill off advertising.

95. This is a statement of fact, and it is wrong. The profits that can currently be made on the global market are not even close to breaking even on research costs.
    Just to be clear, when I say “the global market,” I’m refering to a market that includes the U.S. (post conversion to universal care system). I don’t mean just other countries.
    You can’t say that this statement is wrong because we don’t know how the U.S. system would be structured and the degree to which it would reduce overall pharma profits.
    Moreover, I think it’s highly simplistic to simply look at overall balance sheets presently and say these companies would not be able to recoup research costs if the U.S. went universal. Markets are far more dynamic than you give them credit for. If the U.S. system became more like other countries, a new equilibrium would be reached. Companies would adjust. There’s a lot of money to be made out there; the industry would not just dry up. Business models might change slightly, but there would still be a lot of people to sell drugs to and a lot of money to be made. And if innovation really was drying up, the governments of the world would find ways to incentivize it by extending patent laws, paying higher prices, funding more research, etc.

96. “By ‘it works’ I meant the synthesis process. It’s reasonably cheap to find out what yield you got of the desired product. Finding out whether you have a method to make a new untested drug reasonably cheaply is itself not all that expensive.”
    Again, you’re wrong, and in ways which make me think you don’t understand the process. It is incredibly common to require lots of tinkering with the drug even after tox testing. You don’t know if you have a good method first because you don’t have any idea if the compound you initially design is what you are really going to use.
    Furthermore, almost no one does the same mass production synthesis as you do in initial compound formulation. That often comes after phase II trials. So no one knows if there is a good/cheap mass synthesis because you are almost always using super-inefficient-but-tinkering-with-what-you-want small scale synthesis.
    “But if you’re the US government, testing on humans isn’t that expensive. You’re already keeping the records. You already have your victims lined up, with their disclaimers signed.”
    So you’re saying that the US will use radically diffrent protocols? Why not let pharma do it then?

97. “If the U.S. system became more like other countries, a new equilibrium would be reached.”
    What does this mean? If companies could squeeze more out of France and Germany, why aren’t they doing that NOW?
    “You can’t say that this statement is wrong because we don’t know how the U.S. system would be structured and the degree to which it would reduce overall pharma profits.”
    Well sure, if my plan won out we wouldn’t have to worry about it. I’m concerned because there are a lot of people who think that we can squeeze the drug companies at now real cost and they seem to be closer to making the policy than I am.
    “And if innovation really was drying up, the governments of the world would find ways to incentivize it by extending patent laws, paying higher prices, funding more research, etc.”
    Why do you believe this? My equally supported belief is that once you have people used to not paying for drugs, the typical anti-tax concept comes to the fore and you have serious trouble dumping the missing 3-5% of GDP that you cut out for ‘efficiency’ reasons.
    What other thing has that worked for? Bridge Maintenance? Ok, that was a cheap shot. But still. Why do you think that government run drug research is going to be more efficient than say military research?

98. You don’t know if you have a good method first because you don’t have any idea if the compound you initially design is what you are really going to use.
    But you can tell whether you got what you intended to get. If you choose to go after something else, that’s another decision.
    Furthermore, almost no one does the same mass production synthesis as you do in initial compound formulation. That often comes after phase II trials.
    That’s true. But my point was, you can synthesize the drug to test. And if that’s far too expensive small-scale, it’s a sign that you’re probably testing the wrong drug.
    So you’re saying that the US will use radically diffrent protocols? Why not let pharma do it then?
    For pharmaceutical companies it’s a moral hazard. For well-designed government programs it isn’t. Though it could be.
    My first quarter in grad school there was a woman who was doing biostatistics. She had a lab rotation with a medical researcher who was supposed to replicate a research project first done at Harvard. She was supposed to do data entry and statistics and in theory she was supposed to advise him on experimental methods. And in theory he was supposed to test the Harvard guys’ results in case something was wrong.
    But in practice he believed that he was more on trial than the experimental results, that if his results were different then the grant agencies would decide that he was incompetent. So each time a new child got added to the program he looked them over carefully and used his best clinical judgement to decide whether they were going to die or not, to decide which group to put them in so that his results would come out the same as the prestigious group. And he sure didn’t listen to her about it. She was just a grad student. She heard stories about the problems professional biostatisticians had dealing with medical researchers. She quit the program that quarter.
    So of course it isn’t just corporate empires that lie about statistics. But it should be possible to set it up so that the individual physicians who participate in human-use studies don’t have any particular vested interest in determining the outcome. And they can usually get their part of it double-blind. It’s at least *possible* to design a protocol that works, one which would be foolhardy to trust to pharmaceutical companies.

99. “And if innovation really was drying up, the governments of the world would find ways to incentivize it by extending patent laws, paying higher prices, funding more research, etc.”
    Why do you believe this?
    Well, I don’t particularly believe it. Suppose that the USA is spending more than we can really afford on pharmaceutical research. Then of course the rest of the world free-rides on us, they spend what they think they can afford and then they use our results too.
    And if we cut back funding to what we could afford, they wouldn’t pick up the slack, they’re already paying what they can afford. So pharma research gets cut back. Fewer new drugs. Smaller companies. Apart from antibiotics and our large handful of antiviral drugs, we’d just have to live with that. The rate of improvement in medical care might go down. Down to what we could afford. Selah.
    If we continued to lose the race to develop new antibiotics as fast as bacteria evolve antibiotic resistance, that would be bad. It’s happening already and it might happen faster. But we’re already losing. I remember when tetracycline retailed at less than 5 cents per pill. Get a new equivalent — supposedly better, less toxic but less effective — and it retails at $120 for a bottle of 20. People who can’t afford insurance can’t afford that. Even at insurance company discounts the economy can’t afford that. We’re already losing and we might save something by giving up.
    But why should we spend more than we can afford, to increase the rate of medical progress faster than we can afford it? If medical treatment improves at a rate we can afford, that’s the rate we need.

100. My equally supported belief is that once you have people used to not paying for drugs, the typical anti-tax concept comes to the fore and you have serious trouble dumping the missing 3-5% of GDP that you cut out for ‘efficiency’ reasons.
     Actually, your belief isn’t supported by the research. People in countries with a public healthcare system will generally support higher taxes if taxes will go to improving healthcare. See:
     http://www.aph.gov.au/library/Pubs/rn/2003-04/04rn57.htm
     The main quote:
     “Consistent with several international findings, most Australian opinion polls show public acceptance for higher taxes to pay for the popular broad-based items of health services and old age pensions. Health polls are unambiguous in the preference for higher spending and better services, reflecting healths character as a public good of enduring national, personal and electoral concern. While Medicare is a popular program there is clearly a base of public support for public money to be spent on improving the affordability of private options.” (Emphasis my own)
     The characterization of government healthcare as an attempt to gouge companies for whatever they’re worth does not appear to be based on any actual study of the stated policies of such government healthcare systems. Here is such a policy for your perusal:
     http://www.health.gov.au/internet/wcms/
     publishing.nsf/Content/pbs-pbpa-policies
     -contents~pbs-pbpa-policies-ch2
     (sorry about the broken link – just remove the line breaks)
     Note that in this policy, the starting negotiation point is a 30% profit margin for the pharmaceutical company, based on the companies’ own estimates of the costs involved in developing the drug. This is in addition to other subsidies for all forms of local development and research performed by the company.

101. seems to me that at the end of the day we have a value choice to make:
     in the stay-the-course corner, ably represented by SH, we have the pharmaceutical industry, which must be protected from the ravages of dealing with a single payer.
     in the system-must-change corner, we have 40+ million people without access to regular preventive care.
     Somehow, I think that when Big Pharma insists on receiving a particular price for a new medicine on the grounds that it needs to recover costs incurred on other failed products, and Uncle Sam refuses to pay, and Big Pharma refuses to sell, the taxpayer will insist on the drug being added to the formulary. I also suspect that the US will have far more success in cost-shifting to other Western countries when its negotiating position on formulary pricing has real bite.
     But even if you disagree, I’m still going with the 40+ million having better access. I think it’s profoundly and utterly wrong that other Americans must die and/or suffer unnecessarily so I can have access to the next newest drug. I’d rather have a shorter life than bear that burden.

102. I think Sebastian is correct in that innovation and the profit incentive are very important in driving research and development of drug; I think other people are underestimating how big money drives the R&D cycle, and how actually necessary it is.
     On the other hand, I not entirely convinced that the biotech industry will collapse or totally gutted. Yes, the super big money will be much less super, but I’m doubting that it will go away entirely or even substantially. There’s too much of a basic need involved here (life and health)…and when there’s needs and wants, people will figure out ways to innovate and make money.

103. Sebastian
     “One primary factor driving such innovation is the fact that a lot of people make a helluva lot of money off of such innovation. It is far less clear that such innovation will have a dramatic impact on health.”
     If that were true, why are so many here resistant to my 7-year old technology proposal?
     I cannot speak for anyone else here. Notice that I expressly said that your wish to maximize both access and innovation is understandable.
     If you are correct, it would make a big difference anyway.
     What would make a big difference anyway? Innovation? How so? Why? In what capacity?
     If I am correct, innovation would precisely not make a “big difference anyway,” at least not in terms of health. In fact, the single largest epidemiographic transition since the prima pestilentia took place, depending on when you want to begin counting, went from 1700-1940. Life expectancy in the West nearly doubled, and premature deathchild and adolescent death declined dramatically.
     It is almost universally accepted that chemotherapeutics had almost nothing to do with this shift. Even the assessments most friendly to pharmacoepia concede that its only observable effect took place in the last decade of this period, after the sulfa drugs were invented.
     This is only one of the many reasons for doubting quite seriously that maximizing technical innovation would have a substantial effect on population health.
     Accordingly, I cannot see how it truly would “make a big difference” to health if we maximized innovation.
     (And bear in mind, this is not an attack on innovation in an absolute sense, but merely a policy observation in the relative sense, that if my factual premise is correct — and I think it is — then it follows that allocating finite health care dollars to public health and preventive care makes far more sense than allocating such resources for innovation).

104. I’m neither an economist nor a medical professional, so my point of view here is more or less that of a layman. That said, here it is.
     First, people talk about “the market” as if it were some kind of intelligent demiurge. It’s not. It’s a convenient fiction, a term of art, used to characterize a subset of human activity, which is buying and selling goods and services. As far as I can tell, there’s nothing special about that category of human activity that privileges it above others.
     Second, when people talk about the goodness of the market, they are in general talking about a hypothetical ideal, which is to say a perfectly competitive free market. The conditions for such a market are:
     1. There are lots of small producers and consumers, such that none is large enough to individually have a significant impact on the others
     2. All goods are services are fungible — there is no product differentiation
     3. All producers and consumers know the prices set by all producers
     4. All producers have access to all necessary production technologies
     5. Any producer can enter or exit the market easily (low barrier to entry)
     6. It’s impossible for either producers or consumers to collaborate to influence market price
     In other words, the “free market” does not exist, at least for health care. Maybe for roofing nails or rubber bands. Not for health care. And, not due to government interference or other malign force, but due to the nature of providing health care. At a minimum, the barrier to entry is, correctly, relatively high.
     So, as far as I can tell, the “free market” does not, and can not, exist, at least in the case under consideration, and even if it did, I don’t see anything about market activity as a human behavior that gives it any higher priority over other kinds of human behavior.
     The measure of the goodness of how a group of people care for their health ought to be how healthy they are as a result. Not how much money was made as a result, or how efficiently health care was provided, or by what means it was provided. How healthy is the population under consideration. By that measure, we don’t do that well.
     I don’t much care if improvements come through “market based initiatives” — which is to say, by intervening in the buying and selling of goods and services to incentivize certain outcomes — through regulation, or through any other means you care to propose. Whatever works. The goal is to improve the overall health of the people who live in this country.
     The plain fact is that we spend a whole lot of money — an astronomical, and increasing, amount of money — on health care in this country, and for that expenditure we do receive a correspondingly astronomically high level of good health.
     Lots of other countries, especially OECD countries, manage to make a reasonable level of health care available to virtually all of their citizens without going bankrupt.
     If we wanted to, we could no doubt do the same.
     Thanks –

105. Sebastian, if you’re still around, here’s my basic problem with your logic. To hear you tell it, the pharmaceutical indrustry is incredibly fragile and any significant reduction in its profits would render these companies unable to fund R&D and innovation would grind to a halt.
     But that can’t be true. The global market for pharmaceuticals has increased significantly over the last few decades as more and more patent-protected markets have opened up. If you invent a patentable drug today, there are many millions more customers out there than there used to be. There’s much more money to be made.
     But somehow, even when the market was much, much smaller, drug companies were profitable and developed new drugs. If the much smaller global market of past decades was capable of supporting a functioning, innovating pharmaceutical industry, then the industry can’t be as fragile as you make it out to be.
     If the U.S. converted to a single-payer system and was able to negotiate lower prices for drugs, it would unquestionably reduce the profits of the pharma companies. But the worldwide market for drugs would still be enormous. The industry would adjust and a new equilibrium would be reached. Innovation would continue, just like it did in the past when the global market was much smaller.

106. Both the UK and French governments have a long track record of supporting important local industries – see the automotive industry in both countries. The French government is already subsidising Pharmaceutical R&D, as is the Australian government.
     The main pharmaceutical companies in both France and the UK, as far as I know, do not primarily sell their drugs to the US; their primary markets are local.
     The idea that, should the US reduce its drug prices, these pharmaceutical companies would a) lose their profitability and b) would not receive assistance from the government is highly unlikely. b), in particular, seems far-fetched, considering the traditional heavy involvement of the French government in prominent French industries.
     As a final aside, I think any discussion on which countries benefit most from other countries’ R&D should not just consider the flow of money, but the flow of labour. When it comes to R&D in most areas, the flow of labour is far greater into the US than out of it.

107. Sorry to double post.. but one more point.
     According to the 2004 OECD figures, the US spent %2.04 of its GDP on medicine. For France it was %1.39; for most other western countries, just over 1%.
     If the difference between the US total healthcare spending and the total healthcare spending of other first-world countries is more than 1 or 2 percent, this would suggest that the US could convert to a single-payer healthcare system, pay a similar share of their GDP to the pharmaceutical companies, and still come out ahead.
     I believe according to recent OECD figures, the US was spending 13% of GDP on health care, as opposed to the OECD weighted average of 10%.

108. The continued absence of any reference to Taiwan in discussions like this is interesting. Here we have a major industrialized nation which went from private insurance to national state coverage just over a decade ago, with plenty of data available on the state of the people’s health before and after, and does it ever come up? Not unless I mention it, as nearly as I can tell. 🙂

109. I admittedly may be way wrong here (really), but can someone show me a list of 10 great drugs from the last decade not developed by US (capitalist) pharma?

110. “The main pharmaceutical companies in both France and the UK, as far as I know, do not primarily sell their drugs to the US; their primary markets are local.”
     I don’t believe this is true. Name the companies please.

111. The answer to this is so trivially obvious it beggars the imagination that anyone would ask it: Because in a less regulated market, insurers can charge high risk subscribers higher premiums.

     I would like to point out, with all due respect, that this “trivially obvious” point is meaningful only if you think that every exchange of goods or services creates a market. That is not the case. In order for a market to exist, the flow of information between buyers and sellers has to be symmetrical. That doesn’t necessarily have anything to do with how the market may or may not be regulated.
     Spoiler alert: I’ve seen this movie before and I can tell you what happens next. Typically when I point this out to people, their immediate response is to misinterpret it as meaning that buyers and sellers have to be fair or honest with each other. This is fundamentally wrong. What it requires is that buyers and sellers be equally able and likely to lie or conceal. Or tell the truth if it works out better. In any event they have to have equal access to information about the goods and prices available. Otherwise it’s not a “market” in the first place.
     Since there is no way that information flow between buyers and sellers of health insurance (or complex pharmaceuticals) will become symmetrical for the foreseeable future, there’s no point pretending that — if only the gummint would get the hell out of the way — “market forces” would take care of any problems that arise. They won’t, because even with the kind of total deregulation Brett seems to be angling for, some of the requirements of a market are likely to remain absent.
     Again with all due respect, thinking otherwise is a basic misunderstanding of what distinguishes markets from other sorts of games. Invoking the possibility of market forces acting on US health care providers is pretty much just adding a pony to your wish list.

112. The statement I gave above, on reflection, may not be correct, so I’ll be more specific.
     The primary export market for UK pharmaceuticals is Europe, according to the ABPI:
     http://www.abpischools.org.uk/resources04/pharm_business/manubusch1pg2.asp
     56% of UK Pharmaceutical exports go to Europe, compared with 25% to the US.
     For France, 58% of Sanofi-Aventis’ sales are to Europe, as opposed to 24% to the US.
     So, my statement was incorrect under a strict definition of “local” as “domestic”. A correct statement would be:
     The British Pharmaceutical market as a whole, and the largest French Pharmaceutical company, make a majority of their export sales in Europe, and a quarter of their export sales in the US.
     While this is sales rather than profit, it also doesn’t include domestic markets. The point I wished to make – that European Pharmaceutical companies are not entirely dependent on the US – holds.

113. Extra correction: the Sanofi-Aventis number does include France, I believe. Still, Europe market bigger.

114. 
     I admittedly may be way wrong here (really), but can someone show me a list of 10 great drugs from the last decade not developed by US (capitalist) pharma?
     
     I’m sure these folk don’t think of themselves as US, but I couldn’t give you a nicely formulated list of drugs.

115. can someone show me a list of 10 great drugs from the last decade not developed by US (capitalist) pharma?
     Can we get a definition of “great drug” first? Can we also get a ruling on whether something developed in part with, say, an NIH grant is “capitalist?”

116. “That is not the case. In order for a market to exist, the flow of information between buyers and sellers has to be symmetrical.”
     Maybe you figure that’s the way markets ought to be, but markets don’t have to be ideal in order to exist.

117. Don’t remind me of the “really existing socialism”* of GDR fame (or infamy).
     *real existierender Sozialismus

118. Brett, you’re right, markets don’t have to be ideal to exist.
     Also, markets don’t have to be functional to exist.

119. I’m sure these folk don’t think of themselves as US…
     5 of the top ten largest pharma co’s are, in fact, not in the US.
     and, as far as drugs made by non US companies:
     Glaxo (Advair, Flonase, Paxil, Valtrex, Zantac, Zyban)
     Sanofi-Aventis (Ambien, Allegra, Plavix)
     AstraZeneca (Nexium/Prilosec, Rhinocort)
     Merck (Propecia, Singulair, Fosomax, Gardasil, Zocor)
     and those are just the drugs i recognize from advertisements or that i use myself, and that could reasonably be called ‘recent’. and of course, many of they all have dozens more.

120. s/many of they all have dozens more/most have dozens more/

121. “Glaxo (Advair, Flonase, Paxil, Valtrex, Zantac, Zyban)
     Sanofi-Aventis (Ambien, Allegra, Plavix)
     AstraZeneca (Nexium/Prilosec, Rhinocort)
     Merck (Propecia, Singulair, Fosomax, Gardasil, Zocor)”
     And as I said before, the place they make their research costs back is in the United States market. Having your headquarters in a foreign country doesn’t mean that you profits aren’t driven by the US market (this notion is obvious in debates about Chinese companies which export items to the US and should be obvious here too). And in fact they have a large research presence in the US too, so it isn’t even proof that the discoveries themselves are taking place in Europe.

122. And as I said before…
     obviously this list was a reply to OCSteve’s 12:41.
     the place they make their research costs back is in the United States market
     and i’m sure they’re plenty happy that we pay higher drug prices than any other country in the world.
     Having your headquarters in a foreign country doesn’t mean that you profits aren’t driven by the US market
     again, this was a response to OCSteve’s 12:41.
     and again, i’m sure Glaxo and the rest* is happy to charge people in the US more. and i’m sure Glaxo is happy to have people in the US defend their right to pay more. why, if they couldn’t charge us more, they’d have to charge someone else more. and that just won’t do.
     * who are apparently strong enough to tell the entire US health care system to go fnck itself on the question of lower drug costs for US consumers, but too weak to ask the European health care systems to charge more.

123. Maybe you figure that’s the way markets ought to be, but markets don’t have to be ideal in order to exist.

     Sigh… Does a horse have to be alive to “be” a horse? Suppose you claimed that a particular horse can “do” the things that horses do — like pulling wagons — but that it happens to be sleeping at the moment. Why is it unreasonable to point out that the particular horse lacks a discernible heartbeat? Especially if you are trying to sell the horse in question.
     I’m not looking for a Clydesdale in perfect health, I’m just looking for a not-dead horse. Your comment mistakenly assumes that a repetitive exchange of goods between agents has to approach efficiency. I was trying to do you a favor by pointing out that you had confused the concept of an “exchange” with that of a “market.” And yes, technically, information symmetry is akin to a market heartbeat. When it is absent you can be confident that there will be no invisible hand either.
     You demonstrated my point very well, thank you. I only wish some of the folks who are discussing the horse as though it were still alive would heed the lesson.

124. Thanks cleek. I confused the fact that R&D is happening here with the fact that the companies themselves aren’t actually US based companies.

125. why, if they couldn’t charge us more, they’d have to charge someone else more. and that just won’t do.
     I know, hunh!
     We give the world so much!
     For the health of the pharmaceutical industry, we pay more for drugs than everybody else. For the stability of global oil markets, we shoot more bullets than everybody else. For the profitability of the international financial markets, we borrow when no one else can. And yet we ask for so little in return — a nod of respect. An occasional “attaboy (or girl).” We’re Americans, and who better than us understands what it means to take one for the team?

126. The answer to this is so trivially obvious it beggars the imagination that anyone would ask it: Because in a less regulated market, insurers can charge high risk subscribers higher premiums.

     Well, yes, this is sort of the point. Health care, being something that people often die if they do not have, is something of a special case. If we decide that the holy splendor of The Market is so glorious that it should not be touched, we have decided that its hypothetical wonders are in fact more important to us than the lives of those who will die once they are priced out.
     You imply that those who disagree with you are missing a ‘trivially obvious’ point. They, in turn, rightly wonder whether you have missed the fact that quite a few actual human lives end when the ideal market functions smoothly.
     The fetishization of free markets is one of the things that most disgusts me about our current culture; like any other tools, they’re tremendously useful. They’ve taken on their own moral weight, however, and market-boosters treat any other values as heresy.

127. Whether a response to OCSteve or not, the point remains, those “non-US” pharma companies are doing their their research here and having their research paid for here. Which suggests that it bears some thinking what choking off the profit here would do.
     “who are apparently strong enough to tell the entire US health care system to go fnck itself on the question of lower drug costs for US consumers, but too weak to ask the European health care systems to charge more.”
     Despite the fact that you are being snarky, this is a very serious question. Please answer it. If they could get the European health care systems to charge more, why have they not done so?

128. Sebastian,
     those “non-US” pharma companies are doing their their research here and having their research paid for here.
     But this isn’t true. Clinical research is global. A higher percentage of such research is conducted in developing countries though marketed primarily for U.S. and Western consumers.
     They are doing their research in developing countries.

129. those “non-US” pharma companies are doing their their research here
     all, some, what percentage? do you have a cite for this?
     Which suggests that it bears some thinking what choking off the profit here would do.
     why do you demand that the US supply those profits ?
     how can conservatives demand that we keep the world healthy in one breath, while saying we have no responsibility to keep Americans healthy in the next?
     If they could get the European health care systems to charge more, why have they not done so?
     beats me.
     but, if the drug co’s were to lower costs in the US (for whatever reason), their profits would drop (maybe even to levels that mattered to their ability to do research!) and then the conservatives in the rest of the world could stand up and demand that the citizens of their countries pay more for drugs in order to keep the drug co’s fat and happy.
     i just can’t get over this idea that American conservatives are so dedicated to keeping Glaxo and AstraZenica flush with cash that they demand that we subsidize the entire rest of the world. you take as gospel the press releases of self-interested corporations when they say there’s no way they could possibly bring us the next Viagra without charging the US more than everybody else.

130. … [i failed to finish]
     does it ever occur to conservatives that companies will exaggerate (to put it nicely) the effects of something that they think will hurt their bottom line, even if it’s only in the short term ?

131. does it ever occur to conservatives that companies will exaggerate (to put it nicely) the effects of something that they think will hurt their bottom line, even if it’s only in the short term ?

     But what possible motivation could they have for distorting the truth, cleek?

132. “They are doing their research in developing countries.”
     Which countries are you talking about?

133. “why do you demand that the US supply those profits ?
     how can conservatives demand that we keep the world healthy in one breath, while saying we have no responsibility to keep Americans healthy in the next?”
     Excuse me? Didn’t I provide a proposal to make certain there weren’t any uncovered people in the US? It isn’t like I’m ONLY defending pharma companies. I’m trying to balance competing needs rather than pretend that waving the “we like morality” wand fixes all problems by itself. This is what makes these discussions so annoying. I spend hours talking about an idea to make sure that all Americans have access to health care while trying to also insure that we don’t gut the research market and I still get hit as if I just wanted those people to die on the street.
     ARRRRRRGGGGGHHHHHH!
     If you have an interesting proposal to force/convince Europeans to pay more for drugs, I’m happy to hear it. You don’t get to appeal to Bush’s bad diplomacy though. Clinton and Bush I both tried. Stating that it isn’t fair that the US pays more does absolutely nothing to change the problem. I mention the problem IN THE CONTEXT OF LOOKING AT WHAT IS WORKABLE IF YOU WANT TO COMBINE UNIVERSAL COVERAGE WITH THE HIGH PACE OF RESEARCH.
     This is NOT an argument in favor of failing to make sure that the currently uninsured have access to medical care.
     I’m so angry at this now.

134. cleek: i just can’t get over this idea that American conservatives are so dedicated to keeping Glaxo and AstraZenica flush with cash that they demand that we subsidize the entire rest of the world. you take as gospel the press releases of self-interested corporations when they say there’s no way they could possibly bring us the next Viagra without charging the US more than everybody else. does it ever occur to conservatives that companies will exaggerate (to put it nicely) the effects of something that they think will hurt their bottom line, even if it’s only in the short term ?
     Wanna bet that Sebastian will completely ignore this point in favor of developing an irrelevant line of argument about developing countries instead?

135. Sebastian: If you have an interesting proposal to force/convince Europeans to pay more for drugs, I’m happy to hear it.
     Cleek proposed it, in the comment that I just said I would bet you’d ignore.

136. That isn’t a proposal, that is at best a hope.
     And I can see that while the conversation was fruitful and interesting in the middle, it is has long since ceased to be.

137. I spend hours talking about an idea to make sure that all Americans have access to health care while trying to also insure that we don’t gut the research market and I still get hit as if I just wanted those people to die on the street.
     ok. maybe my use of “you” is sloppy. i’m not always referring to you personally. after all, i did write:

     how can conservatives demand that we keep the world healthy in one breath, while saying we have no responsibility to keep Americans healthy in the next?”

     you’re not obligated to respond for all conservatives, of course. and i suppose i could’ve been more specific about who i was referring to.
     If you have an interesting proposal to force/convince Europeans to pay more for drugs, I’m happy to hear it.
     the top sales guy at Glaxo walks over to the sales computer and sets the Canadian price 10% higher. why would they want to? because the US insurance companies have demanded that the US pay 80% of what they’re paying now (adjust the percentages however you like).
     it’s simply crazy for insist that we maintain a price floor because other countries are able to maintain price caps.

138. And I can see that while the conversation was fruitful and interesting in the middle, it is has long since ceased to be.
     then by all means, feel free to ignore me. sheesh.

139. “the top sales guy at Glaxo walks over to the sales computer and sets the Canadian price 10% higher. why would they want to?”
     Canada sets the prices, drug companies either comply or have their drugs substituted. Glaxo is NOT in charge of the price in Canada.
     And again, if they could do that, why have they not done that? Do you believe they don’t want higher profits?

140. Canada sets the prices, drug companies either comply or have their drugs substituted.
     what stops Americans from doing the same ? (other than lobbying by drug companies demanding that we don’t allow them to)
     And again, if they could do that, why have they not done that?
     i’m sure that at least part of the reason is because people insist that the US provide drug co’s with all the profits they can reasonably get away with. too much profit and Canada would demand even lower prices.

141. If it makes you feel any better, Sebastian, I think you’ve made many points worth thoughtful consideration and, in doing so, have contributed greatly to the discussion, which I have enjoyed reading. Even if I don’t necessarily agree with everything you’ve said, you’re not a d1ck.

142. If it makes you feel any better, Sebastian, I think you’ve made many points worth thoughtful consideration and, in doing so, have contributed greatly to the discussion, which I have enjoyed reading. Even if I don’t necessarily agree with everything you’ve said, you’re not a d1ck.

143. That isn’t a proposal, that is at best a hope.

     I believe cleek is invoking the possibility that if the US refuses to continue paying the price it is currently paying, the Europeans will choose to pay more rather than have the pharmas cut back on R&D. It may be an optimistic proposal, but it’s definitely a proposal.

     And I can see that while the conversation was fruitful and interesting in the middle, it is has long since ceased to be.

     May I offer a question before I run off to work? I would like to know why so many smart, reasonable people (IMO-YMMV) keep assuming that market forces can be taken for granted whenever goods or services are exchanged without regulation.
     Let’s cut to the chase and imagine an absolute minimal market. Four agents, one currency, one consumable resource initially distributed equally to two of the agents (A and B). Does everyone agree that in a true market, the ability of seller A to successfully demand a higher price from buyer C than from buyer D is constrained by mechanisms which we can opaquely refer to as “market forces” until we get around to defining them better?
     If so I’ll have another question later today. If not, I’d love to hear why not.

144. “i’m sure that at least part of the reason is because people insist that the US provide drug co’s with all the profits they can reasonably get away with. too much profit and Canada would demand even lower prices.”
     No.
     Canda is already demanding close to marginal cost. The threat they use is to allow some other company to make the drug(breaking the patent). You can’t push the price of the drug at or below marginal cost because then no one will bother making it (see Mugabe or Chavez on setting prices below production cost). Your threat is gone if you push the price below marginal cost because the no other company will pick up the production if you refuse to do it. So no matter the level of profit, Canada can’t demand ‘even lower prices’. Or rather it can demand them, but at that point they just won’t get any of the drug in question. (This can be gamed slightly with small amounts of drugs by tying high volume drugs to low and only manipulating the low volume drugs, but you can’t violate the principle on most drugs simultaneously because no company can lose money on the marginal cost for any period of time).
     “what stops Americans from doing the same ?
     Thus far, attention to the fact that pharma needs money to do research. Nothing ‘politically’ stops Americans from doing the same. Just like nothing politically would stop the US government from setting the price of California land at no more than $5 per acre or gasoline at $1 per gallon.
     But just because you ‘can’ do something, doesn’t mean that you can avoid the consequences of it. I pointing out consequences and I’m suggesting ways to mitigate them while still getting to certain goals (like covering everyone in the US). But saying that things aren’t fair, and saying that things should be fairer does nothing to address the consequences of doing things.

145. Nothing ‘politically’ stops Americans from doing the same.
     other than Bush’s prescription drug program. and the laws that prevent consumers from buying cheaper drugs from other countries.
     Thus far, attention to the fact that pharma needs money to do research.
     American insurance companies are volunteering to spend money to subsidize drug co’s research ? how generous of them.
     But just because you ‘can’ do something, doesn’t mean that you can avoid the consequences of it.
     again, i’m not buying the drug co’s dire warnings of “consequences”. you listen to any industry flack when regulations are proposed for that industry, and you hear the same story time after time: certain doom for the industry and consequently the consumers who depend on it. doesn’t matter if it’s regulations on safer homes in flood zones, or safer cars, or better inspections in food. the flacks whine to defend the status quo, and then the regulations pass, and life goes on.

146. I’m going to go out on a limb here: the prospect of possibly reduced pace of R&D in the future does not shock or appall me the way that current, avoidable misery among my fellow Americans does. Right now, many millions of Americans are suffering needlessly. We know it’s needless because essentially every other country in the industrialized world manages to avoid it. Even if I knew for sure that the pace of research would, say, be cut in half…i’m inclined to think I’d take the deal, because Americans are not or at least should not be the burnt offerings on the altar of R&D.
     It’s my conviction that in fact the pace of R&D would not slow, and might even accelerate in useful but currently unprofitable fields. But I don’t pin my belief in the desirability of universal health care (not universal insurance – insurance is not what people need, health care is; insurance is only a means to an end, one that’s failing more and more people) on that conviction. I’m just saying that it’s not worth my fellow Americans’ pain, shortened lives, and reduced quality of life to keep the research engines pumping at their current speed.
     And yes, in fact, this does mean that I’m being something of a Luddite, at least on some matters. The original Luddite movement said that not all economic gain was worth having at the price it extracted in independence, dignity, and security for those forced into subservient roles. There’s no inevitable force that compels us to accept every sacrifice thrust upon us. We Americans are paying into a bad bargain on health care, and it’s time to stop paying it. Drug research is an active good, but it is not the only good, and if it can be had only at the price of perpetuating our current system of national neglect, then it’s too high a price.

147. This 2003 study (PDF) actually has Japan with the highest prices with the US second.
     They also make some other interesting points:
     -Americans use generic drugs more often and generics are cheaper in the US than all the other countries in the study except Canada, which was on 6% cheaper.
     -The exchange rate makes up a big chunk of the difference. When the Canadian dollar declined in the 90s it “accounts for 19 percentage points of the 33% Canada-U.S. price differential”.
     -“when drug prices are compared using GDP purchasing power parities, which standardize for cost-of-living differences, the Japan-U.S. differential disappears and the Canada-U.S. differential shrinks from 33% to 14%”.
     On the free market:
     “Our study suggests that the overall distribution of drug prices in the U.S. is more conducive to innovation,” Danzon states. “Under our market system, the prices in the first years that a product is on the market are relatively high. Those first few years have the biggest effect on a drug manufacturer’s incentives for research and development (R&D), because R&D decisions are based on the discounted present value of expected revenues over a drug’s life cycle. What happens after the patent expires isn’t very relevant. Branded drugs then lose market share to less expensive generics, and the drugs become cheaper for consumers. But that doesn’t have much effect on incentives for R&D.”
     In regulated markets, such as those in many European countries, “there are weaker incentives for investment in R&D because revenues early in the product’s life cycle are lower and more of total drug expenditure is spent on costly generics,” says Danzon. “In Europe, some have argued for freeing up “budgetary headroom for innovation.’ What they mean is they should spend less on older products so they can spend more on newer products in order to encourage innovation. Politically, however, this is hard for many countries to do.”
     On sharing the cost of R&D:
     “The dilemma is, how should the joint costs of R&D be allocated across countries? The economic answer … is that if the objective is to maximize social welfare, then the global joint costs should be recouped through price markups over marginal cost that differ based on income levels, assuming that income is a major determinant of ‘true’ price elasticity. Thus, price differentials that are related to income would be consistent with both economic efficiency and equity,” the authors write. As their study shows, this is indeed what is happening: Manufacturers’ drug prices generally correspond to differences in countries’ income levels, with the exception of Mexico and Chile.
     The study was sponsored by Merck but the author notes that there is only one source for the data. It certainly seems to favor the industry, but it was also peer reviewed and published in Health Affairs.

148. I confess I find this thread bizarre.
     New drug development is so important that the status quo must be maintained despite broad dissatisfaction and demonstrable evidence of gross inefficiencies.
     Evidence in favor of maintaining the current system: Primarily, testimony from drug company officials who are not under subpoena.
     Alternatives to the current system summarily dismissed: changes to US patent system, changes to EU/other Western patent systems, changes to manner in which primary drug research is funded, reliance on market and public pressures in this and other countries to pay premium prices on approved drugs to fund ongoing drug development.
     Consequences of maintaining status quo: SH, and I, get access to drugs not yet developed, but 40+ million Americans continue to access American health care system through the emergency room.
     As I said, bizarre.

149. Thus far, attention to the fact that pharma needs money to do research.
     (let me save you the trouble)
     yes, insurance companies do negotiate for lower prices. and yes, entire countries have more bargaining power than single insurance companies, so they’re able to get better prices. and yes, companies do need to make money, so if they can’t get enough from other countries, they have to get it from us.
     but, it’s not our fault that they’ve negotiated bad deals with other countries. it makes no sense that we, as a country, should offer to fund what the rest of the world uses. so i propose that we should be allowed to apply the same leverage in negotiation that other countries do: negotiate as a country, not as a collection of independent retailers and insurance companies.
     and as far as breaking patents… that’s a road i’m sure most developed countries don’t want to go down. we can break their patents as easily as they can break ours.

150. Beautiful summary, Francis.

151. So, to sum up:
     1) We can have cheaper health care in the US with universal health care.
     2) That would, sadly, depress the profits of the pharmacuetical companies, whose entirely livelihood and drive to create new and better drugs rests solely on the US overpaying.
     3) Ergo, we need to continue overpaying, to keep the pace of innovation continuing.
     Yeah, I’m thinking “No”. I say we switch to universal health care, ignore the screams of the pharmacuetical giants, and see what happens. If it turns out that, indeed, there was a nugget of truth in their claims that the US was subsidizing innovation (something I rather doubt, but I suppose it’s possible) then I’m perfectly happy to use some of the money we save by switching to universal health care to vastly increases the number of grants the US hands out for drug development.
     Frankly, I find it amusing how easily some swallow the claims of pharmacutical companies. Show a little skepticism, guys. At least admit that they have every incentive to exaggerate the hit.

152. Sebastian,
     They are doing their research in developing countries.
     Which countries are you talking about?
     Various countries in Africa — Uganda, Kenya, Malawi, to name but a few, and others in SE Asia, like Thailand and Indonesia. Frankly, this is not seriously disputed. Pharma says as much.

153. Shifting gears a bit here – it seems to me the pharmaceutical market discussion has been hashed and rehashed.
     I’d like to return to the topic of for-profit medicine’s lack of incentive to promote preventive care. Obviously, the goal of a profit-oriented enterprise is to sell more of its product. But, where health care is concerned, selling more shouldn’t be the goal. The real goal is to have a long-lived, healthy population. If preventive care, which is far less expensive, can further that goal, would it make sense to have some form of universal preventive care, given that preventive care seems to be largely ignored under existing market dynamics? Would greater health education in our public schools be a prerequisite for such a system, given that preventive care usually requires initiative on the part of patients before an ailment forces them to see a doctor?
     (As an aside, I’ve believed for some time that the basics of economics and personal finance should be taught in schools far more than they now are. I think the same may be said of general health education. Knowledge of these two subjects, I think, would make individual members of our society better able to manage their own lives, and providing that knowledge would pay great dividends to our society as a whole.)

154. Daniel, to my knowledge there is not a significant amount of research being done in those places. If you have a cite, please share it.
     Francis, your summary would be better if I were arguing for the status quo. Since my proposal would be a significant change, it isn’t a good summary.

155. SH: your significant change has about as much chance of becoming law as I do of being the next California Senator, ie, zero.
     Do you really think that the AARP would allow a 2-tier system to get through Congress? Or the SIEU? Or any of the grassroots organizations that would spring up out of the ground outraged by the idea that, with regard to pharmaceuticals only, the govt program would be substantially worse than private programs?
     Since you usually demonstrate a certain amout of political awareness, I’ve been assuming that you’re proposing this utterly delusional idea as a stalking horse for protecting the status quo.

156. Sebastian,
     I’m sorry, but you are wrong, and the trend is towards increasing globalization (because it is cheaper and there is a much less established regulatory infrastructure in the developing world). Here’s a 2005 article:
     “Still, it’s an attractive market for pharmaceutical companies. Gary Stiles, M.D., executive vice president and chief medical officer of Wyeth Pharmaceuticals, estimates that his company currently focuses about 20% of its research and development studies in countries outside the developed countries of Europe and North America. However, within the next 2 years, the company plans to shift this percentage to up to 40%, and other companies are following suit, he added. GlaxoSmithKline also intends to boost its drug trials conducted in countries outside the United States and Europe to 50% in the next 2 years, up from 29%.”
     This 2004 article indicates that 20-30% of clinical trials are conducted in developing countries. I can assure you this number has only increased since then.
     I respect both your views and the manner in which you articulate them, but I do this stuff for a living, and I am extremely familiar with the literature and the practices. I have conversations with pharma people about this every week. They do not deny either the significant portion of clinical trials conducted in developing countries, nor the trend towards increased usage of such communities.
     Clinical trials, like many big moneymakers, have gone global.

157. “I’ve been assuming that you’re proposing this utterly delusional idea as a stalking horse for protecting the status quo.”
     I see.

158. “Do you really think that the AARP would allow a 2-tier system to get through Congress?”
     We’d better hope we can deny them a choice in the matter; The AARP has no interest in research into any medical condition which will take longer to come to fruition than it’s members have left to live. They have a VERY short time horizon. And most of us are not that old, and desperately need cures for those conditions to be available when, in a few decades, we inevitably develop them.
     The AARP is the enemy of all who live, and plan on doing so for a substantial time yet.

159. Um, given that one can join the AARP at the ripe old short-horizoned age of 50, in a country where the average lifespan is still some two decades longer than that, I suspect you don’t have the slightest idea what you’re talking about here, Brett.

160. I’ve been assuming that you’re proposing this utterly delusional idea as a stalking horse for protecting the status quo.
     How about taking it down a notch, yes? This is a comment thread, not a legislative session. Even utterly delusional ideas can be tossed around without necessitating bad faith.
     Since I’ve delurked and the subject has come back around to it, I might as well say that I think Sebastian Holsclaw’s option number 2, as described, has the critical problem that it encourages those who can afford private insurance to de-invest from the general plan, effectively killing it by slow poison. Since the conversation hasn’t really dwelt on it much since then, I’m assuming for now that it’s a bug and not a feature.

161. Daniel, your clinical trials evidence so far is not very strong. First, your 2004 article looks more like a puff-us-up piece than a verifiable source. And your 2005 piece doesn’t make sense in terms of the outlays (the research dollars are about that of one major company). Second there is an enormous difference between ‘some clinical trials’ and general research. When fewer than 1 out of 100 compounds even get to clinical, even if it were true that 20% of clinical was taking place in other countries, that wouldn’t be anything like 20% of research being done in other countries. The vast majority of research is being done in developed countries, most of that in the US.

162. Sebastian, remember that clinical trials are insanely expensive for private companies to do, and they’re less expensive in third world countries.

163. “has the critical problem that it encourages those who can afford private insurance to de-invest from the general plan, effectively killing it by slow poison. Since the conversation hasn’t really dwelt on it much since then, I’m assuming for now that it’s a bug and not a feature.”
     I’m not really sure what you mean, but if I can offer a slight elaboration I think I can fix what you might be alluding to. Say the government program costs $X per person on average. If someone opts out and gets their own coverage, they get say about 60% of X in a tax rebate. That way the incentive for cutting edge care is balanced in such a way as to not drain the general tax base of the government program even if there is adverse selection pressure.

164. “Um, given that one can join the AARP at the ripe old short-horizoned age of 50, in a country where the average lifespan is still some two decades longer than that,”
     Closer to three, but so what? Yeah, you can join at that age. Plan to?
     Even supposing that the average age of AARP members was exactly 50, (It’s probably 60 or more.) that would still give AARP members reason to discount future medical progress much more steeply than the average American.

165. So the Boomers are too old to care, and the Echo Boomers are too young to care, leaving the small Gens X and Y as the only age demographic to care. Given the thread, only some of us even care (assuming you’re all somewhere around my age – 30 to 50). So screw it. Who needs all this new medicine, anyway?

166. If people want the latest key indicators from the OECD, they are available in the following Excel file:
     http://www.oecd.org/dataoecd/46/36/38979632.xls
     The US spends 15.4% of its GDP on healthcare – the nearest other country is Switzerland with 11.6%.
     The US spends 12.4% of this value on Pharmaceuticals, which is actually a much lower percentage of healthcare spending than many other OECD nations (for example, Korea spends 27%), and similar to many others.
     Overall, this means the US percentage of GDP spent on pharmaceuticals is 1.9%, which is significantly smaller than the gap between US healthcare spending (as a percentage of GDP) and other OECD nations.
     Now, should the US switch to a universal system, the amount of pharmaceuticals sold will probably increase by quite a bit. However, since the R&D cost doesn’t change with the number of pills sold, the US could negotiate a reduction in price while still delivering the same amount for pharmaceutical companies to spend on R&D.
     Since the amount spent on Pharmaceuticals by the US is (a) not out of the ordinary by world standards and (b) much smaller than the gap between overall US spending and the spending of other countries, I’m not sure why pharmaceutical costs are playing such a role in the discussion of healthcare systems.

167. the US could negotiate a reduction in price while still delivering the same amount for pharmaceutical companies to spend on R&D.
     no, haven’t you read the thread? there’s no way they could afford any price reduction!

168. OK, again, 60 is not all that old these days — most of the 60-year-old people I know are still pretty darned active. But more importantly, I mean . . . do you actually know any old people, or AARP members? Because I do, and I can promise you that not a one of them wants to live out their last years as an invalid, or slowly wasting away, or succumbing to dementia. Not one.
     So if you’re getting this idea from somewhere because, “I think this is the way it should be” or your rear end, make with the cites.

169. Closer to three, but so what? Yeah, you can join at that age. Plan to?

     Already did.
     Any more inadvertently insulting wisecracks to make or toes you want to step on?

170. The AARP is the enemy of all who live, and plan on doing so for a substantial time yet.
     Gee. Who knew that getting a discount on hotel rooms would make me an enemy of all who live?
     FYI, I plan on living quite a while, insofar as that is something one can plan, which it isn’t.

171. Quite a thread. A couple of quick comments.
     If they could get the European health care systems to charge more, why have they not done so?
     Because we are so freaking easy.
     Even if I don’t necessarily agree with everything you’ve said, you’re not a d1ck.
     My personal mantra concerning anything Sebastian cares to write, here or anywhere.
     I liked your suggestion #1 way upthread.
     I also liked hairshirthedonist’s suggestion that public policy focus on preventative care. The easiest dollar you will ever make is the one you don’t spend. Plus, and more to the point, everybody will just feel a whole lot better.
     But, where health care is concerned, selling more shouldn’t be the goal. The real goal is to have a long-lived, healthy population.
     Thank you.
     The pharma industry will take care of itself, and will most likely do so quite handsomely. More power to them.
     Public policy should focus on public health. When I say “public” I mean “people”.
     Thanks –

172. no, haven’t you read the thread? there’s no way they could afford any price reduction!
     I’m in ur Threadz, questionin ur assumptionz 🙂

173. Brett:
     “The AARP has no interest in research into any medical condition which will take longer to come to fruition than its members have left to live.”
     Most peculiar, Mama!
     I have no idea what this means.
     Surely, the AARP wants to outlive its current members which, ipso fatso, as Archie Bunker, the now deceased AARP member, might say, means that they will continue to acquire new members, including, if you so choose, you, Brett …. your choice.
     So it would follow that they would maintain kind of a rolling interest in medical conditions and cures beyond the time left for say, baby boomers, who are scheduled, judging from the cover photo of Goldie Hawn several years ago, to emerge from the unfortunate end of the demographic python looking pretty hot.
     I mean, I have one word for you …. collagen!
     Plus, who will pay AARP membership fees after they lose interest in the geriatric maladies of the future codgers, those currently under the age of 50?
     I would like to see an article in the AARP magazine entitled “Is There Viagra After Death, Or Is That Just A Case of Advanced Rigor Mortis?”
     I’d also like it if they included guitar tabs for the latest bands.
     I can do without a detailed analysis of Ringo Starr’s latest colonscopy and I find the melanoma profiles in courage to be depressing.
     Ditto the prune recipes.
     My wife thought the centerfold of Paul Newman wasn’t revealing enough.
     As for me, when do they interview Elizabeth Hurley?
     I wonder what would happen if Larry Flynt bought the AARP publishing empire?
     Phil:
     “I mean, do you actually know any old people … or AARP members?”
     I know some old people. I’m also an AARP member. What do those two things have to do with each other? 😉
     Actually, I’m on probation with AARP because of chronic immaturity.

174. Sebastian,
     Your opposition on this point is strange. Being somewhat of a libertarian and committed to some notion of free markets, what possible economic reason would there be for industry to shy away from conducting clinical trials in developing countries?
     It is beyond dispute that it is significantly cheaper for them to do so than in the U.S. Why would they not do so?
     Frankly, your position to the contrary does not make much sense.
     As for the two articles, this is a blog comment, not a paper. You asked for some citations, and I supplied some. One of the two articles quoted pharma officials themselves for the proposition that clinical research in developing countries is growing by leaps and bounds, and that brand-drug manufacturers were planning to increase the number of trials by as much as 40%.
     Obviously, this establishes a trend, not an absolute percentage, and I cited it for this reason exactly, as a minor counterpoint to your empirical assertion. If it were the case that industry overwhelmingly preferred conducting research in the U.S., why exactly would they be expanding at such a rapid rate in developing countries?
     Naturally, it isn’t logically inconsistent for industry to be devoting large percentages to research in the U.S. and upping the proportion conducted in developing countries, which is why I assuredly identified the article as evidence of a trend, a rate, rather than an absolute proportion.
     But it still undermines your empirical assertion.
     The second article — written by an individual in a developing country — gives a precise number, which is 20-30% in developing countries.
     Your 2004 article looks more like a puff-us-up piece than a verifiable source.
     What kind of a criticism is this? Does the fact that its author is in favor of having industry sponsor research in developing countries invalidate the empirical claim cited? That would be absurd, given that the ethics and policy literature is replete with authors from developing countries who consider clinical research desirable and wish to promote it in their country.
     At most, it might be a reason to be skeptical of the author’s claims, which is fine, but you seem to use this fairly mild argument as justification for rejecting the entire empirical claim, which is thin reasoning, IMO.
     I see little in the article to justify dumping his claim entirely, especially because it coheres with the growth trend you (wrongly) seem to think is irrelevant.
     I can assure you I am quite aware of the difference between “research” and “clinical trials.” However, industry funds very little basic research. As several commentators in this thread have pointed out, basic research is largely subsidized from the public fisc, with industry reaping the advantage in using the results in clinical trials.
     I just reported to CMS that approximately 70% of clinical trials are industry sponsored (an industry official was cited in a 1999 GAO report for the proposition that 80% of clinical trials are funded by industry). This is the “research” that is most relevant to this thread, because we are discussing the rent-seeking behavior of industry and its effect on health care expenditures.
     Of these industry-sponsored clinical trials, what percentage are funded in developing countries? A substantial percentage. A steadily increasing percentage.
     In truth, the exact numbers are impossible to estimate because industry is not required to report to FDA how much research it conducts in developing countries. But I have seen little credible evidence suggesting that this percentage is “insignificant,” which is essentially what you asserted, nor that the trend is characterized by anything other than sharp growth since the late 90s.
     Now that I have more fully explained my position, do you have any evidence supporting your assertion that “there is not a significant amount of research being done in developing countries”?
     Perhaps we can come to this agreement: for the sake of argument, I am perfectly willing to concede that most of “research” writ large is conducted in developed countries, if you are willing to concede that a “significant” and growing percentage of clinical trials are conducted in developing countries.
     I tend to think industry is more concerned with the latter inasmuch as that representes the greatest opportunity for them to shrink costs and expand margins.

175. Actually, I’m on probation with AARP because of chronic immaturity.

     Wrong chapter. Try mine.

176. “However, industry funds very little basic research. As several commentators in this thread have pointed out, basic research is largely subsidized from the public fisc, with industry reaping the advantage in using the results in clinical trials.
     I just reported to CMS that approximately 70% of clinical trials are industry sponsored (an industry official was cited in a 1999 GAO report for the proposition that 80% of clinical trials are funded by industry). This is the “research” that is most relevant to this thread, because we are discussing the rent-seeking behavior of industry and its effect on health care expenditures.”
     No. There is a huge and expensive preclinical phase. Most drugs (at least one in 50) never even make it to clinical trials.

177. Most drugs (at least one in 50) never even make it to clinical trials.
     ???????
     1 in 50 = “most” … makes no sense whatsoever.
     Did you mean to say that only 1 in 50 drugs does make it to clinical trials?

178. Say the government program costs $X per person on average. If someone opts out and gets their own coverage, they get say about 60% of X in a tax rebate. That way the incentive for cutting edge care is balanced in such a way as to not drain the general tax base of the government program even if there is adverse selection pressure.
     It’s good to see that you’re thinking about solutions to the problem, but I’m not sure you have a broad enough picture of the problem.
     What I read from you is that the government essentially issues every resident a .6X health care voucher, which can be redeemed either with the government plan for an additional .4X credit or be taken out to private insurance. Fair enough?
     The first problem is that the government plan would be constrained to accept all applicants (that being the whole point of this exercise), while private plans would not. At inception, the per-person cost of the same level of service to a private insurer who can cherry-pick policyholders either directly or by pricing out high-risk applicants will necessarily be less than 1X. If private insurers can afford to assume coverage of even a small fraction of the general population at that ratio, the ratio will immediately begin to drop as the lowest-cost members of the government plan switch out. I can see you making an argument that the ultimate ratio of costs incurred for the same per-person coverage by an at-will insurer to those incurred by the uninsurable remainder would (a) come to an equilibrium (b) greater than .6, but that argument would be unconvincing without some concrete math in support. Even granting both points, though, what you’re suggesting is difficult to distinguish (at least so far) from a government subsidy of the current, dysfunctional system.
     Speaking of the current system’s dysfunctions, you’re also ignoring the incentive for medical providers and insurers to collude. You can see the effects of this in the current system that charges the uninsurable more for the same level of care than it does insurers. I see nothing in your plan, as described, that addresses this problem. It’s entirely likely that you just hadn’t gotten to it yet. Would you regulate that health care must be offered at the same price to all payers, public and private? Consider that under your system, insurers have the additional incentive not just to lower their own costs but to sandbag the government program as much as possible and that depending on how you craft your regulations, medical providers may well fall on wrong side of the fence as well.
     Not to be all about the nitpicking, I would suggest that if you want to advance a two-tiered approach, you might consider defining private insurance as supplementary, not alternative. Sticking with your value of the 7-year innovation horizon, let’s say that government care is the sole coverage for all drugs and devices that have “aged out” of the 7-year protective window, and that individuals can buy insurance that kicks in only for those procedures.

179. Two minor corrections:
     1) On re-reading, I see that your plan for a tax credit is actually worse than the voucher option because those who can get private insurance at less than .6X will actually reap a net cash reward for de-investing.
     2) government care is the sole coverage for all drugs and devices that have “aged out” of the 7-year protective window, and that individuals can buy insurance that kicks in only for those procedures. Not that I think anyone’s confused, but ‘procedures’ should be ‘drugs and devices’ again.

180. Sebastian,
     No. There is a huge and expensive preclinical phase. Most drugs (at least one in 50) never even make it to clinical trials.
     Okay, how exactly does this support your claim that no significant percentage of “research” is conducted in developing countries?
     If we count preclinical and basic research, I’m willing to concur. But I’m speaking of clinical trials, and as to the latter, the best evidence suggests that a significant and increasing percentage of them are conducted in developing countries.

181. Cranefly, my suggestion would be that everybody pays for the public medical care, whether they use it or not. And public hospitals are available to everyone, and you don’t get a “rebate” if you decide not to use them.
     You can get private insurance on the side if you want to. It gives you privileges at whatever private hospitals it happens to be good for. It gives you no extra privileges at public hospitals etc. Presumably it lets you choose among private MDs, and gives you a discount on patented drugs, etc.
     So if you want a special facelift, or special color-therapy acupuncture during a herbal mudpack, or laetrile, you can pay for it yourself or you can look for insurance that will pay. You don’t get a discount on public medicine for doing it.
     A lot like the public schools. People complain about them but private schools don’t seem to be much better, beyond cherrypicking the best and most affluent students and sometimes having bigger budgets. There are a lot of complaints about public schools, particularly that people who don’t use them still have to pay for them. But if we gave them up, would education in general improve?

182. J Thomas: To a first approximation, I agree with you — it’s one plausible description of a universal health care system. My comments directed to Sebastian Holsclaw were in response to his complaint (with some validity) that people were ignoring his suggestion of a plan that was neither universal health care nor the status quo and arguing that it must be universal health care or nothing.
     I’d caution against being too cavalier about writing off special cases. Just because something isn’t covered by insurance doesn’t mean that it might not be needed for your health — take, as a trivial example, birth control. If there’s a hospital involved in something you elect to pay out of pocket for and there are complications, being stuck on your own without the benefit of a corporate legal team can turn a carefully-planned expenditure into bankruptcy. At least, that’s the current situation, and I’d expect any serious proposal for a new system to address it explicitly.

183. J Thomas:
     Sorry to toot my own system continually (it’s not necessarily the best, but it’s the one I know best) but the Australian system is like this, with one useful addition:
     If an operation is covered by the public system, and performed in a private hospital, the private hospital is reimbursed for the cost of the operation by the government. There is also a small tax break for owning private insurance, provided one’s income is sufficiently high.
     The advantages of this system are that everyone gets something out of the public system, whether they then purchase private insurance or not. It also results in much cheaper insurance (for me, about US$90 a month) because that’s not paying for any operations I’d need to have – only for the nicer room, for skipping the wait list on elective surgery, and other supplementaries.
     I’m not sure if it’s the case in the US, but in Australia and New Zealand private schools are paid by the government, just not as much as public schools. The rationale is that if they’re teaching students, they’re reducing the workload of the public system, and deserve some compensation for this.

184. More market required…….

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