Asymmetrical Information

From the desk of Jane Galt:

IT's Magic

As you may or may not recall, the cost of Kerry's health care plan was brought under $700 billion in new spending (which it needed to be, because $700 billion was the amount his new taxes were projected to bring in) by the simple expedient of slashing 30% off the bill through "administrative and IT savings". This rather stonkered me. Turning something over to the government is not a known way to produce enormous efficiency improvements in management, even with something as inefficient as the health insurance market. And forecasting cutting edge IT from the government . . . well, the State Department was long known in Washington as the "Prisoners of Wang", because they'd made a hefty investment in Wang computers, only to see the company blow up in 1992.

They didn't get to replace them, I'm told, until well into Colin Powell's stint as secretary. Many offices still don't have internet access.

Having, in a previous life, designed and built computer networks, and also been the child of a trade association executive whose members work on government spec, it seems to me that the American government is the enemy of good IT. This is not because government qua government is somehow necessarily unable to design a good computer system, or because their technical people are morons. Rather, the procurement process that big government projects must go through in America practically guarantees that whatever system is purchased will be, by the time it is installed, bloated, inefficient, and sadly outdated.

By the time you've had a nice long open bidding period, let every congressman on seven or eight committees earmark the legislation to ensure that at least some part of the system is manufactured or maintained in his home district, held public hearings and offered a lengthy public comment time to let everyone in the country have their say about our new computers, had a crack team of civil servants laboriously sift and respond to every comment, including "I think the computers should be a nice, patriotic red, white and blue", had the EPA go through the mandatory Environmental Impact Statement, and wrapped up all the loose ends in conference committee, your shiny new system is so outdated that you might as well give everyone an abacus and a pad of paper. And upgrade it? Are you crazy? Any big upgrade has to go through the whole damn process again. Shut up and go telex Washington to send us more leeches for the cancer ward.

Or at least, that's how I understand it.

Paul Krugman has been pushing the VA as a model of technological medical management. Perhaps they are. But the New Economist offers another vision of what our government could do with a nice big medical IT project, and it comports much better with what little I know about government IT.

The project was given the go ahead in 2002. It was supposed to cost £5 billion and last less than three years. But anyone familiar with the track record of major UK government IT projects will know what happened next. The project is now due to cost £20 billion and last at least a decade. Beezy Marsh reports in today's Sunday Telegraph that 'Computer says no' to Mr Blair's botched £20bn NHS upgrade

The Prime Minister's dream of a 'paperless NHS', using 21st century, state of the art information technology, is in danger of crashing under a mountain of problems. Four years later, the joke is on Mr Blair, and the taxpayer. The "Connecting for Health" project is two years behind schedule and more than three times over its initial £6.2 billion budget.

Lord Warner, the health minister, revealed this week that the real cost of the programme would approach £20 billion by 2010, its revised delivery date. A report by the National Audit Office (NAO) is expected to be damning, suggesting that corners were cut so that political deadlines could be met.

More than £11.75 million of taxpayers' money has been lavished on consultants, including Ernst & Young, Price Waterhouse Coopers, PA Consulting, Cap Gemini and IBM. Yet the glitzy, "joined-up" NHS remains a low-tech hotch-potch. Doctors are largely unimpressed. Dr Richard Vautrey, a GP in Leeds and spokesman for the British Medical Association on IT, has struggled for months, for example, to get "choose and book" working. It should enable GPs to offer patients a choice of four hospitals but has been beset by technical difficulties. "It does work in some places, but we haven't been able to get it to," says Dr Vautrey.

The technological challenge appears to have outwitted leading network and software providers, including Accenture and iSoft, and the prognosis is not healthy. Prof Martyn Thomas, visiting professor at Oxford University Computing Laboratory, says: "This programme shows many signs that it is at risk of failing. We are hearing concerns about computer products being used in a way that manufacturers have advised against. These concerns are coming from people who fear their jobs are at risk if they speak out. Problems with computer systems cannot be bullied into submission."

Prof Thomas was among 23 leading computer specialists who recently wrote an open letter to the health select committee, calling for an independent audit. The project was given the go-ahead even though small-scale local trials had not been carried out. Later, it became clear that solving myriad problems would be more expensive than anticipated.

From the desk of Jane Galt:

Healthcare, Part IV

So here are the things I care about, when I think about healthcare:

* I don't want poor people to die because they can't afford healthcare. Luckily, I don't think that happens very much; the poor get much better health care than most people think, and many of the barriers they face are not inherent to the health care system, but have to do with things like transportation and trouble getting time off work.

But that doesn't mean I think that the poor get adequate health care. Call me a bleeding heart liberal, but I don't want poor Americans to suffer without basic treatment. It's all very well to say that this is the operation of the free market, but I triple dog dare you to go tell some old woman who is crippled by a disease she can't afford to treat that you think she needs to lean into the strike zone and take one for the team.

* I don't want the government to kill off the incentive to invent life-saving, or life-improving, new treatments. I care about this even more than I care about the uninsured, because new treatments will save a lot more lives than covering the relatively small number of uninsured¹. The patent life of a drug once it hits the market is only about ten years, after which point it is as cheap as it would be in any other country. It's one thing to demand that the uninsured forgo treatment; it's quite another to demand that they be content with slightly outdated drugs (many of which, outraged single-payer advocates keep assuring me, are every bit as good as the newer drugs).

* I want there to be a genuine market in health care services. As I said in my previous post, I don't think that this will significantly reduce costs, but I do think that it could improve quality. The current system of cross-subsidies, third payers and so forth inevitably destroys value.

* I want people to pay for their own health care, to the extent that they can. There is no reason that healthy young mailroom clerks should subsidize hypertensive middle managers, or poor young students contribute to the health care consumption of affluent senior citizens.

* I want health care to be separated from employment. The current system stifles innovation and labour mobility, by tying people to hated jobs when they could be seeking new opportunities.

All that's very nice . . . but how do we bell the cat?

Here is my suggestion. It is simple and elegant enough to be explained in a single sentence, yet powerful enough to meet all the criteria above:

Have the government pay for all health care expenditures above 15% of adjusted gross income, and cover 100% of health care expenditures by people living under 200% of the poverty line.

This preserves the market in most health care services--happy HSA advocates! It is progressive, and provides universal coverage--happy single-payer advocates! It directs coverage to those who really need it--the very sick--without a middle class subsidy--happy Jane! And it preserves market prices for almost everything from hospital beds to surgical procedures, since a significant fraction of the market will be paying their own way. That keeps the government from having to set prices, which as Soviet Russia showed us, is generally a bad idea. Most importantly (from my perspective) it preserves the market for innovations in drugs and medical equipment.

It is certainly not perfect. For one thing, I make no promises that it will control costs; I only allege that it will improve quality.

But you know what? We're rich. We're really, really rich. We're the richest country in the entire history of the world.

We're so rich that we have stores full of nothing but beautifully sculpted plumbing. What do we want to spend our money on that's better than health care?

From the desk of Jane Galt:

Health Care, Part III

A few weeks ago, Kevin Drum slammed this Michael Kinsley piece on universal health care thusly:

. . . Kinsley acts as if single-payer healthcare is some kind of radical theoretical construct that no one understands very well. Better to take things slowly.

But various forms of single-payer have been in use in dozens of advanced countries for decades — including Medicare right here in the United States. There are few social programs we know more about than single-payer, and what we know is that in a well constructed program costs are lower, the quality of healthcare is better, the amount of healthcare is higher, private healthcare remains available to anyone who wants to pay for it, and people are generally far more satisfied than American healthcare consumers are. The problems Kinsley tries to scare us with flatly don't exist in the simplistic ways he presents them, and it's dishonest for him to pretend otherwise.

I don't think that's quite fair. We know what Medicare looks like; we know what single-payer looks like in other parts of the world. But that doesn't mean we know what it would look like here. Knowing what the federal system looks like in Germany doesn't give me all that much insight into the way it works here.

Likewise health care. We have different cultures, different national incomes, different social welfare systems, different employment laws, different environments (Europeans walk more and eat less). Perhaps most importantly, Europeans and Canadians got national health care at a time when medicine could do a lot less. It's a lot easier to deny people things they've never had, than to suddenly announce that we're eliminating private rooms in favour of open wards, and no one over the age of 70 gets hip replacements any more.

So what would a single payer system, or an HSA-based reform, look like here, rather than in the fevred imaginations of their most enthusiastic advocates?

I'm not against HSAs, but I can't say I think they'd do much other than slightly cut down on unnecessary lab tests, while providing a healthy tax subsidy for prescription sunglasses. The basic reason that American health care costs so much is that no one wants to tell anyone that they can't have any treatment that might possibly do them some good. A $5,000 deductible is not going to significantly alter that basic cost driver. It will mostly produce minor savings on clinical visits, but even those will be limited by the fact that almost no one goes to the doctor for fun. It might improve health care quality--when I was uninsured, and had to pay cash for my doctor's visits, I got outstanding service--but I just don't see them making a big difference in costs. The free market in dentistry has not made it all that affordable.

What about single payer? Let us, as Mr Drum suggests, take a look at the Medicare experience. Medicare is unable to engage in the most basic form of rationing--denying life-prolonging treatment to extremely old people who are likely to die of something in the near future. I don't say that we should deny such treatment--my basic feeling is that we're a really, really rich country, so what's wrong with spending a whole bunch of money trying to give Granny a few more precious days? But given that Medicare, which is essentially single payer for everyone over 65, is unable to engage in the least controversial form of health care rationing, I can't see how it would be able to, say, deny fertility treatments to single mothers. This is not true in other countries, for all sorts of reasons. But it is true here.

Nor do I think that single payer will be able to hold the line on wages and salaries . . . at least, not without disastrous results. The labour market for health care workers, from doctors on down, is largely a seller's market. Moreover, government programs are, if anything, even more prone to wage inflation than the private sector. That's because political institutions are extremely easily captured by their employees; they're the only organization where the employees vote for the bosses.

It is possible, even likely, that a government-run health care system would be able to batter cost savings out of suppliers of medical equipment, supplies, and pharmaceuticals. But that doesn't strike me as a good thing. The high returns on medical equipment and drugs are what encourage people to invent more such. Get rid of the return, and you get rid of the innovation. Generating cost savings on new technology in order to cover today's uninsured simply privileges one small group of unfortunates over the very much larger group of people, living now or in the future, who have diseases which we can't currently cure. The lucrative American market is currently the only incentive left for medical innovation; I am very much against destroying it.

Single payer advocates retort that pharmaceutical companies spend a lot of money on marketing, which is true, but irrelevant--forcing pharmaceutical companies to price at cost-plus will kill the research along with the marketing. Actually, if I were running a pharma company, and something torched my profits, I'd kill the highly speculative research before the lucrative marketing campaigns. If we want to stop pharmaceutical companies from advertising, or selling directly to doctors, surely outlawing those things is a much more effective way to manage it than slashing their profit margins and hoping that they cut only the things you want them to.

Others argue that the government can take over the research. Perhaps the government is necessary to fund basic research; I haven't studied the question. But looking at the defense industry, where the government is the sole purchaser and major funder of new technology, it's very, very hard to believe that applying a similar model to health care would result in greater value for money. Rather, it seems very likely to me that politically popular diseases would get an even more disproportionate share of funds than they do now. Pharmaceutical companies have to pay attention to things like the size of the market, and the strength of demand. Politicians pay attention to how loud the lobby is, which is why breast cancer and AIDS get research funding all out of proportion to the number of people they kill.

Ultimately, I think that a single-payer system would succeed in cutting costs only one way: by rationing new treatments, while providing older treatments indiscriminately. That doesn't seem to me like a desireable outcome.

But what about the uninsured, you ask. Don't you care?

Why yes, I do. My health care plan in the next post.

From the desk of Jane Galt:

Healthcare, Part II

I know . . . I know . . . I've been lax. I'm helping my parents get ready to (sob!) sell their house, which is taking up a remarkable amount of my free time.

Anyway, back to health care. I hate sentences that start "the basic problem is . . .", but in health care, the problem is pretty basic, which is that we all want top of the line health care, regardless of cost, but we don't actually want to pay for it. Of course, we do pay for it . . . through tax dollars, foregone salary, and so forth . . . but that's largely invisible. When we're presented with the whacking great sums that it costs to provide that insurance, we screech in pain. Just ask anyone who's left a corporate job and had to buy their own health insurance.

Thus, the two relatively purist sides in the healthcare debate today--the single payer advocates and those who want to put the responsibility for purchasing healthcare back in the hands of consumers--promise that they can make health care cost much, much less. The single-payer advocates say that they can do this through the magic of administrative costs and using government negotiating power to batter suppliers; the "markets want to be free" people promise equally wondrous things from forcing consumers to actually shop around for their health care.

Is this true? Well, one should always be wary of anyone promising that there are no tradeoffs to be made.

Let's think about where the money actually goes:

* 30% of all healthcare expenditures occur in the last six months of life * 31% of expenditures are on hospital care * 9% of spending is on nursing homes * 22% of spending is on physician and clinical services * 10% of spending is on prescription drugs * 10% of spending is on dental/other professional care * 10% of spending is on medical equipment, supplies, and construction * 7% of spending is on administrative expenses

So how likely are either Health Savings Accounts, which encourage consumers to shop around because they're spending their own money, or single payer, to reduce any of these categories significantly?

Well, both would probably cut down on administrative costs: HSAs, because consumers decide what they want without battling insurance companies, and single payer because the government has economies of scale--and because the government doesn't argue when it tells you that the expensive procedure you want isn't covered, and you can't sue. But we spend about 15% of GDP on healthcare; if we could cut administrative costs in half, that would slash our bill to--14.5% of GDP. If we also used our negotiating power--either as a government, or as motivated consumers--to batter down the cost of prescription drugs by 40% (about what single payer systems in most developed countries pay), we could get that down to 13.6% of GDP. That's not chicken feed--in a $12 trillion economy, 1.4% savings means $168,000,000,000 a year, or about $560 for every man, woman and child in the country. But it's not exactly what people are imagining when advocates from either side wax lyrical about the fantastic savings to be had by implementing their plans.

So where are the savings to come from? The remaining categories are (roughly) wages and salaries for medical workers, medical equipment, medical supplies, lab tests, surgical procedures and other non-pharmaceutical treatments, and nursing home care.

In theory, either HSAs or single payer could cut down on many of these expenses. In practice, colour me unconvinced.

* There is already a great shortage of health care workers, particularly skilled workers like nurses; it's hard to see how either the government or the consumer could force those down without substantially worsening care (which both sides say they do not want). We are the only country in the world which is not currently whinging about our doctor shortage; that's because they all come here for the higher salaries and superior work conditions. Slash their salaries, and watch them go home . . . and watch your bright young scientifically minded college graduates look for another career. We'd still get about as many doctors graduating from US medical schools as we do now, but quality would fall somewhat (although it could possibly be argued that the single metric upon which doctors are selected--academic ability--is not entirely the most important quality a doctor should have). But if we lost the foreign doctors, we'd have a net doctor shortage here too.

* Who wants less medical equipment? Show of hands . . . okay, who besides the Christian Scientists? Anyone? Anyone?

* Perhaps HSAs or single-payer will cut down on the amount of medical supplies used . . . but it seems to me unlikely that there are fantastic savings on surgical gloves and gauze bandages to be had. If there are savings in this area, I would expect them to have been mostly found already by the private hospitals which can improve their bottom line by economizing on supplies.

* Nursing home care certainly won't be made cheaper by single payer, since most of it is already paid for by the government. It might be improved by HSA's . . . but not for years and years, as it would take decades for anyone to accumulate enough in an HSA to fund a lengthy stay in a nursing home.

In other words, in my opinion there are few significant, positive savings to be had from improvements in these areas. The bulk of any savings realized by either a single-payer system or HSAs will come from reducing the number of tests and treatments people have. Yes, let us say the dreaded word: rationing.

Advocates from both sides say that they have a way around this. HSA afficionadoes argue that people will just get the tests and procedures they really need. Problem: the bulk of America's healthcare dollars are spent on people who are really, really sick. And when you are really, really sick, your price elasticity of demand for something that might cure you is damn close to zero. There are very few good substitutes for chemotherapy, no matter what they say on late-night television commercials. That means that any rationing is likely to be done, not by consumers carefully analyzing costs vs. benefits, but by the limits of one's checking account. And the reason we're having all these debates about healthcare in the first place is that outside of the Cato Institute, very few Americans are comfortable with the idea that someone could die because they aren't rich enough to afford treatment.

Single payer advocates, who care more than most about getting that treatment to everyone in America, say that they will avoid having to ration needed care by the magic of preventive care. There are several problems with this. The first is that most of that preventive care hinges on active participation of the patient. Diabetics have to lose weight, excercise, carefully monitor their blood sugar by pricking their fingers multiple times a day, and eat a decidedly unappetizing diet. Heart-disease/hypertension patients have to excercise, quit smoking, lose weight, cut fat and salt out of their diets, get frequent blood tests, take pill regimens, and so forth. Asthmatics (as my health care company keeps thoughtfully remind me) need to aggressively monitor their peak flows, follow a tiresome inhaler/pill regimen that can have horrible side effects, clean their houses with the fervor of Martha Stewart on uncut crystal meth, and avoid triggers that include cigarette smoke, car exhaust, spicy food, alchohol, excercise, cold air, hot air, pollen, and dust. You can imagine what a hopping social life the conscientious young asthmatic enjoys.

Poor people, who in our society tend to be both uneducated and light on coping skills, are much less likely to follow these regimens even with good healthcare. Given how poor the track record of middle-class patients is on adopting these regimes, the marginal improvement in outcomes is unlikely to save money.

Another problem is that comprehensive health insurance is no guarantee of good care, as this study from the New England Journal of Medicine points out. The variation in level of care between those who were privately insured, those who were insured by the government (Medicare and Medicaid), and those who had no health insurance at all was trivial. That's right, having health insurance didn't seem to make any difference, as long as you visited the doctor at least once every few years. And yet America is generally the leader in treating those diseases, at least according to McKinsey.

But even if we could get people better preventative care, it's unclear that this would provide cost savings. (It might produce marvelous improvements in quality of life--but we're discussing cost here.) As I understand it, diabetes management only slows the progression of the disease; it doesn't stop it. In today's lower interest rate environment, the cost savings from delaying expensive treatments are probably not worth calculating. But even more to the point, many of the things we can treat are cheap ways to die; a single massive myocardial infarction is probably a lot less expensive than thirty years of hypertension drugs. And people who tout asthma prevention and so forth as a way to avoid expensive emergency room visits are confusing price with cost. A trip to the doctor every two months to get your breathing checked and hear him harangue you about your inhalers consumes, if anything, more medical resources than an annual visit to the emergency room. But emergency room visits are priced to subsidize expensive trauma cases and indigent patients; your monthly checkups are not.

Moreover, even if you prevent an expensive course of treatment for one disease, you thereby make it more likely that the patient will die of something even more expensive. People who don't have heart attacks or strokes get cancer, Alzheimers, or congestive heart failure. This is not an argument for not providing comprehensive health coverage to all US citizens; it is an argument that doing so will not be cheap.

What if we bite the bullet and say that we're going to ration, bully our suppliers, and trim back our expenditures on medical equipment in order to eke out enough savings to cover every American? I don't think we can do it. For why, see my next post.

From the desk of Jane Galt:

What's happening on health care?

A few weeks back, I noted that national health care seemed to be the only major policy programme that the left could basically agree upon. Now, I hear the stirrings of a push for national health care rippling through the liberal blogosphere like a rising storm wind.

If this movement actually takes off, I expect that we'll see a great deal of vehement argument between conservatives screaming that the liberals are going to screw up our health care system, and liberals arguing that conservative people are hardhearted bastards who want the poor to die. So before that happens, I thought I'd set down some quasi-reasonable thoughts about what we want from our health care system, what a single-payer US system would probably look like, and what the pro's and con's of such a system would be.

The first point to make is that our health care system is already screwed up. The practice of having your employer pay for your health insurance is lunatic. We should not be surprised at what we get when the person who pays for your health insurance is not the person who consumes it.

Of course, the fact that our health care system is already screwed up does not mean that it cannot be screwed up even worse. Pointing out that the current system has problems is not an adequate argument for wreaking massive changes in its structure.

So, the first question: why is providing health care so hard? Why are health care and education the only major areas of life that almost everyone expects to have provided by the state?

Well, for starters, everyone needs them, and they're expensive, and getting more so. Education and health care are both victims of something called Baumol's cost disease. Baumol's is what happens when productivity growth is slow in a given sector (usually a service sector).

In other sectors, where productivity is growing faster, some of that productivity increase (generally about 70% over the long run) feeds through into higher wages for the workers. Now, the low productivity sector has to compete with other industries for workers; that means that they need to raise wages too, even though productivity isn't increasing. The result is that the cost of the service goes up. As Mr Baumol famously pointed out, it still takes as many people to play Beethoven's Fifth as it did when he wrote it, but symphonies are now competing with Microsoft for workers, instead of medieval peasant agriculture.

Thus, doctors and nurses have to be paid the kinds of salaries that bright, scientifically literate college graduates would attract if they chose some other field. But it still takes as many nurses to bathe a patient as it did in 1850. (Some of this work is being pushed down onto Physicians Assistants and Nurse's Aids--but even those jobs are highly paid, compared to how little nurses used to subsist upon.) That means that the cost of medical care will slowly, inexorably, rise.

The situation is made much, much worse by the cartel-power of doctors and the various health care unions, who have considerable power to resist productivity-enhancing change.

The third-party payer problem is a huge issue. No one shops for the best, lowest cost alternative; consumers demand the best, while employers, who are footing the bill, demand the lowest cost. The result is predictible: insurance companies battle down doctor fees to save money, and doctors respond by running as many patients as possible through their office (I'd say that about half my doctors project a visible desire for me to leave their office as quickly as possible before I've even sat down), and doing more, more highly remunerated procedures. It's a mess.

The third-party payer system also runs up administrative costs on both the physician and the insurance side, since a phenomenal amount of time is spent wrangling over what is, and is not, covered.

Health care also has the problem that while most of it is relatively cheap, some of it is unaffordable for anyone except billionaires. Get a rare cancer or tangle with the wrong eighteen wheeler, and you can end up on the hook for a bill that runs well into the six figures.

Insurance is generally the solution for such issues, but many argue that the market for health insurance suffers from adverse selection, which I explain here (and link to an argument by Alex Tabarrok that it does not, in fact happen).

But the real problem for liberals is that where adverse selection does not happen, it is because the system has booted out people with expensive pre-existing conditions. This is not a structural problem in the market, the way the other things are--indeed, if there were a market that was willing to basically sell someone homeowner's insurance after their house had burned down, I would think of that as a glaring structural issue. But neither is it acceptable to many Americans.

Which brings me to the second question we have to ask: what, exactly, do we want out of our health care system?

My thoughts:

Quality: We want access to the latest high-tech treatments. In almost all cases, we are willing to spend any amount of (someone else's money) to produce even trivial improvements in our lifespan, or quality of life.

Choice: We want to be able to pick any doctor, drug, or treatment we want.

Security: We do not want any risk that we will not have access to standard medical care.

Innovation: Except for Leon Kass and some environmental activists, we want a system that will continue to deliver more of the medical marvels that have expanded lifespans and improved the quality of life of nearly every American in the 20th century.

Equality: At least a number of us do not want rich people to have a better chance to live, or live well, than poor people.

Low cost: We do not want to spend huge amounts, either of taxpayer money, or our own hard-earned cash, for these vital services.

Later: my thoughts on what an American single-payer system would look like. Meanwhile, I encourage you to chip in with your own ideas.

From the desk of Jane Galt:

HSA in 2006?

Kevin Drum is upset about Healthcare Savings Accounts:

The debate over HSAs is going to get mighty wonky over the next few months, but always keep this explanation in mind as you're trying to make sense of the charges and countercharges. The fundamental idea behind HSAs is not to provide better healthcare, it's to provide less healthcare. Conservatives want you to think twice before spending a hundred bucks for your regular pap smear.

I'm probably going to write enough about HSAs over the next few months to make everyone scream for mercy, especially since I assume the White House will decline to publish an actual plan, leaving us instead to speculate wildly about what they really have in mind. So I'm going to wrap up this post right here. Just remember: if you think more risk, more complexity, and less healthcare are the answer, HSAs are for you. The rest of us will keep pushing for something that actually makes sense.

The idea behind HSAs is indeed to make people spend less on their healthcare. Every health care policy analyst out there claims that their plan will cause people to spend less on their health care; single-payer advocates think that they can shake all that extra money out of the pockets of pharmaceutical companies and insurance administrators, while those of a more libertarian stripe are hoping to get it out of consumers. I won't rehash that argument here (say, "Thank you, Jane").

But I really don't understand the opposition to HSAs among single-payer advocates. It certainly won't hurt anyone, will it? If you get a high-deductible policy, and save the deductible in a tax-free account, how are you worse off? HSAs are, after all, primarily targeted at those who find it difficult and expensive to get insurance, such as the self-employed. Or are those people not entitled to have their health care problems solved the way old, sick people are? You might think the programme is underwhelming as a way to address health care costs, but why the vituperation?

"Conservatives want you to think twice before spending a hundred bucks for your regular pap smear" actually might not be a bad idea--there's some evidence that annual pap smears don't do any better for most women than a pap smear every two or three years, but hey, why risk it? The insurance company's paying! More importantly, there's a fair amount of health care that isn't necessary: "I have a cold! Write me a prescription for antibiotics!" Such visits are a waste of doctor time; a waste of insurance dollars; and they contribute to antibiotic resistance. Eliminating them would be a medical bonanza.

Will that keep health care costs under control? Seems unlikely. The primary driver of health care costs is heroic end-of-life interventions These interventions are not within the budget of all but the very wealthiest of citizens, and given that our society is unlikely to let people die for lack of $300K for ventilator support, they are not going to stop. Given that Medicare has also done almost nothing to restrain these costs, I find it implausible that neither market nor government action will prove capable of restraining the growth of health care costs.

Nor does the fact that our health care costs are high, and growing, really bother me. We're basically the richest nation in the world. All of our citizens have enough food, clothes, and a roof over their head. Do we have something better to spend our money on than being healthy?

From the desk of Jane Galt:

Funding cataclysm?

I like drinking with economists, because they're funny. When I go drinking with, say, physicists, I usually end up mired in rants about string theory, which is tough on me because it makes my already limited pool of brains start rattling around in my otherwise empty skull. When I go drinking with economists, on the other hand, they start ranting about how the rest of the world treats them. The most common version of the complaint was summed up by one economist of my acquaintance who said: "You know, I never offer opinions on gall bladder surgery, chemical synthesis, or drawing up a will, but doctors, chemists, and lawyers--and everyone else--all think they know how to do my job better than I do."

Case in point: Paul Ewald, biologist, who thinks that finding an infectious basis for diseases like heart disease and cancer would destroy the health care industry as we know it:

One array of dangers arises because ideas that challenge the status quo threaten the livelihood of many. When the many are embedded in powerful places the threat can be stifling, especially when a lot of money and status are at stake. So it is within the arena of medical research and practice. Imagine what would happen if the big diseases — cancers, arteriosclerosis, stroke, diabetes — were largely prevented.

Big pharmas would become small because the demand for prescription drugs would drop. The prestige of physicians would drop because they would no longer be relied upon to prolong life. The burgeoning industry of biomedical research would shrink because governmental and private funding for this research would diminish. Also threatened would be scientists whose sense of self-worth is built upon the grant dollars they bring in for discovering miniscule parts of big puzzles. Scientists have been beneficiaries of the lack of progress in recent decades, which has caused leaders such as the past head of NIH, Harold Varmus, to declare that what is needed is more basic research. But basic research has not generated many great advancements in the prevention or cure of disease in recent decades.

The major exception is in the realm of infectious disease where many important advancements were generated from tiny slices of funding. The discovery that peptic ulcers are caused by infections that can be cured with antibiotics is one example. Another is the discovery that liver cancer can often be prevented by a vaccine against the hepatitis B virus or by screening blood for hepatitis B and C viruses.

The track record of the past few decades shows that these examples are not quirks. They are part of a trend that goes back over a century to the beginning of the germ theory itself. And the accumulating evidence supporting infectious causation of big bad diseases of modern society is following the same pattern that occurred for diseases that have been recently accepted as caused by infection.

The process of acceptance typically occurs over one or more decades and accords with Schopenhauer's generalization about the establishment of truth: it is first ridiculed, then violently opposed, and finally accepted as being self-evident. Just a few groups of pathogens seem to be big players: streptococci, Chlamydia, some bacteria of the oral cavity, hepatitis viruses, and herpes viruses. If the correlations between these pathogens and the big diseases of wealthy countries does in fact reflect infectious causation, effective vaccines against these pathogens could contribute in a big way to a new golden age of medicine that could rival the first half of the 20th century.

The transition to this golden age, however, requires two things: a shift in research effort to identifying the pathogens that cause the major diseases and development of effective interventions against them. The first would be easy to bring about by restructuring the priorities of NIH — where money goes, so go the researchers. The second requires mechanisms for putting in place programs that cannot be trusted to the free market for the same kinds of reasons that Adam Smith gave for national defense. The goals of the interventions do not mesh nicely with the profit motive of the free market. Vaccines, for example, are not very profitable.

Pharmas cannot make as much money by selling one vaccine per person to prevent a disease as they can selling a patented drug like Vioxx which will be administered day after day, year after year to treat symptoms of an illness that is never cured. And though liability issues are important for such symptomatic treatment, the pharmas can argue forcefully that drugs with nasty side effects provide some benefit even to those who suffer most from the side effects because the drugs are given not to prevent an illness but rather to people who already have an illness. This sort of defense is less convincing when the victim is a child who developed permanent brain damage from a rare complication of a vaccine that was given to protect them against a chronic illness that they might have acquired decades later.

Mr Ewald combines deep knowlege of biology with gross ignorance of economics to produce an answer that is as silly as what you probably get when economic journalists start theorizing about evolutionary biology. (blush)

How many things are wrong with this argument? First, it assumes that the price of a vaccine is the same as the price for a dose of medicine. But how much would you be willing to pay for an AIDS pill that you have to take oer and over, versus a vaccine that has fewer side effects, plus you don't have AIDS? If you're one of those church ladies who makes pimento cheese sandwiches in between visiting the poor, maybe not so much. But if you're a sexually active young adult in an urban area, I'd venture that you'd probably be willing to pay at least as much for your AIDS shot as you would for your breast implants or nose job. The pharmaceutical company could collect all that money up front, and as we know if we stayed awake in Econ 101, a dollar today is worth more than a dollar tomorrow.

Second of all, it ignores marginal cost: pharmaceutical companies get to get all the money you'd pay for a vaccine, with only the cost of producing one dose. To stick you for AIDS drugs, they need a bigger manufacturing plant, more workers, and of course whatever raw materials go into the manufacturing. That's presuming that people only ever need one dose of a vaccine, which isn't right; most vaccines I'm familiar with require boosters every few years to keep immunity up.

Third of all, it assumes a lump of consumer demand for health care. Say we vanquish heart disease, cancer, and so forth (though given evolutionary biology, won't we need ever-expanding teams devoted to finding new anti-infectious agents? Couldn't we shift some of our statin and chemotherapy scientists over there?) If we're all living longer, we'll need new joints, a lot more plastic surgery, better pain killers, and some sort of drug to keep us awake after Sunday dinner.

Fourth, it ignores competition. Sure, if I'm a company with a blockbuster AIDS drug, I might not want to cannibalise my own sales. But the company across the street whose market-leading antacid just went off-patent would probably love to introduce a lucrative new vaccine.

The health care market can cope with change just fine. That is, if the regulatory system lets it. The problem with vaccines isn't that you can't charge enough money for them; it's that vaccines are very useful things, which tempts governments to break the patent. It is thus perhaps wiser for pharmas to invest in a good baldness cure than something that people actually need. But this is not a market failure; it is a government failure.

There are major incentive problems with vaccines, and to be fair he touches on one of them: because vaccines protect you against something you haven't got yet, patients are more likely to sue if something goes wrong. And as they become more widespread, people are tempted to free ride on the vaccinations of others. It is only because almost everyone is vaccinated that phobic parents are willing to let their children go un-immunized; if measles and polio were widespread, they'd be a lot more worried about possible blindness and paralysis than about the extremely rare side effects of vaccines. This is a public health problem in areas like boulder, where bobo parents refusing to vaccinate their children have caused a resurgence in diseases like Whooping Cough and measles--unfortunately, affecting not just their children, but adults whose immunity has waned over time.

But those are easily fixed with regulatory changes, such as requiring vaccination to attend school; they're not fundamental to the market. With a few tweaks, I predict that the health care industry will survive, and even grow, even if we vanquish heart attacks and conquer cancer.

From the desk of Winterspeak:

Who pays for health care?

Paul Krugman has a good column on rising healthcare costs and how to ration them. Krugman has been a frothing nutter for about 6 years now, so it's nice to see something honest and reasonable for a change.

On the topic of rising healthcare costs, Krugman correct identifies the main culprit: new (expensive) medical technology

Consider what happens when a new drug or other therapy becomes available. Let's assume that the new therapy is more effective ... than existing therapies ... but that the advantage isn't overwhelming. On the other hand, it's a lot more expensive than current treatments. Who decides whether patients receive the new therapy? We've traditionally relied on doctors to make such decisions. But the rise of medical technology ... makes ... medicine ... in which doctors call for every procedure that might be of medical benefit, increasingly expensive.

Krugman's prescription is to have the government step in and regulate pricing. He does NOT point out that this fix works by eliminating new (expensive) medical technology. This does not matter if you are an old person or someone with a treatable disease, but sucks if you are a young person or have a (currently) untreatable disease.

Transfering healthcare from future generations to the Boomers may seem like a clearly Good Thing to Krugman, but not to me.

One area where public interest has killed research is in AIDS vaccine research. Current retroviral therapies costs hundreds of dollars a year and need to be taken over a lifetime. Activists have agitated for these drugs to be given for free to poor nations, and patients have agitated to have these free drugs re-imported into rich countries at lower cost. This appeals to our human moral sense, but it reduces the profit from the drugs, and so reduces the incentives to create new drugs.

An AIDS vaccine would eliminate the value of retroviral therapies. Since those are expensive now, an AIDS vaccine would only be worthwhile to develop if it could be priced high -- say $100,000 a pop.

Some people would pay this. Certainly it is worth far more than $100,000 a pop -- in Africa we are told repeatedly that AIDS is costing these poor countries billions of dollars in healthcare and lost productivity. But Merck, or whichever poor schlub actually invested the damn thing could not charge Africa, or anyone, $100,000 for a dose of AIDS vaccine. Public opinion would force them to give it away for free, or for a very low price. For God's sake -- we're talking about the AIDS vaccine here! (And if anyone got sick from the vaccine they would sue the company for $billions.) Therefore, drug companies will not invest money in developing this vaccine, but they will not say they are not developing a vaccine for the very same reason.

You can see this simple logic play out in this CNN piece, where an NIH expert says the private sector has no incentive to develop a vaccine, and a bunch of pharma execs say "no, we're working on it".

In short, this is what Krugman--and all public-healthcare advocates--advocate. Since expensive new medical technologies increases the price of healthcare, eliminating healthcare development (by taking the profit out of it) will reduce the costs. We can then spend this saved money on... I don't know, the leisure needs of healthy 55 year old ex-government employees.

Update
Some commenters have taken issue with my pricing an AIDS vaccine at $100K and comparing that to the cost of retrovirals -- they say I am making a "lump of labor" mistake. This is a good point, so let me clarify.

The question is how high can a pharma company price an AIDS vaccine? Obviously it is very valuable--AIDS is a terrible disease and very expensive to treat (until recently it was fatal). Assuming that the pharma company has some sort of patent and can price above marginal cost (which is a very reasonable assumption -- most drugs under patent are priced much higher than marginal cost), how high politically can the company price? They will certainly come under pressure to dispense the drug, for free, across the continent of Africa and various other poor countries struggling with AIDS. National drug buyers in richer companies will surely demand bulk rates. Citizen groups in the US will surely demand the right to re-import the cheap foreign versions of the drug. Politicians will surely reimport drugs and dispense them at cheap prices. All of these will reduce the profitability of the drug by limiting the drug company's ability to price.

And remember -- they can only price high until the patent wears off and competitors enter the market. At that point competition will reduce the price to marginal cost (or close to it) and the profit is gone.

All new drugs face the above pressures, but I think the AIDS vaccine will face it more strongly since AIDS is a more political disease and it exists in both the rich and poor world. As the power to price goes away--whether for a treatment, vaccine, or cure--the incentive to create new medical technologies goes away as well.

From the desk of Jane Galt:

Blame Canada

A long time ago, in a galaxy far, far away, I joined Derek Lowe in making fun of drug companies for pretending that drugs from Canada were somehow dangerous, because they didn't have those good old American quality controls. This is silly, though in their defense, if they offered the true arguments against drug reimportation, they would be stampeded by seniors groups who basically don't care if some young whippersnappers who don't know how to show proper respect to their elders maybe don't get any new drugs in twenty years.

But according to this WSJ piece (subscription required), I may have been wrong . . . not because Canadian drugs are substandard third-world counterfeits, but because many of the drugs being represented as "Canadian" are coming from somewhere else:

The agency looked at packages suspected of containing pharmaceuticals sent from India, Israel, Costa Rica and Vanuatu -- four countries the FDA said appeared to be sources of drugs that were ordered from pharmacies alleged to be Canadian in origin.

Out of nearly 4,000 parcels examined, almost 1,700, or 43%, had been ordered from "Canadian" Internet pharmacies and were represented as being of Canadian origin. Of the 1,700 packages, 85% of the drugs weren't manufactured in Canada and came from 27 different countries.

"This operation suggests that drugs ordered from so-called Canadian Internet sites are not drugs of known safety and efficacy," Andrew von Eschenbach, the FDA's acting commissioner, said in a statement Friday. "These results make clear there are Internet sites that claim to be 'Canadian' that, in fact, are peddling drugs of dubious origin, safety and efficacy."

While Canadian drugs are just as safe and effective as American ones, there are lots of countries where that isn't true. Another reason to tell my family to steer clear of Canadian internet drugs.

From the desk of Jane Galt:

Adverse news for adverse selection

Alex Tabarrok has a marvellous post up on adverse selection. As he puts it, the central insight of adverse selection ". . . is simple enough for your friends to understand but profound enough for them to be impressed at your learning. so it's a hard story not to tell!"

Unfortunately, he argues, besides being elegant and important, the central insight behind adverse selection is also not true--at least not in many of the contexts in which it is used.

The basic idea of adverse selection is that in certain markets, all or most of the relevant information is known by one party, but unobtainable (at least cost-effectively) by the other. When you are selling your car, you know whether it is a good car, or a piece of crap that breaks down every two miles. But you have no incentive to tell prospective buyers this. So the information that the buyer gets--"this car is completely reliable!"--is the same whether the car is a lemon, or a mechanical dreamboat.

Buyers, knowing this, will discount the price they are willing to pay by the probability of getting a lemon. But if you are a car seller, why sell a good car at a hefty discount because of some other dishonest schmuck out there? Sellers with very good cars will exit the market, leaving only the relatively poor cars. But soon buyers will demand a steeper discount, because the probability of getting a lemon has gone up. The process is iterative; sellers with relatively good cars will exit the market, making the average quality even poorer, which will cause buyers to demand an even bigger market.

The theory of adverse selection is a favourite of national health care advocates, and has to my mind been one of the more convincing arguments in their arsenal (though not convincing enough to get me to endorse their plans). They argue that as sick people drive up the cost of health insurance, healthy people will decide not to buy insurance. This will increase the average cost of the people left in the pool, which will cause insurers to raise rates, which will cause more healthy people to drop their insurance, which will increase the average cost of the people left in the pool . . .

It makes intuitive sense, yet it is, as Mr Tabarrok says, profound. Just not true:

The facts of the matter, however, are that adverse selection is not an important part of the market for automobiles (trucks), or of auto, life insurance or health insurance (on the latter see below).

One reason adverse selection may not be that important in practice is because buyers and sellers use testing and certification to remove the most important information asymmetries.  You can buy a decent used car, for example just get it inspected or certified.  Only if such adjustments are illegal, or in some other way not allowed, will adverse selection become important.

Second, the asymmetry may run in favor of the sellers.  Do I really know more about my own life expectancy than an insurance firm that has access to sophisticated actuarial models?  And, assuming that I do have extra information is it all that important?  After all "the race is not to the swift, nor the battle to the strong, neither yet bread to the wise... but time and chance happen to them all."  Or, more prosaically, the signal is near irrelevant when the signal to noise ratio is high. 

Third, propitious selection can be more important than adverse selection.  What sort of person buys a lot of life insurance?  Is it people who expect to die soon?  Or is it the sort of person who is so worried about not leaving their family in trouble that not only do they buy life insurance they also buckle their safety belt and eat healthy?  The price of life insurance falls the more you buy so evidently insurance companies believe it is the latter.

Everyone talks about adverse selection in the market for health insurance but in fact non-group policies in these markets are not relatively expensive and not hard to get.  The national average annual premium for reasonably generous coverage for a single person is just $2,268.

Sure, that's a lot of money but the point is that it's not a lot relative to what an employed person and their employer would pay for similar coverage in the group market.  There is no evidence for an adverse-selection death spiral in the market for health insurance.  That's not surprising because non-group health insurance is medically underwitten (i.e. medical inspections just like car inspections).  Most people are accepted a few are not.  Only in states that require insurance companies to accept all or most buyers are rates high relative to the group market (rates in New Jersey, an outlier, are almost three times as high as the national average.)

There are problems in the health insurance market, including a lack of long term insurance, job lock and the inequity of affordability, but adverse selection is not one of them.

That pretty thoroughly undercuts any support I might have had for nationalised health care.

You are cruel! my critics will say. No, not really. It is true that I now have good health insurance, but I was also against nationalised health care when I did not have health insurance, whih I could not afford thanks to New York's practice of "community rating"; i.e. forcing health insurance companies to sell insurance to anyone who can breathe and sign a check. The reason that I am against nationalised health care is that I think the market is the primary vehicle for medical innovation, and I do not want to see the government become the monopoly purchaser that destroys that market. Believing as I do, if I supported nationalised health care I would be privileging the needs of those who are undertreated now, over those who have diseases that we could cure in the future. Since there are more of the latter than the former, this does not seem to me to be a reasonable moral choice, though I am sure that there is more than one left-wing moral philosopher out there who would like to explain to me why I am wrong.

From the desk of Jane Galt:

Good intentions, bad outcomes

A judge has blocked a Bush administration rule that would have allowed companies to cut health benefits for retirees as they become eligible for Medicare.

Now, it's fair for people to suspect that the administration was just giving prizes to its buddies in industry on the government dime. But think about this. If you're a company like GM, paying more for retiree benefits than for the steel in your cars, are you more likely to suck up this expense . . . or cut benefits for people under 65. After all this judge just turned what might have been a five-year committment to an employee who retired at 60, to a committment of 20 years or more, which will now encompass those terribly expensive end-of-life years. Better to let your retirees go from 60-65 without health care, no?

From the desk of Jane Galt:

More on medical residents

A number of doctors have written me to say that I don't understand.

Doctors need to have experience working long hours.

Doctors are young, physicially fit, and exceptionally bright. They can take sleep deprivation better than other people.

There is a loss of information that occurs every time a resident passes off a patient; 24 hour shifts minimise this.

Attending physicians work long hours too.

If we don't work residents to the bone, there won't be enough doctors.

Okay, first of all, all of these arguments (except hte last) apply to pilots. Pilots start out younger and more physically fit than doctors do, and they have to take regular physicals, unlike medical residents. They have IQs well above average. In an emergency, they might well need to fly for more than a standard shift. They need to see all sorts of conditions in order to be able to cope with them should they arise. The handoff of the plane to another pilot causes all sorts of inconvenient delays and possible lost information about how she is handling.

So which doctors will accept the construction of the following system: most planes will be flown by pilots working 24 hour shifts, averaging a total of 80 hours a week. There will be an "attending" pilot who works much shorter shifts, and is "on call", asleep in first class, should the plane run into some problems. Passengers will, of course, have no way of knowing whether their pilot is on hour 1 or hour 16 of his shift when they board the plane.

Of course they wouldn't accept this from their pilots. I sure as hell wouldn't, and I've been that prime young physical specimen the doctors are telling me, strong of heart and will, high of IQ. I've worked 24, 36, even one memorable 60 hour shift. I've gone for months on 2-4 hours of sleep. And the fact is that no matter how high your IQ, how young your heart, how charged your system with adrenaline, when you've been awake for 24 hours . . . You. Are. Stupid.

Your reactions slow down. Your memory gets fuzzy. You become prone to make (bad) snap decisions. You are dangerously willing to cut corners if it will get you home to bed. You have difficulty keeping the thread of what you are doing, forcing you to go back and do it again. It takes longer--a lot longer--for you to diagnose even familiar problems given a set of symptoms.

This is all fine when the greatest risk is that some trader is going to have to wait ten minutes for his market data. Not so much fine when people might die from my bad judgement.

Having supervised others on little sleep, I can readily state that anyone who thinks he was fine after 24 hours without sleep is either lying, or has had his memory permanently impaired by sleep deprivation. You may be the smartest guy in the whole world, but around hour 16 you began dropping 10 IQ points an hour.

Attendings who claim that they work the same hours as residents, or more . . . huh? Being at home, in bed, with your cell phone on in case the resident has a problem, is not "working the same hours" as the guy in the hospital waving a stethoscope around at 3 am. Yes, I too hate having my sleep interrupted, but it is not the same thing as not sleeping at all.

We're now seeing studies showing that residents aren't competent to drive after their shifts are over--they pose an unacceptable risk of accidents. Someone who can't successfully merge into the middle lane should be treating patients?

The argument that we won't have enough doctors without long shifts has some merit. But the reason we won't have enough doctors is not that too few people want to be doctors; it's that the AMA ruthlessly controls the number of medical school slots in order to keep wages high for its members. Now, undoubtedly doctors are going to argue that it is a bad idea to have more med school and residency slots because the extra doctors will be lower quality than the current ones. Possibly true. But is having a doctor with a 3.87 GPA, rather than a 3.89, really better than having a doctor with a 3.89 who hasn't slept more than 4 hours a night in the last month? I don't think so. And I'm pretty sure it's better than not having a doctor at all, which is a real problem in a lot of rural areas.

Doctors, I love you guys. I think you do one of the most important jobs in the world, and take a lot of crap for it. Being a doctor combines two things I really dislike -- hard science, and listening to people complain -- and I'm grateful to every single one of you for undertaking this thankless job. I want to save you from trial lawyers. But I also want to save you from yourselves. I just don't think pushing medical residents to the breaking point is good either for them, or their patients.

From the desk of Jane Galt:

Arguments that don't quite make the case you think

Two entries in this item, both heard recently:

1) People who oppose reforming the medical malpractice laws often like to point out that most medmal cases are resolved in favour of the defendant. "See!" they cry triumphantly. "No crisis!"

But this is hardly a good sign. If the overwhelming majority are resolved in favour of the defendant, that means that a lot of weak cases are being brough to trial. Such cases are no less expensive to defend than cases in which the doctor is at fault. This represents an enormous cost to the system.

Assuming that attorneys are rational actors, and that on net the expected value of all verdicts in malpractice cases in a given year should not be less than zero (or a lot of medmal attorneys would go out of business), then this means that medmal attorneys are in effect playing the lottery: buying a lot of "tickets" that are unlikely to hit, in the hopes of a big payout.

Reducing the payoff of the cases that "hit", particularly the lucrative punitive and pain&suffering damages, should cause the number of weak cases to fall, until the expected value of all payouts is once again something just high enough above zero to produce a living wage in contingency fees. Ideally, we would like to see payouts occur in 50% of the cases, since this would mean that the cases going to court are the ones where there is a likelihood of guilt, but the circumstances are sufficiently murky to make settlement unobvious.

(This presumes, of course, that whether a case pays off is directly related to doctor culpability, rather than essentially random. But if the latter is true, then we need medmal reform more than ever).

Medmal cases have, of course, other costs than just dollars wasted on attorney's fees in frivolous cases. You have doctors wasting time in court, rather than using their expensively acquired, and socially valuable skills. You have "defensive medicine" -- unnecessary tests and consults just for CYA purposes. In a medical system that is already strained, how can one justify imposing these costs when a majority of the cases lack merit?

2) Doctors like to claim that the reason medical residents need to work shifts of 24 hours or more, despite the obvious risks to their patients from being treated by a sleep-deprived young stripling, is so that they can gain "ownership" of treatment for their patients, and see the entire course of a case unfold.

But if this is so valuable, why is it not valuable for attending physicians to work this way? If it is great to have a resident "owning" my case for 24 or 36 hours, why wouldn't it be twice as great to have an experienced attending physician becoming intimately familiar with my emergent symptoms as they occur? Why is it that people only happen to benefit from sleep deprivation and enforced stays away from their family when they are still in the grip of a legalised cartel that can force them to work investment banking hours for a food service salary, on threat of withholding their medical license if they fail to comply?

From the desk of Jane Galt:

Speaking of healthcare costs

Quel surprise! The administration's estimates of the 10-year cost of the Medicare prescription drug plan just shot from $400 billion to $720 billion. Who would have thought that a government health care programme would end up costing vastly more than the politicians claimed when they passed it?

Part of the change comes from earlier flim-flammery on the part of the Administration & congress, which projected costs from 2004-2013, even though the benefit didn't start until 2006. The new projections start in 2006. But that move alone can't possibly be enough to account for the projected costs nearly doubling. Hang onto your hat, Hilda; we're in for a bumpy ride.

Update Democrats are outraged-outraged! But I don't understand why, since the plan they wanted would have cost even more, and presumably, its costs would be forced upwards by the same pressures that beset the Bush plan, which would make it cost even more than the gazillions the Bush administration is planning to spend. I mean, I understand that they didn't like the structure of the programme, but the basic cost pressures are the same. As far as I know, the reason prescription drug costs are rising so fast isn't that prices are rising faster than inflation, but that people are consuming more drugs. I would thus expect the primary driver of the programme's costs to be expanded consumption (which the Democrat's plan featured more of), limiting any gains to be had from their plan to get the pharmaceutical companies over a barrel and beat them with a big stick until all the drugs fall out of their pockets.

From the desk of Jane Galt:

Anecdotes cut both ways

Dr Tony on TennCare, the generous state Medicaid programme that's being cut because it was bankrupting Tennessee:

Whenever there is an article, like this, about TennCare, they always describe some poor soul that nobody could justify removing from the roles. However, I never see any articles listing all the healthy 20-somethings I see in the ER who are on TennCare. These are potentially insurable people who simply elect not to buy insurance and get on TennCare during an acute illness, usually requiring hospitalization, and then just stay on the roles. Then they ask for a prescription for Tylenol because they have no money. Then they spill their beeper and cigarettes out of their purse as they reach for that cell phone that's ringing.

This is actually a serious problem with journalism. Whenever we have a programme cut, we go out looking for the heartrending story of someone who will lose their benefit.

But living, as we do, in an imperfect world, we have to accept that there are tradeoffs to social policy. Until Jesus comes back to sort out the deserving from the needy, we are stuck with legislators and civil servants to do the job. Since they, unlike Jesus, are not omniscient, they will get it wrong some of the time.

This means that we have to choose whether to bias towards false negatives (setting up a system that will deny benefits to some who deserve them) or false positives (setting up a system that will give benefits to some who don't). This is not a binary choice; at any given level of benefit, I guarantee you that someone, somewhere, should be getting it and isn't; while someone else shouldn't, but is. The question is how many of each you've got; society has to decide how much of each it wants to risk, even while knowing that, due to the very nature of the problem (imperfect information) it will not have a very exact idea of whether they are denying benefit to too many, or too few.

Put like that, of course, the answer seems obvious to all but the hard-core libertarian: deny benefits to as few people as possible! But of course, widening the benefit basket has costs. The most obvious are the monetary costs, which in the case of Medicaid, are considerable, but there are also all sorts of second-order economic and sociological costs. It's pretty obvious, for example, that the dramatic increase in transfer payments in the 1960's had the primary effect of lessening material want, but the secondary effect of creating an inner-city underclass. These are difficult questions.

But when journalists attack these stories, they are prone to elide the difficulties. Right-wingers will say "liberal bias" and I don't deny that that's a problem, but there are other issues. Heart-rending stories make for good journalism, the kind that gets you noticed. Plus, it's easy to find someone who's going to get their benefits cut; just call your favourite advocacy group, and they'll supply several from their stable. On the other hand, how do you go about finding someone who's basically scamming the system? They don't want to be found.

"Hard cases make bad law", and sad stories make bad policy. What journalists should be telling us is the complex web of problems that surrounds a big policy debate like this one, but too often they settle for the easy way out, reporting numbers and a few "he-said, she-said" matches between the policymakers and their interest-group opponents, which they tie together with a story about some benefit recipient guaranteed to rend the heartstrings. But anecdotes are not data.

Not that journalists shouldn't tell us these stories: I firmly believe that we should see the human face of the policy decisions we make. But we should see all the faces (or at least a representative sample), not just the ones that are easy to find, and reaffirm the average journalist's committment to spending other people's money.

From the desk of Jane Galt:

Can Medicaid trim down?

We have seen the future of nationalised medicine, and it is . . . mind-bogglingly expensive:

Forty years ago, Congress, as an afterthought to the Medicare program for the elderly, created Medicaid to help pay for the medical needs of about four million low-income people. Today, the program covers 53 million people -- nearly one in every six Americans -- and costs $300 billion a year in federal and state funds, recently surpassing spending on the federal Medicare program. In some states, Medicaid accounts for one-third of the budget.

The benefits offered by Medicaid have steadily expanded over the decades. The program now pays for 60% of the nation's nursing-home bill. It covers eight million disabled people and 25 million children. At many hospitals that cater to indigent people, Medicaid accounts for more than 40% of the revenue. "It has become a program that takes care of the worst situations," says John Holahan, director of the Urban Institute's Health Policy Center.

Bush is trying to cut $60 billion out of the Medicaid budget over the next decade, allegedly by cracking down on the gimmicks states use to collect extra payments from the Feds. Does this include New York State's scheme of forcing the local government to match the state's spending, thereby doubling the take from the Feds? Enquiring minds want to know!

From the desk of Jane Galt:

The law of one price

Prescription drugs seem to be proving out the economic theory that one cannot long sustain different prices in different regions if the premium in high-priced Region A is higher than the cost for transporting the goods there from Region B. For a long tme, the theory didn't quite translate into practice, because of the information costs involved in learning about Canadian drug prices, finding someone to ship them to you, and so forth. The internet has, of course, removed those information problems. Now the burgeoning business in importing pharmaceuticals from Canada is threatening the stability of pricing regimes on both sides of the border.

Alone among commenters, I am unsure which regime will collapse: the US patent regime that keeps prices high, or the Canadian system of price-controls and bullying that keeps them low. Everyone else seems to know exactly what will happen--the liberals are sure that this will finally usher in the blessed era of practically free drugs we've all been waiting for, and the libertarians that this will finally force those loathesome Molson-quaffing, Chesterfield-sitting, statist free-riding bastards up in Ottowa to pay their fair share of drug development costs. Me, I jus dunno. On the one hand, I can see how a combination of political pressure and free-wheeling individualist black-marketeering might lead to our importing Canadian price controls. On the other hand, I can also see how strategic behaviour by the pharma companies to limit Canadian supplies to the amount of drugs actually consumed by Canadians could ultimately destroy the Canadian regime, as all of their artificially low-priced drugs end up on the American black market, and Canada has to raise prices in order to get its people drugs.

Right now they're trying to forge what we might call a "third way": Canada is considering forbidding the export of prescription drugs. That strikes me as unlikely to be much more successful than other sorts of export controls. What would undoubtedly be successful would be for Canada to nationalise the pharmacies, becoming the sole distributor. The transaction costs are still too high to get a black market going via thousands of individual Canadians. This seems rather extreme, but one should never underestimate the lengths to which governments will go to keep their populace sated with artificially cheap goods.

Then there's the possibility that we will multi-source our price control importation. The American population is ten times that of Canada; Canadian pharmacies could never plausibly buy enough drugs to supply our whole population. Europe, on the other hand, is larger than America, and we might plausibly be able to acquire a significant fraction of our drugs through that channel.

From the desk of Jane Galt:

What's wrong with this picture?

From the New York Times:

Doctors in training were more than twice as likely to get in a car crash while driving home after working 24 hours or longer, compared with when they worked shorter shifts, according to a study conducted by Harvard Medical School.

The study also found that after extended shifts young doctors were about six times more likely to report a near-miss accident and that they sometimes fell asleep while driving.

"A lot of the lay public doesn't realize that twice a week most young doctors in this country are forced by hospitals to work these marathon shifts of 30 hours in a row," said Dr. Charles A. Czeisler, a professor of sleep medicine at Harvard Medical School and the head of sleep medicine at Brigham and Women's Hospital in Boston.

"If they're going to require these trainees to work such long hours, they should at least provide them with transportation home."

I enjoyed a minor degree of temporary fame in college for coining the aphorism "If you can't walk, you shouldn't drive".

Perhaps it is now time for me to coin an addendum for the benefit of doctors who have a hard time with these sorts of concepts: "If you can't drive, you shouldn't treat patients."

Update An eagle-eyed reader chides me for my insensitivity to the differently abled. I thought this was crystal clear, but apparently not: my aphorism was coined for the benefit of people whose ambulatory ability had been temporarily inhibited by excessive consumption of ethanol. It was not directed at those who had lost the use of their legs. If you are physically challenged, and you can find a car that you can operate, I stand foursquare behind your driving--but not while drunk.

From the desk of Jane Galt:

What makes medical costs go up?

lots of things, says the Wall Street Journal (subscription required):

Hospitals remain the 800-pound gorilla of health-care costs, particularly the fast-growing segment of out-patient services. While admissions and actual use of hospital services have risen less than 1% since 2003, prices climbed at an annualized 7.7% in the first six months of 2004, nearly as much as the 8% increase in 2003.

One factor in the higher hospital prices is labor: Nursing shortages helped drive up hospital wages by 4.5% in the first half. Dr. Ginsburg said earlier cuts in profit margins for Medicare patients also may have prompted hospitals to shift more of the cost onto private payers.

Though prescription drugs have been a lightning rod for rising health-care costs, actual drug spending continues to moderate. In the first half of the year, it climbed an annualized 8.8%, slowing from the 9.6% rate that prescription-drug spending rose in the second half of 2003. Much of the slowdown appears tied to prices, which increased a modest 3.1%. The relatively slow drug inflation reflects the increased use of cheaper, generic drugs. The growing popularity of tiered drug copayments, which force consumers to spend more if they opt for expensive brand-name drugs, also may have pressured drug makers to hold down prices, the study's authors said.

What does the bolded passage tell us? That more than half the increase in prescription drug spending came, not from greedy drug companies gouging patients, but from greedy drug companies providing more drugs for a rapidly ageing population to take.

From the desk of Jane Galt:

Factoid of the day

A colleague who is researching a story on New York has just informed me that the rumours I had heard about 1 in 5 New Yorkers being on Medicaid is untrue. The actual number is 1 in 3 New Yorkers, which goes a long way to explaining why the city is bankrupt.

New York is an interesting place. As you may or may not know, the states set the level of Medicaid spending, but the Feds match the states dollar for dollar. New York State decided that a good way to soak up extra Federal money was to require the local governments to match the state, dollar for dollar. Since the Feds match all state and local spending, this had the effect of doubling Medicare spending in the state of New York, at no cost to the state, other than the psychic anguish of its highly taxed citizens.

New York City is picking up 25% of the cost of each Medicaid recipient. By the end of 2004, the City Council expects Medicaid to cost the city $4 billion a year. That's $1650 per person, or a tax of over $200 on each non-Medicaid recipient to pay for their neighbor's healthcare. That's before they start paying for the rest of the city's lavish spending levels. Those billion dollar deficits seem a lot less surprising all of the sudden.

From the desk of Jane Galt:

Really good piece on health care by Robert Shapiro.

From the desk of Jane Galt:

HillaryCare, Part II

So with the unveiling of Dean's new health care plan, I think that we can presume the Democrats are going to make some sort of national health care the centerpiece of their 2004 agenda, unless of course they nominate John Kerry, in which case they'll have no agenda whatsoever. But I digress.

As you can imagine, I'll have some very pungent words for nationalized health care just as soon as I clear up this backlog of work. But for now, here's a question. This is the money quote from Dean's announcement:

``Here, in the richest, most advanced country in the world in the 21st century, it's simply wrong for a sick child to go without seeing a doctor because her parents can't afford it,'' he said, noting the United States was the last of the major industrialized countries to provide universal health care.

But here's the thing: I'm unaware of any situation in which sick children go without seeing a doctor simply because their parents can't afford it. Poor people have Medicare. Less poor, uninsured people have free clinics, out-of-pocket payments, or the emergency room. The only situation in which I can see this occurring -- that a child goes without a doctor simply for lack of health insurance, rather than because of other parental dysfunction -- is one in which a lower-middle-class family cares more about their credit rating than their child. In other words, it seems vanishingly unlikely.

But perhaps I'm wrong. Can anyone produce evidence -- not anecdotal, "my cousin says. . . ", but real data consisting either of peer-reviewed studies not funded by single-payer advocates, or of personal experience in which you, or a member of your immediate family, did not take a sick child in need of medical attention to the doctor because of the expense? Children with the flu, or other non-fatal maladies for which the only treatment is rest and liquids, do not count. Perhaps in some theoretical medical textbook world, they should see a doctor to ensure that it's nothing serious -- but my mother didn't take us to the doctor for those things, and we had perfectly good health insurance. The pain-in-the-ass factor is too difficult to separate from the expense factor in mild illnesses, so please -- only serious cases.

From the desk of Jane Galt:

Is Widespread Heterosexual AIDS a myth after all?

MedPundit points to a study claiming that AIDS in Africa is caused more by poor health care practices than heterosexual sex. If it's true, it's horrifying. Not because it's bad news -- indeed, it's very, very good news, since providing gloves and syringes to medical personnel is probably a lot easier than getting the entire population using condoms. What's horrifying is the process by which the WHO may have decided that the problem was heterosexual sex, relying less on the data and more on the political leanings of the people involved in making policy: the local field personnel, who didn't want to admit they had problems, the overpopulation folks who wanted condoms distributed to cut down on babies, the Western AIDS activists who wanted evidence of a heterosexual AIDS problem to increase the threat perception and hence funding in their own countries, WHO doctors who didn't want to terrify Africans about vaccinations, and scientists who let paternalistic beliefs about African sexuality and their desire for an eye catching publication showing widespread heterosexual AIDS influence their thinking.

I'm not qualified to judge the merits of the paper, although the gap between heterosexual AIDS here and in Africa did seem improbably large, given that I am assured by an epidemiologist that the female-to-male transmission ratio here is simply too low to establish what I think he called a "stable disease reservoir" -- a sustainable population of infected people to keep the disease going. Women would have to have an improbably high number of partners over the course of the disease to infect sufficient new males to prevent the epidemic from dying out. The study argues that that factor still overrides the cultural and health factors that have been pointed to as facilitating heterosexual transmission in Africa, and it seems to me that they make a good case. If they're right, people are going to have some 'splaining to do.

From the desk of Jane Galt:

Advertising, Marketing, and SG&A: or, how consumer groups lie with statistics

A number of you have asked how I could possibly claim that Pharma only spends 1% of revenue on advertising, when y'all have seen numbers from consumer groups that run 30%. Well, I got that number from an industry group, but they provided backup. (I can't find the link now, sad to say)

One should, of course, qualify that number, since in position papers like these, things are rarely what they seem. The advertising they are discussing is consumer advertising, not advertising to doctors, which is a very large expense. They backed it up with numbers on overall industry revenue and numbers from some advertising group on pharmaceutical advertising revenue. However, the percentage spent on advertising expensive drugs will be much, much higher than that. It's just that, although they're popular, expensive drugs do not actually make up the majority of industry revenue.

But although I certainly wouldn't have put it past the industry group to portray themselves in the best possible light, I know the consumer groups are lying. Or rather, stretching the truth into new and interesting shapes. The number they are calling "advertising" is actually a number on the balance sheet known to accounting professionals as SG&A: selling, general, and administrative expense.

SG&A is a basket term. It includes everything that happens outside of a factory (things that happen inside a factory are COGS: cost of goods sold) or a lab (things that happen in a lab are R&D: research and development).

So how do they get there from here? Thus: first one consumer group writes a report in which they render that SG&A expense as "Marketing" to make their point a little more punchy. Now, a large component of SG&A is marketing. But it is not the only thing. If you've ever worked in the headquarters of a corporation, think of all the departments. Accounting. IT. Payroll. HR. Mailroom. Reproduction. Marketing. Corporate Finance. Sales. Those are all part of SG&A.

Somewhat counterintuitively, to the accounting layman, Sales is not part of Marketing. Marketing is the department that figures out who your consumers are and how you should sell things to them, and what you should sell; the sales department actually goes and browbeats the customer into buying the stuff. Nonetheless, one consumer group decides that it's all pretty much marketing, and then writes a report called something like "Pharmaceutical Companies: Raping the American Family for Fun and Profit", which cites the SG&A figure as the company's "marketing expenditure".

Now, advertising certainly isn't the same thing as marketing. It's a component of marketing, but only a small one. There's also professional advertising in places like the JAMA, which no one really objects to (there wouldn't be any JAMA without that kind of advertising); there's product market research and sales materials to be written and junkets for physicians. Much of this stuff may also be objectionable to many, although one should keep in mind that if the pharmaceutical firms stop paying for physicians dinners and vacations, their patients may have to start, so it's not necessarily a net savings. All of which is irrelevent, because the important part is that it is not advertising.

Nonetheless, another consumer group takes that report and writes one of their own: "Pharmaceutical Companies: Satanic Spawn Who Dream only of Murdering Our Children and Selling Their Broken Little Bodies for Mulch". This report cites that "marketing" number as "advertising expenditure". Thus we get the claim that pharmaceutical companies spend 30% of their revenues on advertising, when the real number is much, much lower than that. And thus the belief common among advocates for a single payer health care system that we can force companies to lop of 30% of the price of a drug without touching R&D.

This is wrong in two ways, of course: the number is too big, to start with, and more importantly, it misunderstands the way that companies make decisions. Consumer groups are thinking of pharmaceutical expenditures as budget items -- expenses to be cut. But you have to think of R&D and marketing expenses as an investment. Every budget season, the company allocates its funds by deciding which investment will be more profitable. The assumption is that if you institute price controls, companies will give up marketing to focus on R&D. But the reverse is likely to be the case. R&D is very, very, risky, and very long term. Marketing is perhaps risky, but very short term, and so much less investment is required overall. If you cut the potential profit on a product in half or more, a risky project like R&D has to have a stratospheric potential return to ever get funded. Marketing dollars, on the other hand, are likely to have a much bigger return, because when prices are controlled, the only way to make money is through volume -- meaning advertising becomes crucial to maintaining profitability. Who advertises more: Qualcomm, with its fat margins and high R&D expense, or Proctor and Gamble, with skinny little margins and tiny research expenditure?

So anyway, that is how I arrived at my number, and how they arrived at theirs. You may dispute my number -- but only, please, with good numbers of your own, not with some PIRG screed, 'kay?

From the desk of Jane Galt:

Homicide Rates Redux

Dr. Weevil has a nice follow-up post on the effect of medical care on homicide rates.

From the desk of Jane Galt:

Should Albuterol be Decontrolled?

So right after I graduated from business school, I almost died.

It was incredibly stupid. I'd run out of albuterol and when I went to the pharmacy to get a new one, I found out my scrip had run out. I kept meaning to call the doctor to get a new one, but I forgot. (I probably have to use a rescue inhaler once a week during my good periods. I was in a good period. Or so I thought.)

So I went to a mexican restaurant with a friend to suck down margaritas. We were waiting for someone else, so I didn't eat much, and between the margaritas and the lack of food -- let's just say my judgement was impaired.

A couple at the table behind us was smoking up a storm and it kept drifting over me. I guess I noticed that I was getting a little wheezy, but I was tipsy, so I didn't think about it. Then my friend went to the bathroom and I noticed it was getting very hard to breathe. I stood up and walked around to get away from the smoke, and the rate of increase slowed down, but it was still getting progressively harder to breathe.

Did I go home and call my doctor? No I did not. I was still tipsy and not thinking very clearly. I saw my friend and went back to our table.

Next thing I knew, my airway had pretty much closed. I was sucking desperately to get a little air in, while people all around me phone 9-11.

Now, our table was outside. Just then a perfect stranger stopped and asked my friend whether I had asthma. She said yes, and he whipped out the albuterol inhaler I should have had. It took about seven sessions to get enough down my lungs to open them up again, but the result was instant, total relief.

If there is anything good about asthma, it is that the rest of you have no idea just how magnificent a thing breathing clearly is.

The moral of the story being, first, never leave the house without your inhaler; second, never think that because your asthma hasn't bothered you lately, it's fine; and third, never discount the amazing kindness of strangers. I never even got this guy's name -- by the time I was put-together enough to say thank you, he'd walked away. But I'm pretty sure that without him I would have died. At the rate my airway was closing up, I never would have gotten to a hospital in time. I'd never had an episode like that before or since; my asthma's very mild. But if you are by some chance reading this, inhaler person, I'm eternally in your debt.

Anyway, the entire point of this long story is that I have long suspected there was a fourth moral to the story: albuterol should be sold over the counter. But this email I got from a pulmonologist on the subject has made me rethink that:

I'm a pulmonary doc from the University of Chicago.

About albuterol -- please, please don't make it available over the counter. Why? It will worsen asthma care substantially. According to published data, only about 30% of patients with persistent asthma take a controller medication (inhaled corticosteroid or leukotriene modifier, from the Asthma in America study, and also from the NHLBI National Asthma Education Program, see also Milgrom, J Allergy Clin Immunol, 1996). Many of the patients not on controllers over-use albuterol, with the result of unabated, persistent airway inflammation. This leads to continued poor control of asthma over time. That in turn increases substantially the risk of death (Suissa, NEJM, 343:332, 2000), decreases future responsiveness to controller therapy (Haahtela, NEJM, 331:700, 1994), and increases the risk of being hospitalized for asthma (Donahue, JAMA, 227:887, 1997).

One of my colleagues at the U of C. has been examined public-aid health data in Chicago to look at albuterol over-use. He's examined public aid pharmacy claims databases for albuterol and controller prescriptions by zip code in Chicago. If you're properly treated, you should have (on average) one controller prescription per month, and at most, one albuterol prescription. If the albuterol:controller ratio is higher than that, it suggests that asthmatics in that zip code aren't properly controlled and are over-relying on rescue inhalers. In about 3/4 of the zip code regions, the albuterol:controller ratio exceeds 4. In none of the zip codes is the ratio less than 2. Either 1) asthmatics are using their inhaled steroid but still taking about 16 puffs of albuterol a day, or 2) you have a large number of asthmatics who are taking albuterol but no controller. Since the proportion of patients with intermittent asthma (no need for controllers) is only about 20% of all asthmatics, this suggests that we're doing a poor job of treating the persistent asthmatics.

The reasons why asthmatics are over-relying on rescue inhalers are many, from family and social disintegration, lack of access to medical care, apathy and acquiescence of chronic illness on the part of patients, poorly educated primary care providers (sorry, I'm a pulmonologist and I see this every day), insurance policies that force changes in medication based on preferred pricing for them which leads to confusion on the part of patients, and so on.

If you make albuterol over the counter, the temptation is for an asthmatic to just buy it and skip seeing the doctor. That's the point of over-the-counter claritin, after all -- just take it and don't bug the doctor with your hay fever. In this way asthma remains poorly controlled, and we docs never see them to address it. Asthma control in the community is poor enough as it is, and I'm afraid this would just make it worse.

From the desk of Jane Galt:

Say What?

I was reading Sydney Smith's excellent critique of this NY Times article on birth control, in which she points out that the reason we don't have many new kinds of birth control is not (as the article argues) our "Puritan ethic" but the fact that the ones we have work pretty well.

Then I clicked through the article and this caught my eye:

Efforts are also under way to make emergency birth control available over the counter. High-dose birth control pills, sold under the names Preven and Plan B, offer immediate backup for women who have had unprotected sex. As an interim measure, Dr. Finer said, California, Washington and Alaska already allow pharmacists to provide the pills to women without a prescription.

So I can't get an albuterol inhaler, which I have to carry at all times, without a prescription -- but I should be able to induce an abortion without consulting a doctor?

From the desk of Mindles H. Dreck:

Criticizing Science Without Logic

Alicia Colon recycled this old column in the New York Sun today (the current version is not available on-line).

Basically her argument is that:

1. there has been one disastrous experiment in using fetal stem cells to treat Parkinson's
   
2. donor embryos are likely to be diseased (she even uses the same reporter example in today's column)
   
3. the press is under-reporting lots of other good medical breakthroughs not involving stem cells,
   
4. you should sign your organ donor card
   

In the Sun column she also throws in a gratuitous ad Hitlerum remark about how Dr. Mengele would be at home in today's stem cell researchers' labs.

None of these arguments make a logical case against stem cell research. The fact that other research is progressing is encouraging, but certainly makes no logical argument for discontinuing stem cell research. One never knows where the breakthrough will come. As for the incredible media bias in favor of stem cell research...that speaks for itself.

I expect my acquaintance Lee Silver would find the Mengele comment ridiculously over the top, as I did. Over to you, Virginia Postrel.

See Silver's comments on embryos here.