Asymmetrical Information

Jane, you first need to convince me that spending $1 trillion dollars on health care worth $1 trillion dollars is somehow a bad thing.

It might be bad if the same level of health care could be provided for $0 dollars over the same ten year period. Or it might be bad if having $1 trillion dollars of extra health care in the system is itself a bad thing. But I don't see either as being true. Do you? Or is there some other reason spending money on health care is bad?

Your second concern about stifling innovation is groundless and tons of counterexamples are available of innovations coming from the old Russia or even from socialist systems like Britans to put that concern to rest.

Can you name one significant American medical innovation (whithout mentionsing Viagra) that we would lack if it weren't for the 'profit motive' as it is now constituted?

This is exactly why I said I did not want to get into an argument about health care economics. But briefly:

I am unaware of any medical innovations to emerge from the former Soviet Union on anything to even vaguely rival the scale of that which came out of the free market. Their health service now is completely overburdened with providing basic care; it is not a fountain of innovation. To provide just one example, it is now estimated that 20% of women in the former Soviet Union are sterile, because the only form of birth control available was the abortion.

More broadly, it is widely acknowleged by anyone except leftist advotes that the United States provides the overwhelming majority of the profits in the pharmaceutical and medical technology industries (particularly the pharmaceutical industry, where marginal costs are exceptionally low). For example, Aventis, which manufactures Allegra, gets only about 40% of its sales of the drug in the US, but over 80% of the profits from the drug.

I'm not asking you to agree with me here, but I've studied this issue pretty intensively, so unless you're pretty expert, you're not going to offer any arguments that sway me. Your post reveals that you are not expert on this subject. That's why I asked readers to concentrate on specific questions, rather than rehash arguments that won't change my mind.

Jane. The issue was medical innovations and you respond with medical delivery problems in the now free markets of Russia. Well if you haven't noticed the same problem exists right here in the USA.

But back to point. You are right I am not an expert but you don't sound like one either. One medical innovation that came from the old Soviet system was radial kerotonomy (sp) now popular in the US as laser vision. This is where the lens of the eye is reshaped through laser surgery. That was pioneered by the Soviets. I was not limiting my observation, however, to the old Soviet system, now broken, but included other socialist medical delivery systems as well. In fact isn't Glaxo, one of the largest and most profitable pharmacuticals in the world still a British company?

You may have noticed, as an expert, that virtually every advanced industrial nation in the world has a socialized medical system. Are you claiming that no good medical innovations ever come out of these countries?

And seriously, why is it wrong to spend money on health care that would not otherwise be spent?

Jane:

When is the last time that a large-scale program like this passed? 40 years ago? You need strong support from industry to get something like this done. There is exactly zero chance that this will go through, particularly with a Republican Congress. Clinton had much better facts on the ground at his disposal, and he didn't get anywhere near getting it done.

Also, I'm sure you know a fair bit about health care policy, but I seem to recall that in the past you've badly mischaracterized some of the arguments made for managed competition during the Clinton effort. It's not as if Alain Enthoven, Uwe Reinhardt, et. al. were total jokers.

Entering the debate with fear and trembling... would the current flu vaccine deal be an example of what happens when the profit motive is removed from health care? I was just reading (Weekly Standard, and I haven't verified sources beyond that yet) that the reason all our flu vaccine comes from overseas is that American companies couldn't profit on it between the '93 law under which the gov't buys and redistributes virtually all vaccines, and the legal principle from the polio era under which they could be sued for big damages even if malice couldn't be demonstrated.

Now I'll zip it and let the Kerry supporters have it again.

Ken,

I believe Jane is claiming that Glaxo, although a British company, is profitable because of the profits it reaps in the US. And that the US profit margin is the primary driver of innovation for medical and pharmaceutical companies all over the world.

If what she says is true (I'm not an expert so I have no idea), than the home country or home market of any medical/pharmaceutical company becomes irrelevant. The only thing relevant is that these non-US companies can eventually sell their products in the US, which is where they will earn the return on their initial R&D investment.

Your argument about the $1 trillion is senseless. Try it this way: my next door neighbor took $50,000 from me. He spent that $50,000 on a new BMW. But I shouldn't be upset because it's not a bad thing to spend $50,000 on a car that is worth $50,000.

If you replace the words "new BMW" with "artifical heart" you have exactly the argument you are trying to make to Jane.

What you neglect is that, regardless of whether my neighbor got value for money, maybe I should be upset because, you know, he took $50,000 from me.

Health care would suffer if Kerry got in. For the most part, his ideas make no sense. The US is the only country in the world where health care is provided by employers. It's an absurd system, and politicians who refuse to address this basic failing of our system will fail to improve health care.

The larger problem here is the funding of Medicare alluded to by Greenspan in his testimony to Congress. If costs keep going up 10% a year, the government will be unable to fund Medicare. Neither candidate has addressed this issue.

DRB,

So one results of the current situation is that regardless of which other industrialized country a medical device maker/pharmaceutical company is located their socialized medical system gets subsidized to the extent they can overcharge US customers for the products they sell and thereby turn a profit here which is denied them in their home markets. Your other point is that this profit is motivation for them to innovate.

OK. Profit is indeed on motivating factor to innovate. But it is not the only one and may actually skew research away from where real needs are. A good example is Viagra and Allegra. These are quality of life drugs, not medically necessary for good health but immensly profitable to their makers. Wouldn't the research money have been better spent providing basic health care to those without any care at all?

And if you think you might get upset about the government taxing you to spend money on health care on your felow citizens, just let me tell you how upset I am about the government taxing me to spend money on killing people overseas.

But after we get our feelings out of the way we still have to decide, as a society, whether to tax ourselves and for what. My vote goes to health care over bullets. And then some. Untill everyone is covered.

I'm in the UK and have to suffer in our bEurocrat rationed treatment service, which is misleadingly named the National Health Service. I would BEG Americans not to get beurocrats to ration their treatment by punishing the succesful! I may need to actually get some decent treatment one day, and I won't get it quickly here.

GSK = Glaxo SmithKline (Welcome); The Welcome Trust being one of the largest charities in the world, and the UKs leading funder of medical research (i.e. It's not part of the state, and helped fund the UKs contribution to the Human Genome Project amongst other things)

FYI Viagra was originally being developed as a heart drug, but it had "curious" side effects...

IMHO American has a huge problem with parasitical lawyers, not medicine.

Allegra is simply a quality of life drug? Are you for real? Do you have any idea how much productivity time is lost due to allergies or to taking antihistamines that make you drowsy? Poor choice of drugs, dude.

Well Rex, I was kinda thinking Allegra and Viagra go together, you know , kinda like a chemical cocktail for the allergy prone penile disfunctionals.

Heres what Kerry says-

U.S. health care spending has increased by about 10 percent a year since President Bush took office, and the number of people without health care insurance has risen to 43 million. Kerry is promoting a plan designed to cut costs largely by retooling or expanding existing government programs.

Under the Kerry approach, the federal government would pay for the most expensive health expenses, known as catastrophic costs. The plan would also provide tax credits and other benefits to businesses to provide lower-cost coverage to employees and would permit the reimportation of prescription drugs from Canada, among other things. The idea is to push prices down by easing pressure in several areas, from business to bureaucracy, simultaneously.

To spread coverage to the uninsured, Kerry would expand existing programs for lower-income workers, through Medicaid and the Children's Health Insurance Program, or CHIP.

Kerry's health care plan is easily his most ambitious campaign promise, but it comes with a large price tag: more than $650 billion, and perhaps much more, over the next decade, according to health care experts. The proposal dwarfs the senator's plans to increase spending in other areas, including education and the environment.

The senator says he would pay for the health care changes by repealing the Bush tax cuts for those making $200,000 or more each year. Independent experts predict this tax-cut rollback would generate $800 billion to $900 billion over the next decade, which would cover the health program's cost but leave little room for other spending increases in a Kerry administration, assuming he adheres to his pledge to cut the deficit in half by 2009.

"It is a plan that learned the lessons of our efforts to provide health care in the past. We are not going backwards," Kerry said at a speech here at Edinboro University. "It is a plan that recognizes and honors the values of America: People want to chose their doctor, and under our plan they will. People want to chose their plan; under our plan they will. People want choice [and] competition between plans; under our plan they will have it. People don't want the federal government making choice for them; under my plan it doesn't."

The reps claim that the cost over 10 years would be over a trillion for a decade. But after 911 and Iraq the reps have no credability.

The Bush campaign has offered no specific criticism, only-

He stressed the need for growth of community health centers to serve the poor and said the newly enacted legislation to revamp Medicare is helping senior citizens. He said Kerry's proposed changes would put millions of people looking for health care into "a government program."

"With a straight face he tried to tell Americans that ... the government has nothing to do with it," Bush said

Lewin is by no means independent, but heres your worst case scenerio-

IN THE BALLPARK." But Lewin figures the Kerry plan would be substantially more costly. That report, released on Sept. 21, projects it would come in at over $1.2 trillion -- $1.6 trillion in new spending and tax cuts, and about $400 billion in offsetting savings. Those numbers, which roughly track a recent study by the conservative American Enterprise Institute (AEI), could be a big problem for Kerry.

Until now, he has insisted he could pay for his health plan by rolling back the Bush tax cuts for those making more than $200,000 a year. But doing so would produce about $860 billion, not nearly enough to foot this bill -- let alone slash the deficit in half, as he has also promised.

And heres what Bush offers-

A LOWBALL FROM BUSH. The Lewin report is by no means all bad for Kerry. It confirms that he would indeed cover a big chunk of the uninsured. Thorpe figured the Democrat would pick up 28 million of the 45 million who are now without coverage, AEI estimated 27.3 million, and Lewin projects 25 million. Bush would cover between 2 million and 8 million, depending on whose estimate you believe. The Lewin study also credits Kerry with lowering average family health-care costs by $450 a year, while Bush's plan would actually raise costs slightly.

And while the consulting firm figures the cost of Kerry's plan is twice what the Democrat claims, it also calculates that Bush has, umm, misunderestimated the cost of his plan as well. Lewin figures its price tag would be $227 billion instead of $90 billion that the President claims.

And possible downsizing of the Kerry Plan-

Kerry can scale back some of his proposals to make it more affordable. For instance, he would have Washington pick up the costs for expanding state-run health insurance for poor adults and children. Lewin figures that would result in a $343 billion windfall to states -- much more than Kerry intends. If Lewin is right, Kerry could adjust his plan accordingly. Lewin also figures Kerry's scheme to subsidize employer premiums by about 10% would cost a staggering $700 billion -- far more than AEI and Thorpe figure. If Lewin is correct, that part of the plan will also have to be trimmed

"Under the Kerry approach, the federal government would pay for the most expensive health expenses, known as catastrophic costs."

That's completely back-ass-wards. The whole point of insurance is to cover catastrophic costs. The only reason "health insurance" covers routine doctor visits is because the tax code encourages "health plans" from your employer that are really just a mechanism for paying your doctor with pre-tax dollars.

The Medical Savings Account is the way to go. Get a real insurance plan with a high deductible, and pay your doctor directly, still with pre-tax dollars. Or better yet, drop all tax deductions for company health plans, individual health plans, health care costs, etc., and have people pay for everything, health related and non-health related, with after tax dollars, while dropping the tax rates to compensate.

"The plan would also provide tax credits and other benefits to businesses to provide lower-cost coverage to employees"

That is completely retarded. The fact that employers are "providing coverage" to their employees is a bug, and a rather nasty one, not a feature. The way things stand, the insurance company's customer, and the one that they're competing to please, is your employer, not you.

"and would permit the reimportation of prescription drugs from Canada, among other things."

Because paying full price for intellectual property is such a ripoff...

Where'd you get that "three times the median income" cutoff for the kerry health care plan? Can't find it anywhere.

Jane and others,

A question for you all. I am currently paying about $300 per month for a single person Blue Cross/Blue Shield health plan with a $500 deductible.

Kerry, as a Senater, has the same plan, ie Blue Cross/Blue Shield, but I am sure with a lower deductable.

His campaign pledge is to allow me to buy into the government plan, to get the same options for coverage that he has. Now because the government has far greater buying power than I do the cost is probably going to be much less to me.

How can this be a bad thing? And where does the $1 trillion dollar government cost come in? Is that to cover those who cannot afford to pay anything?

The best part of Kerry's plan is opening the federal employee's plan to all Americans. Drug reimportation from Canada is a reasonable idea, as is allowing Medicaid to negotiate with drug companies. But the rest of Kerry's plan makes little or no sense. He leaves Anericans stuck getting their health care from their employer and further complicates matters with new government programs.

Putting the savings at $800 billion for the tax increase is double counting, because the tax rates go up automatically over the next five years unless Congress acts. If the tax cuts were permanent, then the $800 billion figure could be claimed. As it is, the number is about half that amount.

Jane,

I'm surprised that you're concerned about this issue. From what I read of political analysis, the conventional wisdom seems to be that a republican majority in congress will almost certainly stop most of a President Kerry's agenda. I think there are two factors which back up this conventional wisdom.

a. We live in the post-9/11 world, where I think people are more concerned about foreign policy than domestic policy. Furthermore, if Kerry wins, I think it will be mostly due to issues of Iraq. In this atmosphere, I think Republicans will be more likely to vote their conscience on the matter, since basically their political fortunes will not be strongly affected.

b. I think you're a little off in your description of voters. Yes, there is uncertainty about health care costs and people do like to have children taken care of, but I don't think that people will automatically translate that into supporting Kerry's agenda until and unless the thing is passed and checks are being mailed and effects are being felt. I think what drives voters to decide on issues is what narrative they place those choices in. President Kerry will be able to tell the narrative of providing benefits to the benighted and relieving the "middle-class squeeze", but I think the republican narrative of government taking over your health care will be more persuasive. These narratives will exist despite factual information like the differences between ClintonCare and KerryCare. They'll be coming from the same sentiments. Finally, you mention in your post about "the widespread belief among Americans that someone is cheating them out of the cheap, excellent health care they deserve." Republicans can point to trial lawyers as playing that role in their narrative.

On a final note to virtually everyone else who has been commenting on this thread,

Yikes! Jane has asked specific questions. Yet most of the comments explicity flout what she was asking for.

Drug reimportation, "Because paying full price for intellectual property is such a ripoff."

Giving the rest of the world a free ride while the USA pays the whole cost of developing new drugs is certainly a ripoff. The best way I can see of fighting this is with a truly free market - if the drug companies allow Canada (for instance) to beat their price down, then Americans can, with a little extra work, buy at Canadian prices too. It will give drug companies an incentive to negotiate harder with foreign countries, or if necessary to cut back on shipments to them, and eventually it will lower US prices a bit as the rest of the world pays a bit more. If you don't like how that affects Zimbabwe, then I suggest you donate your own money to buy drugs for poor Zimbabweans, rather than supporting a sneaky backdoor way of involuntarily taking the money from sick Americans.

However, I want to see a second part to re-importation. If you think you had a problem with your reimported drugs and want to sue the manufacturer, you can't use US courts. You've got to sue in the country where you purchased them. Because maybe part of the difference between US and Canadian prices is the cost of liability insurance under our insane tort system...

I've seen several comments that refer to structural changes in how things are paid for that will save significant amounts of money. Examples include drug reimportation and using the Senate Health plan to reduce insurance premiums.

A logical problem with such plans is that these reductions in costs will reduce the revenue that the providers gain. These companies (drug manufacturers and insurance companies) will either start losing money or make up the costs elsewhere. In the case of drug reimportation, they will raise prices in Canada. Actually, that's fine with me, but will probably eliminate any significant savings in the long run. In the case of insurance premiums, the insurance companies would just have to raise rates on the Senate plan.

Bolie IV

How can anyone cry for the pharmeceutical companies? First, they have a 10 year + government imposed monopoly on any new drug they create. Second, they currently spend twice as much on advertising as the do on R and D on average.

Begbee wrote:

Second, they currently spend twice as much on advertising as the do on R and D on average.

That’s a lie and it’s been debunked repeatedly on this site. Promotional Spending by drug companies is about even with their expenditures on R&D and about half of Promotional Spending is actually the Retail Value of Samples. In other words, drug companies spend twice as much on R&D as they do on advertising and marketing, not the other way around.

Source (Chart 9):
http://www.kff.org/rxdrugs/loader.cfm?url=/commonspot/security/getfile.cfm&PageID=13709

Kerry's plan: for what it is worth - for a single person, the FEHB Premium for Blue Cross Blue Shield standard will be $181 for 2005. The employing agency pays $51 of that premium with the employee picking up the rest in pre-tax dollars.

Drug Reimportation: Since the pharmas make most of their profits selling into the US markets, why would they continue to sell into Cannada/someother country if it would drastically hurt their bottom line. Wouldn't Canada/someother country respond by limiting exports to the US if the alternative was an IP battle with the pharmas? Point being drug reimportation won't work in the US because the pharmas/other coutnries will react to protect their profits/cheap drugs.

"Drug Reimportation: Since the pharmas make most of their profits selling into the US markets, why would they continue to sell into Cannada/someother country if it would drastically hurt their bottom line."

The reason is that prescription drugs are an industry with very high fixed costs (research and development) and very low marginal costs (the actual production and shipment of the drugs once they are researched and approved). It's the profit margins in the United States that make pharmaceuticals profitable to research and develop; however, *once the companies have already done so*, they can still make some money selling to the price-ceilinged countries at below market price. Just not as much - and not enough to outweigh the research costs.

I guess I wasn't clear on drug reimportation. The question I meant to ask more clearly: if there was massive reimportation into the US - wouldn't the pharma's and 'other countries' respond in ways that effectively retain the status quo and prevent significant reimportation?

So on the one hand, you fear this plan because it
involves spending a lot of money on healthcare.

And on the other hand, your fear this plan because
it takes too much money out of the healthcare
business and leaves it with not enough profit to
fund innovation.

Oy! You're hard to please.

The current US healthcare system is a drag on the
economy in a couple of ways:

1) Employers are forced to deal with much of the
cost, and a good deal of the administrative
hassle, of providing health insurance. This
adds to employment costs and inhibits growth,
especially for small businesses.

2) We have a large and growing number of
uninsured people, who suffer from a lack of
(cost-effective) preventive care and thus
end up consuming expensive pro-bono emergency
care, with costs which are spread across the
insured population.

Obviously we would like to apply medical resources
efficiently, even if we then want to allow a
healthy level of profitability to support
innovation. So it makes sense to ensure that
as many people as possible have access to
cheap or free preventive care. Kerry's plan
gives incentives to increase the number of
covered employees within the current framework,
and to provide better options for individuals.

It is reasonable to believe that this will give
us more health without more overall cost.
The incentives will involve some tax dollars,
but improving the nation's health will of course
increase productivity and boost the economy, so
you can score some payback in extra tax revenue.

I don't see any obvious reason to believe that
this will make the healthcare business less
profitable, though it may push more money into
preventive medicine and less into expensive
drugs and surgery. That might affect the
profitability of different segments, but it's
still going to be a huge market. With the
current flu vaccine shortage, which might well
lead to thousands of extra deaths this season,
I would argue that this change of focus is
overdue.

"Kerry's plan: for what it is worth - for a single person, the FEHB Premium for Blue Cross Blue Shield standard will be $181 for 2005. The employing agency pays $51 of that premium with the employee picking up the rest in pre-tax dollars."

And right now, as an individual,I am paying about $300 per month for BC/BS coverage with a $500 detuctalbe. I expect the premiums to go up in 2005. So the Kerry plan will cut my costs by about a third. Multiply this by millions of other Americans who are in the same situation as I am and I see this Kerry plan as a no-brainer.

Reading over the comments, the only thing I'm really able to tell is that supporters of the Kerry plan don't much care about its effect on medical innovation. While it is reasonable to care about total healthcare costs and equity of distribution, that's not actually the question asked.

The only reason that the Kerry plan makes any sense - is that current STATE laws prevent anyone but employers and a VERY limited set of associations from offering group health insurance.

We should expand ERISA-premption so that any organization could offer group health insurance. Most of the unisured are either young people who choose to go without insurance or employees of small businesses who can't form a large enough pool to offer affordable insurance.

I don't think we should force people who choose not buy insurance to buy it. But I do think that insurance laws should be changed to allow small employers and other legitimate groups to band together to form large insurance pools. There is no need to for the Federal government to run the program.

We already know that they most efficient way to distribute any good or service is through the market. If there are distributional concerns - these can be handled through vouchers or tax credits or other means that minimize market distortions.

The Kerry plan is the camel's nose under the tent towards state-run health care. Aside from the war on terrorism no issue concerns me more.

I would also vociferously agree with the prior comments that we are trying to shoehorn pre-paid medical care into an insurance model. I think that a freer market in the kinds of insurance that can be offered would lead to what in my mind are more rational insurance models being available (MSA's plus catastrophic). But I also think that a large majority are very risk averse when it comes to medical financing and will continue to choose fee for service or HMO insurance.

I am utterly convinced that the policy of invading
France would be a good thing. Don't waste time
trying to convince me that I'm wrong, but explain
how our domestic cheese producers will be able to
maintain the pace of innovation if we don't invade
France and gain unrestricted access to the
profitable French cheese market.

Blessed are the cheesemakers.

question 3, part b, subpart 2:

Even deprived of the huge profits currently possible with a monopoly on the US's ostensibly "free" market, innovation would continue.

There are still lots of doctors and research scientists out there, doing their respective things with the petri dishes and bunsen burners. Even under the current system, not all of them work for pharmeceutical companies. Not all academic research work is done at the behest of a corporate sponsor. Not all of these scientists will have anything better to do with their time post- hypothetical industrial devastation. Not all of them are yet done with their Ph.Ds.

I suppose you might plausibly have an effect on the number of folks coming out of med schools or grad programs going into drug development, but I don't see those who are already there trading in their lab coats for Amway franchises. I don't imagine the drop in the valuation of a Pharm. industry index being directly correlated to the number of mothers prodding their children to go pre-med.

So, relatively low profits will produce a dip in intellectual capital, but I'd predict this would be short term, as I think entry into this field is fueled more by intellectual curiousity or an aspiration for worthwhile-in-itself achievement (i.e., Nobel prizes and such) rather than rational self interest (i.e., greed).

Profits would eventually level out, normalize, such that whatever amount is devoted to R&D no longer reflects the artificially high dollars reaped in the US, and instead reflects the valuation of the entire world population of potential beneficiaries (this could come in the form of block research grants from governments to non profit corporations devoted to such R&D -- I do believe such entities exist even under the current business model (i.e., Cancer foundations and whatnot)).

On the "will it pass" issue, keep in mind that 1) it is virtually certain that the Republicans will keep control of the House of Representatives, and that 2) the Republican House majority tends to be very disciplined and ideologically cohesive. Also take into account the recent Boston Globe series on the way in which the Republicans in the House have, in Kevin Drum's words "abused their majority position in Congress to rule the legislative process in the House with an increasingly iron — and often corrupt — fist."

Given the above, I consider the likelihood of Kerry's health plan passing Congress, in anything like its proposed form, as virtually zero.

Please excuse the interjection of a Bush supporter - brief comment/question arising from Bill's comment two posts ago: I may be laboring under a delusion, but I thought that the primary R&D cost for pharm companies is animal & human trials? I completely agree that the kind of person who becomes a researcher will generally become one regardless of the job market in the field, but if the pharm co. itself doesn't feel it can afford the testing of a new drug required to bring it to market, why would it fund the research?

P.S. Is this not part of the motive behind being a "generic" drug producer, if you're able to be patient enough to wait out the patent - you don't have to innovate, or even market your drug, just produce it?

Very interesting discussion. Please carry on.

Are you saying that we are so selfish that we won't look to help each other unless Big Pharma and Big Medicine pump a lot of money into the system? I don't think so.

La,
I think she is saying that helping each other is risky in the case of drug research.

It costs a lot of money to research and produce a new drug, and the failure rate is high.

Now, society will direct some amount of money to this risky endeavor even if no profit is involved, because the rare successes are worthwhile; hence non-profits and universities and governments spend money on basic scienc and on R&D related to drug development.

However, today the market directs more money on top of this towards drug development, because there is a profit in it. And that pursuit of profit has resulted in some lifesaving and life-improving drugs.

Given the high risk of failure in drug development, the pharma companies need high profits on the drugs that work to support the overall investment (ie. to cover the many losers).

Jane's fear is, I think, that if Kerry's healthcare plan reduces the profit available in the market for drugs, the return on investment for the pharma companies may decline to the point where they direct less money to the pursuit of new drugs, and we get fewer new drugs.

Such an outcome can exist even in a world where we freely choose to help each other and direct money and effort towards healthcare without being motivated by profit. It will simply affect the excess healthcare/drugs that we get now thanks to the profit motive supplementing human benevolence.

As an addition to what Jim said above - if the government takes over all medical research, what gets researched will be in total control of Congress. Q. to Democrats: do you want Tom Delay and Dennis Hastert setting research priorities? Q. to Republicans: Do you want Nancy Pelosi and Dennis Hastert setting research priorities?

Given how much money they've dumped down the alternative medicine hole over the past few years to placate a few nutjobs in Congress (yes, redundant), I blanch at the prospect of a bunch of scientific illiterates deciding this.

When Nixon delcared war on cancer in the 70s, it sucked lots of research money out of other areas and dumped it onto quite a few projects only tenuously related to cancer. The current system is the worst, except for all the others I've seen proposed.

Bletch.

Replace 2nd Dennis Hastert above with Tom Daschle.

For what it's worth I really don't understand the mechanism by where government bulk buys of drugs results in no new drugs being developed, ever.

Using this logic, defense contracters should be wildly unprofitable, right?

Jason: Defense contractors are wildly wasteful. I know, I used to work for one. The main problem isn't dishonesty or malice on the part of the contractors (I'm sure this exists, but not in the office where I worked) but that the government required us to do silly things. To start with, to prove that we weren't cheating, we had to put in more hours doing paperwork to document that we were working and that purchased materials were being used for the contract than we put in doing the actual work - and the government pays for all this paperwork and inspections.

Beyond that, if the goals and priorities are set by politics or by high-level bureaucrats with limited understanding of the technology, resources will be mis-allocated. You'll have huge teams chasing the almost-impossible or the probably-ineffective, while better ideas are ignored. This happens in business, too, but the market provides automatic corrections - if a pharmaceutical company spends too much on drugs that don't work out or fails to find ones that people will buy to cure their diseases, eventually the investment money will move to companies whose executives had better judgment or better luck. Civil Sevice employees never lose their jobs for guessing wrong, and counterproductive government programs often go on forever.

"counterproductive government programs" actually expand as they now have more "customers"!

Jason,

The problem is that many socialist countries negotiate their drug prices for the whole country. Given that drugs require a huge fixed cost (R&D) and a small marginal cost (per pill), the drug companies have an incentive to sell drugs for just over the marginal cost *IF THEY CAN RECOVER FIXED COSTS ELSEWHERE* So if the drug companies have access to a relatively unregulated market (in price), they can charge that market enough to cover marginal *AND* fixed costs. Then they negotiate prices with other markets (France, Canada, etc...) to sell the drug at just a little over marginal cost.

If the US starts reimporting drugs priced to just cover marginal costs, the drug companies will no longer be able to cover the fixed cost of R&D with US profits. So the drug companies will have to raise prices if reimportation continues. This puts a strong incentive on Canada (or wheoever) to stop people from exporting drugs to protect it's prices.

This is actually freeloading on the part of the socialist countries that negotiate the good rates. Ideally, drug reimportation would result in the fixed costs being spread around and US prices dropping some.

Bolie IV

I don't see the case for the crushing of innovation that Jane alludes to. Kerry is not proposing something so radical as a completely government-run medical payment compensation system. He is proposing a compromise plan that tries to address what some subset of analysts have identified as the major problem points of the current framework. Specifically, he is addressing: child care, the effects of catastrophic costs on general insurance rates, the unusually broad spectrum of coverage availability/affordability based on employment status, and high drug costs. Some aspects of his plan share characteristics with the Republican-engineered medicare overhaul. (Not sure how libertarians assess that, but just thought I'd point it out.)

As I understand it, there is still a major role to be played by private insurance companies in a Kerry world, and still places for choice to be exercised by consumers. Kerry is aware of the benefits that market-based competition provide for health care innovation, and he is also aware of the impossibility of getting anything so radical as Jane casts the Kerry plan as passed.

I don't claim to be an expert on the issue, but do know enough to know exaggeration and straw man plans when I see them. I also feel, though I have not researched the issue completely, that something is broken in the pharmaceuticals marketplace. Due to my career I do know something about how medical research works, and I don't think drug companies are being constrained to do it very efficiently by the current profit and competition environment. The overall economic priority accorded to pharmaceutical versus other types of health care approaches can also be questioned. It's conceivable a change of the balance of power here might lead to increased innovation in health care, not the opposite.

Most of the life saving drugs developed in the last 25 years have been developed with government or non-profit money. It's just not that profitable to treat life threatening illness.

Lets take a simple case:

Lets say you're a drug company and you have $10m to invest. At the end of that time you could either have a drug that saves the lives of 10,000 people a year or have a drug that treats male pattern baldness (effectively enough that you can market it as such). There's just more money in baldness ... and erectile dysfunction ...and many other non-critical needs.

I don't necessarily think that the government should get involved in the health insurance business, but I'm not terribly impressed with the performance of the for-profit companies. I think government investment in basic research is almost always a positive.

Mark, Bolie, I'm not following. Defense contracters have been ludicrously innovative, highly profitable, and they only have one customer - the government.

Maybe there's some giant difference I'm not aware of, but in general "if the US goes single-payer all health care innovation will disappear" seems like the worst of blackboard economics.

Defense contractors "wildly innovative"??? The electronics I worked on was over a decade behind the times. Partly that's because it takes time to work out how to make new technology tough and reliable under field conditions, but the main problem is that you can only work on the technology specified in the contract, and that's generally what some Congressman heard about five or ten years ago. Where I worked, the entire staff was ex-military, except a few secretaries - and they tended to have husbands in the Army. We cared much more about getting the Army the best possible system for the money than about the company we were working for. But, the contract didn't leave us much room to use the better technology that had become available while this idea had been kicked around by the brass and congressional committees.

"Highly profitable": Sometimes, because the government is paying for all the BS. If you've got to pay a higher price to get nearly obsolete IC's because your board design went obsolete before they decided to go ahead and build it, the government pays for that. If you've got to put one accountant and one inspector on the payroll for every engineer or technician, the government pays for that. If you've got to spend $8,000 to test ten hammers and make sure their handles don't get brittle at -40 degrees or rot away in the jungle, then the government pays $800 each for hammers, plus your profits. Most of the time, the contractor gets a percentage of the total cost as almost guaranteed profit, so there's no advantage to them in holding costs down. The project manager (usually a military officer) gets bragging points at his promotion reviews for how many people and how much money he controlled - so he'll find a way to spend all the money available, and probably reasons to ask for more.

OTOH, the contracts come and go, and when they go, there are no profits. The parent company where I worked played this quite smart - rented offices, desks checked out of government warehouses, and what couldn't be rented or borrowed from government warehouses was bought with government money and belonged to the government. When the contract ended, so did the whole corporate division created to handle it. We counted all the gear and handed it over to Army inspectors, canceled the leases, and collected our last paycheck. Only the top guy went back to corporate headquarters, to start trying to pick up another contract.

Many companies cannot, or choose not to, handle it this way, so they are stuck with an empty building, equipment that may go obsolete before it is used again, and redundant employees. If they somehow manage to keep part of the team together, they have a big advantage in bidding and getting started on the next contract - they've already got the key people on board, and they've got offices for them to start working in, rather than having to start everything from scratch. (I spent the first two months on this job in a garage with a packing crate for a desk - but it was luxury compared to much of my time in the Air Force.) Of course, you've only got the proper starting team if you actually managed to hang onto the good people - I suspect that any engineer who could stand a year or two of makework is someone who doesn't like doing real engineering work.

If the rebuttable is "defense contracters actually suck," ok, I guess, but that's pretty non-conventional wisdom.

Many comments here are predicated on the idea that clinical trials are the most expensive part of R&D-it is not! The pharmaceutical companies state that only "one in 1000" pass PRE clinical trials", and "only 1 in 5 pass clinical trials to make it to market". In many cases clinical trials can last only a matter of weeks, depending upon about 4000 factors. Rarely is a pharmaceutical drug a New Molecular Entity which requires years of clinical trials. Most are simply variations on old drugs, often less effective than an old fashioned diuretic.Yet the dogged research that lasts through pre-clinical trials usually lasts from 10 - 15 years. Pharmaceutical companies are rarely involved at the pre-clinical stage, most are NIH labs (funded by government) or overseas labs (also funded by a different government) or by small bio-tech companies (also funded by government based on the excellent tax breaks available for research-or in the case of the firm I work for, partially funded through the university system-and so by government).
Obviously the claims on this board concerning R&D costs are based on the Tufts study (the only one done by the Pharmaceutical industry). That study has long been discredited. Also, even during clinical trials these costs are shared as most of the people used in the trials are at teaching hospitals and private offices. The pharmaceutical company does not pay all of those costs, but simply adds a stipend to it. Not only that, the vast majority of that cost is given to the doctor conducting the study, with no direction on how it is spent. So it is often spent as a 'consulting fee' and the tests are usually highly favourable to the product since another 'bonus' is given if a drug is successful. Doesn't sound like the makings of confidence building enterprise does it?

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