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

[OCSteve]

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.

[Lewis Carroll]

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.

[Lewis Carroll]

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.

[Anonymous Liberal]

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

[Sebastian Holsclaw]

Q: Why do I argue with strawmen?

A: It is easier, and makes you feel better.

[Brett Bellmore]

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.

[publius]

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.

[Ugh]

Q: How many law and economics professors does it take to change a light bulb?

A: None, the market will take care of itself.

[cleek]

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.

[J Thomas]

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?

[Yukoner]

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!

[Equal Opportunity Cynic]

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.

[Brett Bellmore]

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.

[Davebo]

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.

[OCSteve]

maybe you should try out throwing feces, too

I think I recall a few threads where that prevailed. ;)

[Sebastian Holsclaw]

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".

[Turbulence]

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?

[Turbulence]

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...

[Jake - but not the one]

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

[cleek]

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.

[Sebastian Holsclaw]

"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.

[Sebastian Holsclaw]

"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.

[Francis]

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.

[gwangung]

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.

[cleek]

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.

[Turbulence]

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.

[Brett Bellmore]

"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?

[Jack Lecou]

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?

[Sebastian Holsclaw]

"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.

[Turbulence]

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...

[Ugh]

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).

[Anonymous Liberal]

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.

[Lewis Carroll]

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

[Sebastian Holsclaw]

"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.

[Lewis Carroll]

"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.

[Daniel S. Goldberg]

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?

[Brett Bellmore]

"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?

[Brett Bellmore]

"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.

[Lewis Carroll]

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.

[Daniel S. Goldberg]

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.

[Sebastian Holsclaw]

"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.

[Lewis Carroll]

"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*.

[Daniel S. Goldberg]

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.

[Lewis Carroll]

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.

[hairshirthedonist]

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.

[Sebastian Holsclaw]

"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.

[J Thomas]

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.

[Turbulence]

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.

[double-plus-ungood]

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%).

[Daniel S. Goldberg]

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.

[Anonymous Liberal]

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.

[Sebastian Holsclaw]

"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.

[gwangung]

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.

[Sebastian Holsclaw]

"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.

[OCSteve]

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.

[double-plus-ungood]

I think you're confusing two different things.

Yes, you're right. I realized that about two seconds after posting. Thanks.

[Sebastian Holsclaw]

"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.

[double-plus-ungood]

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.

[double-plus-ungood]

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.

[Sebastian Holsclaw]

"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. ;)

[double-plus-ungood]

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.

[double-plus-ungood]

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.

[double-plus-ungood]

Pfizer reported profits of $11.4 billion for 2005.

I can't seem to find a breakdown of non-USA profits though.

[Sebastian Holsclaw]

"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.

[Anonymous Liberal]

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.

[Michael Cain]

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.

[hilzoy]

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.

[Sebastian Holsclaw]

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.

[double-plus-ungood]

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?

[Sebastian Holsclaw]

"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.

[Sebastian Holsclaw]

"WTO retaliatory measures?"

Not likely at all under the current patent understanding. (I think impossible, but I'm hedging slightly).

[double-plus-ungood]

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.

[double-plus-ungood]

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?

[double-plus-ungood]

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.

[Ugh]

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.

[Sebastian Holsclaw]

"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.

[Sebastian Holsclaw]

"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.

[Anonymous Liberal]

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.

[J Thomas]

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.

[Jeff]

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.

[Anonymous Liberal]

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.

[Ugh]

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.

[Sebastian Holsclaw]

"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.

[Sebastian Holsclaw]

"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.

[Sebastian Holsclaw]

"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.

[Anonymous Liberal]

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.

[Anonymous Liberal]

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.

[Jeff]

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?

[Sebastian Holsclaw]

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.

[Sebastian Holsclaw]

"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)".

[Sebastian Holsclaw]

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

[Anonymous Liberal]

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.

[J Thomas]

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.

[Sebastian Holsclaw]

"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.

[Anonymous Liberal]

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.

[Sebastian Holsclaw]

"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?

[Sebastian Holsclaw]

"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?

[J Thomas]

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.

[J Thomas]

"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.

[slightly_peeved]

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.