How Markets Work

by publius

Anonymous Liberal says the following about the Bush Administration’s strong push against public health care for children.

But people like this need to realize that this isn't some grand experiment. We're not dealing with hypotheticals here. When policies like this are put in place, real children--ones with real hopes and dreams and fears--are made to suffer. Some even die.

I used to think the same thing. Given the media coverage, it’s easy (very easy) to paint this as a shameless effort to put the needs of large fat men with bags of money for heads before children’s health. But to be contrarian, I think A.L. is missing the point. Like so many others, A.L. needs to develop a more sophisticated view of markets. Understanding how markets work will help everyone understand why Bush’s policies actually make sense. A tough pill, 'tis true. But don't blame me - blame the laws of economics.

To help this process along, I’m pasting below the fold a pamphlet that taught me everything I know about markets and children’s health. It’s written as a Q & A dialogue, which I found a bit annoying, but it’s informative nonetheless.

MARKETS FOR IDIOTS – HOW THEY WORK, WHY THEY WORK

Q. Mr. GiantMoneyBagForHead, I don’t understand why the administration opposes health care for children.

A. A typically naive understanding. You just don’t understand markets.

Q. Markets . . . What are they?

A. Furry four-legged creatures that live underground – holler dwellers.

Q. I had heard different.

A. They are quite shy though, so it’s important to coax them out of their hiding places.

Q. Why would we do that?

A. Because Little Johnny, markets excrete a sweet elixir when they emerge. The elixir cures virtually any problem it comes into contact with.

Q. Sounds great – how do we coax them out?

A. Pheromones, Johnny, pheromones. They have great sense of smells, markets. We need to stimulate the production of pheromone called Demand. When markets smell Demand, they come scurrying out, releasing their sweet elixir.

Q. Ok, so how do children fit in?

A. Simple. Sick children emit high levels of Demand. Not as much as dead children, but it’s still quite high. It’s important to maximize that Demand.

Q. Maximize?

A. The more sick children, the more Demand.

Q. My cousin had a pre-existing condition – he was really sick, so he must have been emitting a ton of Demand.

A. Exactly – markets are particularly competitive and well-developed for children with pre-existing conditions. Again, it’s because their Demand levels are so high. They just come running when they smell it.

Q. Do markets ever not respond to Demand?

A. That’s an abstract hypothetical Johnny. I want you to focus on the real world.

Q. And what about stressed, crying parents?

A. They too are excellent sources of Demand, particularly unemployed ones.

Q. So the sick children stimulate the Demand, and then markets emerge to fix the problem?

A. Now you’re getting it.

Q. So by giving them free health care, we’re actually hurting them, right? Because the markets will just stay in their holes?

A. Precisely, markets may be counterintuitive, but they’re never wrong.

Q. And if we really wanted to help everyone, we would abolish all public health care.

A. Now you’re thinking like an economist!

Q. But I keep hearing that poorer working people don’t have health care. Doesn’t everyone emit Demand?

A. Yes they do Johnny. It’s just that some Demand is more potent than others. People with less money emit lower levels of Demand – usually because they’re bad people.

Q. So it takes more of them to get a market out of its hole?

A. Precisely. A lot more.

Q. How come this all works out so perfectly.

A. It’s the natural order of things. Markets are God’s plan for us – those cute furry buddies are ingrained in the very structure of the universe, much like the laws of physics.

Q. This has all been very helpful. Thanks Mr. GiantMoneyBagForHead

A. Just remember this above all else – decisions about a person’s life and health should be made on a for-profit basis. It is the First Principle.

Comments

[Francis]

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.

[gwangung]

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.

[Daniel Goldberg]

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).

[russell]

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 -

[A.L.]

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.

[slightly_peeved]

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.

[slightly_peeved]

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%.

[Bruce Baugh]

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. :)

[OCSteve]

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?

[Sebastian Holsclaw]

"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.

[radish]

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.

[slightly_peeved]

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.

[slightly_peeved]

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

[Keir]

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.

[Phil]

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?"

[Brett Bellmore]

"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.

[Hartmut]

Don't remind me of the "really existing socialism"* of GDR fame (or infamy).

*real existierender Sozialismus

[J Thomas]

Brett, you're right, markets don't have to be ideal to exist.

Also, markets don't have to be functional to exist.

[cleek]

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.

[cleek]

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

[Sebastian Holsclaw]

"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.

[cleek]

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.

[radish]

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.

[OCSteve]

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.

[Model 62]

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?

[Jeff Eaton]

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.

[Sebastian Holsclaw]

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?

[Daniel S. Goldberg]

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.

[cleek]

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.

[cleek]

... [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 ?

[Jeff Eaton]

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?

[Sebastian Holsclaw]

"They are doing their research in developing countries."

Which countries are you talking about?

[Sebastian Holsclaw]

"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.

[Jesurgislac]

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?

[Jesurgislac]

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.

[Sebastian Holsclaw]

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.

[cleek]

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.

[cleek]

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.

[Sebastian Holsclaw]

"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?

[cleek]

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.

[hairshirthedonist]

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.

[hairshirthedonist]

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.

[radish]

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.

[Sebastian Holsclaw]

"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.

[cleek]

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.

[Bruce Baugh]

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.

[OCSteve]

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.

[Francis]

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.

[cleek]

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.

[Bruce Baugh]

Beautiful summary, Francis.

[Morat20]

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.

[Daniel S. Goldberg]

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.

[hairshirthedonist]

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.)

[Sebastian Holsclaw]

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.

[Francis]

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.

[Daniel S. Goldberg]

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.

[Sebastian Holsclaw]

"I've been assuming that you're proposing this utterly delusional idea as a stalking horse for protecting the status quo."

I see.

[Brett Bellmore]

"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.

[Phil]

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.

[Cranefly]

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.

[Sebastian Holsclaw]

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.

[J Thomas]

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

[Sebastian Holsclaw]

"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.

[Brett Bellmore]

"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.

[hairshirthedonist]

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?

[slightly_peeved]

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.

[cleek]

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!

[Phil]

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.

[gwangung]

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?

[Bernard Yomtov]

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.

[russell]

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 -

[slightly_peeved]

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 :)

[John Thullen]

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.

[Daniel Goldberg]

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.

[gwangung]

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

Wrong chapter. Try mine.

[Sebastian Holsclaw]

"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.

[CaseyL]

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?

[Cranefly]

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.

[Cranefly]

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.

[Daniel S. Goldberg]

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.

[J Thomas]

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?

[Cranefly]

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.

[slightly_peeved]

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.

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