Asymmetrical Information

The real solution for these pharmas is to stop knuckling under to Canadian pressure. Trying to stop anything from crossing the border in a free trade area is a losing proposition, so they should just create a Canada-US pricing scheme and stick to it. People will be free to shop across the border anyway, so they should just price their drugs appropriately and let people buy them where they wish.

Of course if Canada starts to violate their patents, that would create a whole new problem. But we will see more of that problem as the pharmas get pressured into giving drugs to developing countries. They will be making their way back, too.

Why is the Canadian threat to break the patents taken seriously? US companies can afford to ride through a loss of the Canadian market. However, reciprocal patent recission by Congress would be lethal to Canadian companies.

I'm not a NAFTA expert or international trade lawyer (the thought of the retainers makes the mind boggle...), but I have the feeling that any patent recissions would be contrary to those agreements already in existence. Before any legislative or executive reaction was induced, there would be two decades of litigation and all the companies would walk away from the issue like they do from toxic waste dump ownership.

I have a question: is the only reason to block a single-payer system in the US because we want to preserve R&D spending?

Does it strike anyone as odd that because we don't have a single-payer system that everyone else gets to benefit from redistribution of wealth?

Not saying I'm for or against, just making a random observation.

I used to follow the parallel imports issue in Europe, which is a huge mess.

Glaxo is right to put up its dukes here, but PhRMA's argument violates a classic marketing rule regarding emphasizing negative product attributes.

Airlines do not advertise their safety records vs. competitors' records because they would only discourage people from flying ANY airline. Here PhRMA is in the position of a major carrier comparing itself to its OWN commuter subsidiary.

What a bunch of morons!!

The major argument for nationalizing is that it would save money -- no one's in favor of it if it pops our health care spending another 5-10%. The major argument against it is that those apparent European savings are really free riding on our research spending, or unlikely to be replicated here -- smart science majors have sufficient opportunities here that they don't have to be doctors at $75K a year, which is the average salary in the UK. Basically, people want single payer because they want to pay less for their health care, and get as much as they want. I think that putting the government in charge of it is historically unlikely to produce those outcomes.

You're defending Canada freeloading on the US? The only reason they *have* a different marginal price is that reimportation is illegal.

Have they ever actually threatened to break a patent, either? Wouldn't that get them into WTO deep shit?

Apparently they broke the patent for Cipro post-9/11, but that's all I can find.

Basically, people want single payer because they want to pay less for their health care, and get as much as they want.

There's also "health care for the working poor."

But that's not what the advocates are trying to sell, because "health care for the working poor" without the mythical cost savings means "tax increases for the working middle class".

Or it means restricting the supply of health care services to the middle class, ir order for more to be made available to the working poor, so as to keep total expeditures in check. Nope, honestly explaining the necessity of rationing, due the inevitability of scarcity, ain't much of a strategy for selling anything, which is why single payer advocates energetically avoid talking about it.

You're defending Canada freeloading on the US? The only reason they *have* a different marginal price is that reimportation is illegal.

Well, sort of. The alternative, at least in the short run, is to allow the US research subsidy to shrink and pray that there isn't too much of a fallout in terms of lost R&D. Note that reducing the drug cost in the US clears up the free-rider problem by removing the ride. The only way to remove the freeloaders is to force them to pay something resembling a fair(er) share of the costs.

"Let's look at what this really tells us: ... a loss of a small portion of the US market is more serious to them than the loss of the entire Canadian market."

Not necessarily. The drug companies might just think that the Canadians will blink first. Or they might be bluffing. Or they might be afraid that if trends continue eventually they will lose a large portion of the US market.

And where did you get that drug companies spend 1% on advertising and promotion, and 20% on R&D? Is that a rhetorical joke?

As far as I've been able to tell, we really don't know how much drug companies spend on advertising relative to R&D, because the drug companies won't disclose that information. Although the fact that they don't want to disclose probably tells us all we need to know...

Also, the drug companies are massively inefficient in the way they spend their R&D money. The current system gives them way too much incentive to develop drugs that are merely copies of existing drugs, which add very little to the overall quality of health care. Read the recent WSJ article on the development of Nexium if you don't believe me.

However the overall point that the US subsidizes pharmaceutical R&D, and that R&D might drop if the US went to single payer, is probably valid. But there’s no reason that lost spending couldn’t be made up through increased public funding. This might even result in R&D spending being allocated more efficiently.

Ah yes, Faith will never die. Central planning by political bodies IS a more productive method of allocating capital, we just need to get the right experts to do the allocating. Is Holy Communion served regularly in this Church?

However the overall point that the US subsidizes pharmaceutical R&D, and that R&D might drop if the US went to single payer, is probably valid. But there’s no reason that lost spending couldn’t be made up through increased public funding. This might even result in R&D spending being allocated more efficiently.

Doesn't that just remove the cost savings that the single-payer system is supposed to provide? Instead of R&D being funded by profits on sales in the US, R&D is now funded by the gov't tax revenues, paid for by much the same people. And how does removing one bureaucracy (corp. management) in favor of another (federal funding boards) create cost savings?

It's got nothing to do with faith, Will. When it comes to what the role of government should be, I'm an ardent agnostic. It depends on the facts. Ideologies that either reflexively oppose or support government intervention are equally stupid, and tend to obscure more than they illuminate.

I don't dispute that in the majority of cases the market will do a better job of allocation that central planning. I used the word 'might' in my earlier post, because I could certainly be persuaded that my argument is wrong. But ideological boilerplate certainly won't change my mind.

If one's foremost concern is to allocate capital in the manner that will provide for the highest quality goods and services, with the highest degree of continual innovation, and there is a substantial number of people willing and able to pay for those goods and services, then there is a century's worth of evidence that political bodies do a markedly inferior job of allocating said capital, compared to the allocation that occurs through decentralized means. Now, if the the primary concern is that everyone, or the overwhelming majority, receive essentially the same goods and services, then political bodies can peform more effectively, particularly if the goods and services are inordinately dependent on cutting-edge technology. Unfortunately, efforts made by political bodies to equalize the goods and services, both in terms of quantity and quality, have the effect of stifling supply and inhibiting innovation. If political bodies allocated capital for the automobile industry, the Corvair might still be considered an advanced example of automotive engineering, and they might in be short supply.

Sometimes having political bodies allocate capital is unavoidable. I don't think there is a way to avoid having political bodies allocate capital for national defense, nor should there be, but deciding assign such a task to political bodies inevitably means certain things. Capital will either be allocated in an extremely wasteful manner, in knowingly wasteful projects for years on end, without reference to actually producing something that is useful to people (ever hear of The Crusader artillery system ?), or the demand by majorities, comprised of millions of individuals, to access that valuable good and service, without reference to their willingness or ability to pay for them with their own funds will prove to be so expensive (see what happens to the demand for subsidized housing whenever subsidies are increased;it always rises to the level available) that soon those political bodies will attempt to restrict supply. This is why all of Canada at one time had fewer MRI machines than the D.C. metro area. The other phenomena which occurs is that if the political bodies institute price controls to limit the cost of those goods and services that people would love to access without paying for themselves, then people who provide the innovation for those goods and services decide that they would rather do something else. Again , this is particualrly true in areas of cutting edge technology.

As much as proponents of central planning hate it, people just don't innovate as well or as much, absent the prospect of getting filthy rich, which central planning inevitably precludes, at least on the basis of efficiently providing high quality goods and services that people wish to use; the apparatchik who successfully games the bureaucracy can sometimes pull it off. I understand the political and moral realities of attempting to deliver health care purely through market forces, and fully understand the weaknesses in our current hybrid regime; there are many reform proposals I might support. That is a 3000 word post on it's own however, and I have to call some of those pesky clients of mine. I am suspect, however, when central planning regimes are proposed without full disclosure as to what the inevitable unpleasant results of central planning are. There really is quite a lot of historical evidence available, and those that ignore it are either ignorant or disingenuous, which is not to say that all central planning advocates fall under this rubric; a small minority do frankly acknowledge these unpleasant effects, but maintain their advocacy. I just wish they all did.

RC Wrote

>As far as I've been able to tell, we really >don't know how much drug companies spend on >advertising relative to R&D, because the drug >companies won't disclose that information. >Although the fact that they don't want to >disclose probably tells us all we need to know...

Not necessarily - not by a long shot. There are countless sound business reasons not to disclose this kind of information, but the most important is that to do so would be to reveal valuable information to competitors. Any business, but especially one based on product innovation, guards details about its product development process zealously, lest those details be used by competitors to anticipate and thwart competitive moves.

Plus there's massive subjectivity involved in evaluating what the true costs of R&D are. If a pharma company spends $500 to take a group of freshly minted Ph.D.s out to dinner to woo them into joining the company, is that an R&D expense? It has nothing to do with test tubes and gene sequencing machines, buts its neccessary to the long-term success of the R&D effort. What about spending $5 million to take a 20% equity stake in a biotech start-up? Again, the ambiguities are boundless.

>However the overall point that the US subsidizes >pharmaceutical R&D, and that R&D might drop if >the US went to single payer, is probably valid. >But there’s no reason that lost spending >couldn’t be made up through increased public >funding. This might even result in R&D spending >being allocated more efficiently.

The history of pharmaceutical technology suggests that the public sector would be ill-equipped to pick up the slack if private R&D dollars dried up. As a general rule, the public sector (both government labs and university labs supported by public money) is very good at doing basic science research, and not very good at all at doing applied science research. The opposite is true for the private sector.

This is partly due to structural factors: the public sector is very good at basic science because it effectively operates on a massive scale. Why? Because the lack of profit motive encourages widespread information sharing, which makes the many thousands of public sector labs operate like one big research machine. And this massive scale is essential to making progress in basic science, which is speculative, and thus must be conducted with as few constraints as possible. But this massive scale also makes public sector research spectacularly unfocused and undisciplined. Think big pharma R&D is "inefficient?" What do you think the dollar-on-dollar return on the hundreds and hundreds of billions of public sector dollars is? Applied science research needs to be cost-efficient and disciplined to be effective.

In addition, there are cultural factors that make the public sector ill-equipped to due applied science research. To put it bluntly, compared to the work done at most government and university labs, pharm R&D is boring, sometimes painfully so. The tremendous burden of proof that the FDA puts on pharma companies to get through the approval process means that they have to do tons of dot-all-the-Is, cross-all-the-Ts clinical trial work. Even pre-FDA product development involves massive drugery compared to university lab basic science work.

The Harvard department of biochemistry may well be happy to get a couple hundred million extra dollars in federal funding to take on some of the work that the big pharmas now do, but they're sure as hell not going to grant tenure to somebody for collecting five years worth of data on whether or not a new ulcer drug makes your poop stinkier. Academics look down their nose at work that would be considered sexy by the standards of corporate R&D.

Not to mention the fact that some scientists go to work for pharma companies because they can't stand academic politics. Its not entirely clear that if big pharma R&D went away that it would be possible to attract all of the same talent into public sector labs.

All-in-all we've been quite well served by the current system, in which the public sector expands the frontiers of human knowledge about the world, and the private sector figures out how to use that knowledge to improve the human condition. The sequencing of the human genome offers an excellent example. Public sector labs taught the world how to read the library of DNA, but when the time came to pour through the millions and milliosn of pages in that library, Celera stepped up to the plate and finished the job in a fraction of the time it otherwise would have taken the government.

Cheers,
Jacob Marley,
Scrooge & Marley Counting House

University of Chicago GSB '03

Chris: You're right that increasing public spending on R&D reduce some of the cost savings of a single payer system. But certainly not all, since some much of the savings would probably be due to reduced administrative costs.
Not that I'm necessarily in favor of single payer. I'm also agnostic on what the best way to achieve universal coverage is.

As to your question as to why a government bureaucracy might be more efficient than a corporate one, it depends on how the incentives faced by each entity would differ. Basically, the corporate bureaucrat wants to increase the profitability and/or stock price of his company, while the government bureaucrat wants to increase the amount of funds his program gets. How does that affect the behavior of each? That’s at the heart of the question.

But that's not what the advocates are trying to sell, because "health care for the working poor" without the mythical cost savings means "tax increases for the working middle class".

Good point, but taxes could be raised on the rich. Hypothetically. And the lower middle class don't currently pay health insurance premiums at all, so that might offset the costs a bit.

The alternative, at least in the short run, is to allow the US research subsidy to shrink and pray that there isn't too much of a fallout in terms of lost R&D.

I'm not following this ironclad link between (US & Canada being charged different prices) and (US R&D expenditures); the only potential loss to US drug companies I see would be the elimination of the profit they've been getting due to price discrimination in the two markets.

Furthermore, I don't see much of an actual price discrimination potential on actual ability to pay; I think all the price discrimination is due to Canada's singlepayer healthcare system being segmented off by trade regulations.

A generalized way to think of it: Country A and Country B have banned all trade in item X. However a company in Country A has a subsidiary in Country B that produces the banned items for that country. Now, what happens when the trade barrier is removed?

Can you *find* a freetrade economist saying that the outcome of removing a trade barrier (in general, or in this case) won't benefit both countries? Note that the above is stripped of all details about the health care market.

Jane's past objection to this, if I remember correctly, was that "the Canadians will refuse to pay the higher price and break the patent" - basically, that they'll refuse to pay a higher price and break the patent; they'll just start stealing left and right.

The problem is that the patent breaking carries the entire load in this argument; *only* if you assume it will happen is the outcome bad. And I think it's pretty damn unlikely it would happen, seeing how the WTO would club them with a stick, and it'd start a trade war, and blah blah blah: the same reasons first-world countries don't just steal each other's IP in any market!

Summary: Sony Playstation 2s are currently imported, and the US doesn't break their patents. Microsoft software is exported, and first-world countries don't break MSFT patents. An obvious rejoinder is "but those don't have the government as the only purchaser", but why would the government be more likely to violate its trade treaties? You're going to have to provide an ironclad case to convince me Canada will throw IP law in the trash.

Oh, I left out that the endpoint, reduced US R&D expenditures, can't be reached without the "Canada breaks patents" linkage.

Will:
What annoys me is when people try to frame the issue as if the only alternatives were Hong Kong and Stalinist Russia. In reality, there are lots of points in between, and lots of different historical examples on both sides. The issue is much more complex (and much less well understood) than ideologues of either side would make it out to be.

For example, political bodies were highly involved in capital allocation for the auto industries of both Japan and India. However the Japanese car industry turned out to be highly successful and innovative, while the Indian car industry showed no innovation and never expanded beyond the home market. So it all depends on the specifics.

Jason: If they don't break the patent, who cares? canadian prices equalize at US prices, and everyone's happy except the Canadians. But personally, I wouldn't stake money on that outcome.

But personally, I wouldn't stake money on that outcome.

See, this is what drives me up the wall: what on earth is the evidence that'll they'll start smashing patents? You sound extremely convinced; what's the reason?

Because there's no other reason for prices to be so low in Canada, given the reimportation problem. It's not Mexico; per capita incomes are comparable. So why are prices 40% cheaper, if not a threat to break the patent, implied or explicit?

Of course, if they don't break the patents, and thus start paying the same prices as are paid in the U.S., part of the rationale behind single-payer systems, the ability to keep costs down, begins to crumble; the increasing costs and use of new phramaceuticals represents a significant portion of rising health care costs in the U.S..

Canada has a history of not exactly breaking patents, but wielding some legislative threats. Prior to 1984 Canada had a compulsory license scheme, where generics could be manufactured and sold in Canada, even though the patent was still valid. A royalty was paid, but this was much less than full value for the patent holder. In 1984 a new patent law was implemented in an effort to attract more pharma R&D into Canada, and patent protection was extended still further as part of the NAFTA agreement.

But still, when governments have the legislative power and are also facing budget constraints the temptation runs deep, as Ontario's current battle with Myriad genetics shows:
http://www.canoe.ca/Health0109/21_cancer-cp.html

Thus the patent threat is not just some hypothetical, future thing, it is exactly the situation that existed in the past. Even when the patents were fully honoured, they were valid for considerably shorter periods in Canada.

[But that's not what the advocates are trying to sell, because "health care for the working poor" without the mythical cost savings means "tax increases for the working middle class".

Posted by Jane Galt at January 15, 2003 12:09 PM ]

Nope, tax increases for the rich should pay for the health care of lower income American citzens.

Because there's no other reason for prices to be so low in Canada, given the reimportation problem. It's not Mexico; per capita incomes are comparable. So why are prices 40% cheaper, if not a threat to break the patent, implied or explicit?

Because the bargaining power of extremely large purchasers for drugs (and procedures in general) is extremely large? I don't think this is a controversial statement in the medical field; I've heard a dozen variants of it over the years.

Of course this begs the question of why we're "appeasing" Canada by going along with the absurd reimportation ban, if they really are that likely to just throw out IP law.....

A few points:

1)Glaxo is not threatening to cut off the supply of it's drugs to the ENTIRE country..it's only threatening to cut off supply to mail-order pharmacies that sell to patients in the United States.

2)Canada's drug prices are lower because of price caps, it has nothing to do with breaking patents. If memory serves, patent periods might be lower in Canada than in the U.S., but then patent rules are also different all over the world. Post 9/11, the government did intend to break the patent for Cipro, but ultimately backed down. And yes, within the limits of international agreements (NAFTA, WTO, etc.) that Canada has signed it could change it's patent laws though probably not too drastically.

3)A single-payer system doesn't imply ripping off the drug companies. As noted in your article, drugs are not covered by the government in Canada (with the exception of the old and those who are very poor), and yet Canada's health care system is still much cheaper than that of the U.S.

4)Having lived in Canada for most of my life and moving to the U.S. a few years ago, I can atest that the Canadian system is better and cheaper per capita. (i.e. on a per capita basis, Canadians spend less to give everyone health care than Americans do even spreading the cost over the 50 million Americans without insurance). I don't think that America will adopt a single-payer system because there are way too many soundbites of bad things about the Canadian system (i.e. adoption of new technology is slow, if you go to an emergency room and your injury is non-life threatening you will be forced to wait a long time), but for the most part, the difference between having a good PPO health plan in the U.S. and being covered in Canada is minimal.

Jason, the government doesn't buy the drugs; like here, they're paid for privately. So there's no "large buyer" discount. What it does do is cap prices and generally throw the weight of the state around to keep prices artificially low.

Ah, didn't know about the price caps. Still: why the appeasement? Would we let Japan price-cap Intel processors for their home market, and ban reimportation of them in the fear Japan would just start breaking the patents?

Hey, guys, here's one Canadian who'll beg you, *please* don't start talking about single-payer health insurance again. Umm... you'll hate it, honest. Don't you listen? We even sent you David Frum to convince you that it would be horrid, just horrid, waiting periods into the next century, you're all gonna die.

Oh. Didn't work, huh?

Okay. The real reason we don't want you to talk about a single-payer system is that your right wingers will fight just as dirty as they did last time, and all that corrosive mud will splatter over the border and eat big holes in our system. We've barely gotten over your last bout.

If you had a hope in hell of implementing it, that would be different; we'd wish you luck. But until there's some sign that the political will exists -- like, oh, the word "liberal" stops being a swearword to half your voters -- we'd appreciate it a lot if you'd just forget about the whole thing.

David,

How are you defining "rich" and "lower income" and how much of a tax increase are you talking about?

Sylvia,

How does debate over single payer in the US affect Canada's system in any way?

Comments are Closed.