My Health Care Co-Pay

by Kieran Healy on April 13, 2005

Everyone else is talking about health care this week, so here’s a reprise of an old post of mine. Below is a figure showing the relationship between the “Publicness” of the health system and the amount spent on health care per person per year. Data points are each country’s mean score on these measures for the years 1990 to 2001.

You can also get a nicer PDF version of this figure. As you can see, health care in other advanced capitalist democracies is typically twice as public and half as expensive as the United States.

When I posted this before, I made the mistake of not emphasizing a key point: these data do not include any health-related Research and Development spending, so it’s not the case that the U.S. is way up in the top left simply because it’s generously subsidizing everyone else’s research costs.

The figure doesn’t show it, but it’s worth noting that despite not having a national health system, U.S. public expenditure on health in the 1990s was higher in terms of GDP than in Ireland, Switzerland, Spain, Austria, Japan, Australia and Britain.

It’s easy to see that mainstream debate about health care in the U.S. happens inside a self-contained bubble, and that one of its main conservative tropes—the inevitable expense and inefficiency of some kind of universal health care system—is wholly divorced from the data.

{ 137 comments }

1

Troll 04.13.05 at 9:36 am

I got nothing.

2

mrjauk 04.13.05 at 9:51 am

“…and that one of its main conservative tropes—the inevitable expense and inefficiency of some kind of universal health care system—is wholly divorced from the data.”

Is there anything this administration, and the modern “conservative” moment, does that isn’t wholly divorced from the data?

3

thefrog 04.13.05 at 9:57 am

note that both the US and Switzerland – the countries that spend most on health care – have a strong pharmaceutical industry that contributes a lot to GDP (more than in other countries?; maybe that’s sth to look at).

4

John 04.13.05 at 10:13 am

It’s funny that from looking at the graph I came to a very different conclusion. It is my feeling that high spending on healthcare in the US reflects the high quality and availability of healthcare.

For example, when I lived in the UK I went in sick to my local clinic. Since I was there, I asked if they could take some blood to check my cholesterol. The doctor informed me that clinics were not allowed to take blood. For a blood test I would need to visit a hospital, but even there I would be unlikely to be tested unless it pertained to my current illness.

I had money for a blood test and was willing to pay for one, but the service was not available to me.

Yes, the UK has low per capita healthcare spending, but you get what you pay for.

5

P ONeill 04.13.05 at 10:20 am

It’s tough to keep track of all the ways that the US system is so inefficient, but one channel is that the government share is subject to massive adverse selection and so in effect represents a supporting pillar to the private market. The government takes on a lot of the most expensive care in Medicare and Medicaid. In the alternate universe where these programs didn’t exist and the “best healthcare system in the world” relied entirely on the private sector, that system would produce so many hard luck cases that there’d be a huge demand for universal health coverage.

I hate sounding like half-baked Marxism, but this may be a case where things have to get worse before they get better. The wall of hare-brained rhetoric that protects the current system (R&D! Mayo Clinic! Where would you rather be sick?! Socialised medicine!) is tough to break through.

6

Simstim 04.13.05 at 10:21 am

Eh? So does (or did) the UK.

7

sd 04.13.05 at 10:32 am

This is a very common liberal meme – that the US (mostly private) health care system is so inefficient that it gets worse outcomes after spending more money than the (mostly public) systems of Europe, Canada, etc. True to an extent, but I think any responsible analysis would have to wrestle with the following factors:

1) The US lifestyle is, on balance, considerably less healthy than most if not all developed countries. While this may well be an indictment of America, its not an indictment of the health care system per se. Americans are fatter and more sedentary than Europeans. This results in higher costs for healthcare that having nothing to do with the mix of public and private funding and control.

2) The US may well have less tolerance of tacit euthanasia than other developed countries. A massive proportion of total US healthcare spending is spent in the last few weeks of life. There is anectdotal evidense that doctors and families in most European countries are much more willing to let terminally ill old people pass away rather than enagge in Herculean efforts to prolong their lives. Again, you can argue that this is not wise on Americans’ parts, but it has nothing to do with the mix of public and private funding and control.

3) A growing proportion of total healthcare spending is on drugs. It is unquestionably the case that the public systems of Europe and Canada pay less for drugs than the private system in the US. It is also unquestionably the case that without the profit margin provided by the US market the bottom would fall out of pharma R&D spending. (Yes, I’m familiar with the arguments put forth, for example, in the recent Marcia Angel book. They’re wrong. I have some insider knowledge of this. I know of what I speak) You say that your data do not include health-related R&D spending but that is bullshit. The high prices that US consumers pay for drugs is an implicit R&D subsidy to the rest of the world. To pretend otherwise is simply stupid and ill-informed.

8

RS 04.13.05 at 10:32 am

I believe the US and the UK are the two biggest countries when it comes to BigPharma. Unfortunately we won’t be allowed to turn the argument on its head because obviously the US patient and tax-payer is subsidising the profits of the British pharmaceutical companies.

You altruistic lot.

9

Jeremy Osner 04.13.05 at 10:45 am

Subsidizing R & D spending for the rest of the world is bizarre behavior on the U.S.’s part. Would make much more sense to get a single-payer system, equilibrate to where we are paying the same as Europe and Canada for our drugs; then see the bottom fall out of R & D, it will affect all consumers of pharma and all will have to share the load of paying for it to be restored — if progress is indeed so important to health care consumers. It may be that the mass of humanity would rather pay less for their health care than add another year onto their average lifespan.

10

slolernr 04.13.05 at 10:45 am

Higher spending on US healthcare does not yield better results, if by “better” you mean longer life. Both US males and US females die younger than people in other OECD countries. According to Lindert’s Growing Public, pp. 258-262, even controlling for bad habits, pollution, income and occupation, a chunk of this premature mortality is explained by amount spend on public healthcare. (A chunk is not. There’s a .pdf of part of the analysis here.

11

Steve LaBonne 04.13.05 at 10:46 am

sd, your allegation requires a lot of further analysis before it can be accepted even in part. How much of our high drug spending is occasioned (due in large part to aggressive and sometimes shady marekting to doctors by big pharma) by doctors presribing, for example, the latest and most expensive patented ACE inhibitor for a patient who might lower his blood pressure equally well by taking a cheap generic thiazide diuretic? See Malcolm Gladwell’s recent piece in the New Yorker on this very subject.

12

Matt McGrattan 04.13.05 at 10:52 am

“For example, when I lived in the UK I went in sick to my local clinic. Since I was there, I asked if they could take some blood to check my cholesterol. The doctor informed me that clinics were not allowed to take blood.”

This is total rubbish. GPs clinics routinely do blood tests. I personally have had half a dozen over the past 4 years at 3 different clincs. Typically it’s done by a practice nurse rather than by a GP, generally a good thing as nurses are usually better at it, and usually if it’s not urgent your GP will make an appointment for you to see the practice nurse in order to have tests done. If it is urgent, the GP will do it.

Not only that but I’ve had, although not on every occasion, my cholesterol tested by my GP as a matter of routine when I’ve switched to a new GP practice.

I don’t know where you were told this — the clinics couldn’t do blood tests — but either your memory is incorrect or the doctor was bullshitting you.

It’s entirely possible to ask for a cholesterol test and it’s extremely unlikely you’d be refused. Last time I had one, less than 3 years ago, I had just turned 30 and had no medical history that suggested I was at risk of high cholesterol but my GP had it done just to check. An older person, someone in a high risk category or anyone anxious enough to want to know would not be refused.

There certainly are problems with the UK health system and my experience of emergency room care, for non-life-threatening ailments, has been mixed to say the least.

However, blatant falsehoods like “clinics can’t do blood tests” don’t help the debate.

13

RS 04.13.05 at 11:00 am

If the US market is really subsidising pharmacuetical R&D, the question is what is the structural flaw in that market that allowed it to pay more for the drugs than they are worth?

14

Peter 04.13.05 at 11:01 am

Matt McGrattan:
He had his experience and you had yours. Both represent just one observation. Why such a nasty tone? Why is there always someone who behaves this way in any exchange when confronted with the experience of another that does not wholly match their own?

Steve Labonne: sd’s first two points are not new, novel or out of left field. Studying for a PhD in economics (concentration in health) I heard both routinely. There is nothing whacky about points 1. or 2. That isn’t a formal proof, to be sure, but at the same time I think that there is no reason to treat these views as exceptional.
There were apsects of the Gladwell piece that were very good, and other aspects of it that were less persuasive.

15

Amber 04.13.05 at 11:09 am

Peter- I took from Matt that he actaully Lives there…so would then have a much better view on the situation, no?

16

RS 04.13.05 at 11:09 am

Peter:

As it happens, I too was struck by what john said, in particular, ‘clinics’ (depending on what he means by this, I presume he means GPs) can obviously do blood tests, it is the primary location for non-urgent tests like cholesterol, they would laugh at you if you went into hospital to get one. Also, it is very easy to get things done if you pay for them.

17

Steve LaBonne 04.13.05 at 11:10 am

I didn’t say they were wacky- you hear them all the time- but that I don’t believe they’re correct. And then too there is Jeremy’s point- if it could actually be established that we pay through the nose for mediocre care and spotty coverage in order to subsidize the development of pharmaceuticals to the benefit of countries with better, lower cost health care systems, why on earth should we be so foolish as to keep doing it? (Of course, in actual fact I find this claim about as convincing as claims that Bush invaded Iraq out of humanitiarian concern for Saddam’s victims.)

18

RS 04.13.05 at 11:12 am

So if sd’s points 1 & 2 are true, perhaps they undermine his point 3 – because it may just turn out that these drugs aren’t worth as much to the Europeans or Canadians as they are to the Americans?

19

Matt McGrattan 04.13.05 at 11:13 am

Peter:

Sorry if the tone came off a bit harsh — but there’s a lot of misinformation around about health care on both sides of the Atlantic and I regularly hear things repeated about the UK system that simply aren’t true. I’ve lived all over the UK, in Scotland and in England, and have been registered at at least half a dozen different GPs clinics and have _never_ heard of clinics not being able to carry out blood tests. For what it’s worth both my parents are ex-nurses and I think they’d also be pretty surprised to hear that clinics can’t carry out tests.

Indeed, the carrying out of blood tests is precisely one of the purposes _of_ clinics and many GPs clinics contain a professional, a practice nurse, who has, as their one of their primary jobs, the carrying out of such blood tests.

Now it may be that this particular doctor _said_ that clinics can’t carry out blood tests, but this particular doctor (or John’s recollection of this particular doctor) was wrong.

Apologies if I still sound a bit harsh. It’s not my intention to be personally offensive, but I really do want to emphasize that it’s simply not _true_ that doctor’s clinics can’t carry out tests. They happen as a matter of routine.

20

saurabh 04.13.05 at 11:13 am

sd, I’d LOVE to hear your insider knowledge contradicting Marcia Angell’s contentions. The bottom would fall out of pharma R&D spending? is that right? WHO CARES? Pharma doesn’t do crap. Spending on obesity drugs and 400 iterations of the same erectile dysfunction pills and allergy meds? Wow. Maybe they could dip into their record-breaking profit margins to fund a bit of that R&D?

The real research subsidy is in NIH and NSF, and always has been. The major medical breakthroughs happen there – statins, the biggest new cancer treatments, etc. All of these things came almost fully-formed out of government-funded labs. Pharma adds a box, some gelatin and a huge price tag. The fact is, pharma companies aren’t interested in doing fundamental research – they have no need to. They’re perfectly happy growing fat off the productivity of academics.

So, piss off with your “insider knowledge”, and pharmaeceutical companies can just burn, for all I care.

signed, Bitter Academic.

21

saurabh 04.13.05 at 11:15 am

I should point out that statins actually came out of Japan, not the U.S.

22

RS 04.13.05 at 11:17 am

Matt McGrattan:

I guess it depends in what context he went to the doctor – contrary to popular belief, the NHS is not keen on giving non-essential care to tourists.

23

Peter 04.13.05 at 11:18 am

rs-And now we have two observations to John’s one. I don’t live in the UK and so I cannot know the de facto conditions at clinics (and even if I did live there I’d still only have me experience). My irritation has more to do with tone than content: Mr. McGrattan has a right to his position (just like the other guy).

Steve, the issue here is one of persuasiveness. There is always some element to basically every explanation offered in this debate. On balance, I think that sd’s points seem, for a variety of reasons, essentially credible as meanigful explanations (again, with the exception of poiint 3, which I cannot speak to because I just wouldn’t know what I was taking about). I’m surprised no one has brought up Cutler’s recent book in this context.

24

Peter 04.13.05 at 11:19 am

Matt-Its all good.

25

RS 04.13.05 at 11:20 am

Saurabh:

To be fair it costs a mind-boggling amount to develop a safe and effective compound after you have identified a potential target, and then to take a drug through trials and onto the market. Which is why state run pharmaceutical development is currently so rare (although signs are it is going to become more common).

26

RS 04.13.05 at 11:24 am

Peter:

Not so, you have, as far as I can tell, two people with extensive experience of the system over many years, plus one person’s anecdote that may-or-may not represent much experience of said system. In other words, this isn’t a vote, he was wrong, why he was wrong I don’t know, but the facts are the facts.

27

Peter 04.13.05 at 11:25 am

rs-You and I basically don’t know anything about any of these people. Can I interest you in a poker game? (Lighthearted jab, that’s all).

28

Alison 04.13.05 at 11:29 am

I’m in England. I had a blood test on Monday, for anaemia, just because I asked for it and incidentally, last time I had that kind of test they did a few other tests (including cholesterol) just because the blood was there, and gave me the results next time I went in.

I think a testy tone is excusable. I’m now trying to analyse what is so annoying (because I feel annoyed too). Is it that the description of British health care is so inaccurate? No, I think it’s that the poster seems to overlook that there will be people reading the description who actually live in the country, and who know what the facts are at first hand.

And the offended tone when challenged.

Peter, for instance said “Both represent just one observation.”

But that isn’t true, one is the (in this case mistaken) observation of a visitor, weighed against the collective observation of people who have used a health care system for decades. 60 million people in the UK know you can get blood tests at clinics. Admittedly they don’t all post to Crooked Timber.

29

abb1 04.13.05 at 11:44 am

What Saurabh said.

Why is it often accepted as a fact that the US pharmaceutical industry actually develops life-saving drugs? My impression is that most of the R&D is paid for by the government and the results then given to the private sector for testing, patenting, marketing and production. Big deal, who needs them. They are mostly parasites.

30

Peter 04.13.05 at 11:45 am

But Alison, what you and the others are offering is not a collective observation-you are offering your own. You are not a meaningful population sample for drawing any kind of conclusions about de facto realities (even if I am inclined to suspect that you are correct).

Further, the issue of tone (which Matt, to his complete credit, immediately recognized) is important in all discussions.

I’m afraid that on the internet there is pretty much only two gears: civil discourse and screaming match (aka dialogue of the death).

31

Peter 04.13.05 at 11:46 am

Jesus, I cannot spell or write coherently today. “Dialogue of the deaf”

Apologies everyone.

32

Carol 04.13.05 at 11:50 am

FYI, most original research done on the behalf of Big Pharma happens on college campuses via NIH grants etc across the country, which means we subsidize the original stuff through tax payer funds. Then Big Pharma takes the drugs developed and figures out how to patent the drug, use it for a hundred maladies not originally considered, publicize it on TV so that everyone is all agog for a prescription from their MD, and when the patent expires, figure out a hundred novel uses so that they canr epatent the drug under a new name.

Very little is actually spent on real R&D in this country. Countries in the OECD actually allow companies to expense R&D as they do here, so that really isn’t an impact on their profitability.

33

RS 04.13.05 at 11:53 am

“My impression is that most of the R&D is paid for by the government and the results then given to the private sector for testing, patenting, marketing and production. Big deal, who needs them. They are mostly parasites.”

Is that really true? In my experience the governments do the basic clinical research, identify the targets, but the drug companies develop the compounds and pay for the massive costs of trials for FDA and other national licencing board approvals.

If the governments had developed the compounds in the first place why didn’t they licence them to the companies and make a hefty profit?

34

Matt McGrattan 04.13.05 at 11:54 am

Peter:

It’s quite difficult for a factual dispute to be resolved if the experiences of those who really _are_ in a position to know i.e. life-long residents of the UK and users of the NHS are dismissed as not being a meaningful population sample. What would count as a meaningful population sample?

I am aware that it’s easy to slip into a war of competing anecdotes here but I really do think that this particular situation is not like that and it makes the resolution of debates near impossible if too high a bar is set for evidence.

Anyway, for what it’s worth, here’s the BMJs own article on cholesterol tests:

http://www.besttreatments.co.uk/btuk/conditions/5190.html

which strongly implies that tests are carried out by GPs in their clinics.

35

John 04.13.05 at 11:55 am

Matt McGrattan wrote:
“I don’t know where you were told this”

At Belgravia Clinic near Victoria Station.

I had a better experience when to a hospital to treat a concussion after a rugby match. There I asked a nurse about a blood test, and he told me discreetly that it was normally not done, but they could take care of it for me. Not sure what hospital that was, but probably around North London since our game was in Willesden Green.

Sorry if you disagree, but that’s just my personal experience.

36

james 04.13.05 at 11:56 am

There is a reason so much R&D money is spent on weight loss and hair gain compared with an affordable malaria treatment. The cost of discovering a compound is not the same as the cost to develop a compound for human use.

It would be interesting to see what US healthcare costs are if sd’s points are factored out.

37

Harry 04.13.05 at 11:57 am

But a dialogue of the death would be so much more interesting.

38

RS 04.13.05 at 11:59 am

Peter

I liked ‘dialogue of the death’, it had a gladiatorial ring to it.

“what you and the others are offering is not a collective observation-you are offering your own. You are not a meaningful population sample for drawing any kind of conclusions about de facto realities (even if I am inclined to suspect that you are correct).”

I wonder if you can see the inherent silliness in that statement. I once went to America and the people there were green, but however many of you tell me that they aren’t green, and I must have been there on St. Patrick’s day or something, that is just your point of view, different to mine, but equaly valid, we would have to carry out a survey of the United States and calculate the exact proportion of green people…or, alternatively, I’m just talking out of my arse and all the Americans can just tell me that I’m wrong because what I am saying is patently false.

Post-modernism has a lot to answer for!

39

Peter 04.13.05 at 12:00 pm

Matt,
That is a good question. Basically you need a nationally representative sample of the UK population of size sufficient to compute the indicator of interest (in this case something like “% who reported that they were able to get such and such a test”). There are well known “bibles” of sampling (eg Kish) that have the formulas necessary to determine that sample size.
Note what I am not saying: that your experiences are invalid. They were your experiences, no question about that. The question is whether they are representative. They may well be-but they do not in and of themselves prove that. That requires allot more information-and in fairness to you, more than could be offered by individual commenters per se.
My link to the article didn;t work. Can you give me the cite (then I could maybe access it through my university’s e-journal database).

40

Peter 04.13.05 at 12:01 pm

And I agree: dialogue of the death is growing on me too.

41

RS 04.13.05 at 12:02 pm

“I had a better experience when to a hospital to treat a concussion after a rugby match. There I asked a nurse about a blood test, and he told me discreetly that it was normally not done, but they could take care of it for me.”

Blood test for what?

If I may out it politely, I suspect that perhaps you weren’t interacting with the health service in the UK in quite the manner that they were expecting, leading to crossed wires.

42

Matt McGrattan 04.13.05 at 12:03 pm

Peter:

It’s a public web-site and not a BMJ article so it won’t be on an e-journal database. It’s on the BMJs web-site which offers medical advice on treatment to the general public.

The only reason I can think why it’s not working is that it may bar non-UK IP addresses.

43

Peter 04.13.05 at 12:05 pm

rs-My comment isn’t silly-it goes to the heart of what it means to judge an observation to be representative of the experiences of a population in some sense of another. The problem with your St. Patrick’s day example is that the issue here is not whether you saw what you saw (I’m sure you did). The issue here is whether that observation is representative in that it is a meaningful conclusion about what one would see on a randomnly drawn day of the American experience. My guess is that it is not that.

44

Harry 04.13.05 at 12:06 pm

With due respect to peter, and also to Matt, the problem is that people do make things up. Matt’s experience is not just a bunch of anecdote; he is describing the policy in at least three health authorities. So those, at least, we know about. The original claim is therefore flat out false: ‘They don’t do tests in clinics’. There may indeed be a clinic in which they don’t do tests (maybe a small rural one?) but we know that it is not a true generalisation that they don’t.

The NHS is in trouble, and it, itself, has lots of inefficiencies (too many house calls, too many small clinics, not enough large clinics, not enough beds in some hospitals, staff shortages not completely unconnected to the high pay qualified people can earn in the US). But Kieran’s data very strongly suggests that the US system is hgihly inefficient. If Americans live unhealthily shouldn’t the government be preferring public health measures over high spending on emergency care? Practice a bit of triage? The inefficiency of the US system is the issue here, and saying boo to systems that look prima facie better doesn’t answer the question.

45

abb1 04.13.05 at 12:06 pm

Rs,
the drug companies have, IIRC, the highest or one of the highest ROI of all industries. They spend what – around 60% of their budget? on marketing. Profits, marketing/advertisement, CEO compensation, bribing doctors and politicians – subtract all that and what’s left? It’s a waste.

46

Peter 04.13.05 at 12:11 pm

No claim is ever wholly

Fair disclaimer: I am a health economist who examines things like performance of health systems in lower income countries. My wife does the same thing for America’s VA system.

Harry, it is a nearly universal truth that system rules are never whollly adhered to. The question is how often do deviations occur? My only point, then and now, is that the individual observations we are hearing here, while are valid in and of themselves, do not bring us any closer to a meaningful answer to that question. It doesn’t matter what three health authorities sais, in some sense. THe closest thing I have seen here to evidence that might make this case is the article Matt mentions (which I assume relies on a random sample on one level or another)>

47

Peter 04.13.05 at 12:14 pm

No claim is ever wholly true or untrue…that is what I meant to say.

Sorry again for these mistakes.

48

sd 04.13.05 at 12:15 pm

saurabh:

As has been pointed out here several times, there is a huge gap between identifying a clinically useful compound and developing a workable drug from it. Yes, government and academic labs uncover many lifesaving compounds that are later commercialized by pharma companies. And without that public sector R&D on the front end there would be no drugs. But without pharma R&D on the back end there would no drugs either. Unless you know many tenured Ph.D.s in biochemistry who would be satisfied spending 8 years doing high throughput screening and clinical trials work. The fact is that the R&D that the pharma companies do tends to be looked down on by academic researches as boring, mundane, and non-original. Which it is. But that makes it no less neccessary. I’ve worked for a large, very prestigious, US academic medical center in the technology transfer and licensing office before. I’ve seen the internal proprietary analyses of the costs and benefits of having different actors do different parts of the total drug development job. And the results are clear every time – academic and government labs are great at groundbreaking, innovative original research but they are terrible at doing the grunt work research required to take an identified compound to market. Without pharma R&D we would have hundred of really good ideas for disease treatments but no workable drugs.

More broadly on the Marcia Angel book: it is stunningly economic illiterate and/or deceitful. In particular:

1) Angel trumpets the thoroughly dishonest line that the real costs of drug development are $100M a pop instead of the $800M a pop claimed by the pharma companies because the cost of capital is a fictional cost that isn’t paid out in cash. Bullshit. A mediocre freshmen economics students could tell you why this is false false false. But to put it simply, if you buy Angel’s argument, please lend me $50,000. I’ll be happy to pay you back $50,000 in 30 years.

2) In measuring the profits of drug companies she relies on publically reported net income. This is an economically unsound way of measuring returns – net income is an accounting fiction that reveals little about the underlying economics of a business. The better measure, total-return-to-shareholders, shows that the pharma industry generates average returns for shareholders – nothing extraordinary at all.

3) In comparing the profits of pharma companies to other sorts of businesses she cherry picks the one year where a fluke accounting rule change makes the big drugs companies look like they account for an absurdly large proportion of total Fortune 500 profits. Either she doesn’t know what the Hell she’s talking about or she is trying to deliberately decieve her readers.

49

Matt McGrattan 04.13.05 at 12:17 pm

No, sorry, I didn’t mean to be misleading. The article I mention isn’t an academic study so it doesn’t rely on random sampling.

Rather, it’s a piece of advice for patients published by the BMJ about how to have their cholesterol levels tested, what is involved, who does it, and how to interpret the results. It simply _states_ that their GP will do it, or a nurse. It doesn’t give numbers.

There’s no “90% of GPs sampled in a survey of 2000 GPs randomly drawn from Medical Council lists said that they carried out cholesterol tests”. One of the things about a centralised state run health care system is that policy is largely the same across the whole system. If the policy is that doctors don’t do X then doctors generally don’t do X.

The BMJ is reporting what doctors _ought_ to do. Not what they in practice do.

50

Peter 04.13.05 at 12:17 pm

Lest it draw fire, let me expand on the “no claim is wholly true or untrue point.” What I am saying is that I have no prior reason to believe anyone isn;t telling the truth here. What I am saying is that a. it is entirely possible everyone is faithfully and honestly recalling their experiences and b. we still cannot draw broader conclusions from that. Not in any meanginful, intellectually defensible way.

51

Peter 04.13.05 at 12:21 pm

Matt,
What is the matter with you????? “The article I mention isn’t an academic study so it doesn’t rely on random sampling”

Are you suggesting that the popular media even occasionally fails to maintain the most scientific standards when presenting alternative viewpoints to the public?

Well…….I’m just shocked.

;)

52

Steve LaBonne 04.13.05 at 12:27 pm

Of course the pharma companies perform an essential function. The argument is over whether they perform it in a highly wasteful and irrational way (from society’s point of view) and whether the same functions could not be performed better under different arrangments. Basic research is also expensive, yet we don’t seem to have a dearth of it as a result of not leaving its provision to the market. Why, exactly, is bringing the fruits of that research to patients- again, fully recognizing that as also being an expensive business- somehow a totally different proposition in principle? I so often see this asserted, yet so seldom supported.

53

sd 04.13.05 at 12:39 pm

Steve Labone:

There are a number of reasons why pharma companies are the best positioned to bring drugs to market. First of all, as I indicated, the research needed to bring a drug to market is highly repretive and requires great scale. Academics are just not interested in doing this type of work. It is relatively uninteresting, as it does not involve exploring novel intellectual territory. And it does not lend itself to personal glory seeking. PIs in academia get paid a lot less than their counterparts in industry. Part of the compensation for the lower pay is greater visibility and prestige. But you can’t build a reputation as a singular intellectual force if you are part of a 20 man team working on a single big project with only one outcome. Academic research is organized around the individual professor commanding a lab of just a few students and post docs. A lab of this scale can;t do drug development work. It can do drug discovery, but not development.

Second, doing drug development well neccessarily involves running an economically efficient operation. Its very costly and time consuming and is only feasible if costs and operating scale can be managed proactively and aggressively. Universities, quite frankly, are terrible at this. Universities turn out blockbuster ideas at a very high cost. A very neccessary function, but not a good fit for running 7 year clinical trials programs with hundreds of subjects. Same goes for governments.

54

jet 04.13.05 at 12:40 pm

There is a silver bullet to “fix” big pharma in the US. Change the patent laws so that minor changes in a drug do not qualify it as a new drug and you’ll see a lot less money spent on legal and marketing and much more on R&D.

And no, NIH does not produce finished goods. The NIH focuses on basic research and passes off the long hard haul of actually creating a drug to the drug companis, which average 15 years and 500 million for each drug on the market.

55

Jim Bliss 04.13.05 at 12:41 pm

Peter,

your idea that no claim is wholly true or untrue is bizarre when applied to this point. What John originally stated was “The doctor informed me that clinics were not allowed to take blood.”

Now, whether it’s John who is mistaken (and the doctor didn’t say that) or the doctor who is mistaken (or lying) is irrelevant. The claim is incorrect. GP clinics can and regularly do carry out blood tests. In fact, this is one of the primary functions of local clinics.

The claim that clinics “are not allowed” carry out blood tests is wholly untrue.

“Your local GP surgery offers a wide range of services. Your doctor can give you advice on healthcare and healthy living, prescriptions, jabs and tests (such as immunisations and blood tests) or refer you on to a specialist or hospital when appropriate. All surgeries in Wandsworth have access to counselling, often at the surgery itself.”
– From a South London NHS policy document
http://www.wandsworth-pct.nhs.uk/health/localservices.asp

56

Steve LaBonne 04.13.05 at 12:47 pm

Where did I specify that it would / should be done in universities? And sorry, I don’t see prima facie why “same goes for governments”- the government could (and maybe should) pay for clinical trials, which could be performed by either public or private organizations or a mix of both. The government, in the form of its patent laws, is actually directly responsible for the high profit margins that the companies now invest in developing (and still more, in marketing)slews of unneeded drugs as well as the occasional one that’s a genuine improvement. Something is wrong with “free-market” arguments when the actual basis for something claimed to be a triumph of the market, actually turns out to be rent-seeking.

Finally, a point that’s been raised a few times but nobody on your side of the issue seems to want to deal with. Let’s say for the sake of argument that it’s an established fact that our high health-care costs pay for essential pharma R&D on which other countries free-ride. WHY should we go on doing that?

57

Steve Burton 04.13.05 at 12:48 pm

According to the OECD data, per capita spending on healthcare in the USA in 2002 was $5267.

44.9% of that was *public* spending.

That works out to per capita *public* spending on healthcare in the USA in 2002 of $2365.

According to the same data, per capita spending on healthcare in France in 2002 was $2,736.

76% of that was *public* spending.

That works out to per capita *public* spending on healthcare in France in 2002 of $2079.

*So per capita PUBLIC spending on healthcare in the USA in 2002 was 14% HIGHER than it was in France.*

The obvious conclusion to draw from this is *not* that the USA needs to adopt a ratio of public to private healthcare spending more in line with that of France: it could accomplish that simply by slashing private healthcare spending by 74% while leaving the current public healthcare system unchanged. But presumably that would do nothing for healthcare outcomes.

No, the obvious conclusion to draw is that Americans are not getting their money’s worth for what they are *already* spending on publicly funded healthcare.

Perhaps if those of you on the left could dismount from your anti-private enterprise hobby-horse for a moment and instead focus on how to reform the current public healthcare system in the USA so as to achieve French-style outcomes at French-style prices, you might be able to get somewhere with conservatives and libertarians. I mean, if you can give Americans the legendary glories of French health-care while simultaneously cutting their public health-care expenditures by 14%, who’s going to complain?

And if Americans want to go on spending all that extra private money on healthcare too, what skin is that off your noses?

58

saurabh 04.13.05 at 12:51 pm

sd – first, let’s not forget that many clinical trials are NIH-funded, meaning that taxpayers are also bearing a portion of the burden for bringing these drugs to trial on behalf of pharma companies. Furthermore, it seems probable, based on the average costs of phase I, II and III trials, that the cost of bringing a drug to market are inflated by pharma companies. So I won’t cry too hard over the weight these noble companies are carrying for us.

Second, regardless of all this, we should still take pharma companies to task for what they DO chose to bring to market – that is, not malaria medication that would save millions of lives, but male pattern baldness cures and other such rubbish. By that token, we already ARE missing out on important drugs.

No, NIH doesn’t produce finished goods, because the government doesn’t mandate this. NIH is underfunded and starved as it is. But that doesn’t mean it -couldn’t-, or that in the absence of a highly-profitable drug industry, we couldn’t come up with something better.

59

Steve LaBonne 04.13.05 at 12:53 pm

We are focused. We say, study the best systems (including the French, in which provision of services is largely PRIVATE- so much for this supposed anti-private-enterprise bias!) and design a system that contains the features that make them work. But then we confront a political atmosphere that’s been thoroughly posioned by bogus conservative rhetoric (including unfounded blanket accusations of hostility to private enterprise).

60

Sebastian Holsclaw 04.13.05 at 1:00 pm

“My impression is that most of the R&D is paid for by the government and the results then given to the private sector for testing, patenting, marketing and production. Big deal, who needs them. They are mostly parasites.”

Your impression is deeply, horribly, awfully, wrong. See the above discussion.

61

Steve LaBonne 04.13.05 at 1:05 pm

Your turn, Sebastian: Finally, a point that’s been raised a few times but nobody on your side of the issue seems to want to deal with. Let’s say for the sake of argument that it’s an established fact that our high health-care costs pay for essential pharma R&D on which other countries free-ride. WHY should we go on doing that?

62

RS 04.13.05 at 1:13 pm

Peter:

You can only be taking the piss.

63

Peter 04.13.05 at 1:17 pm

Nah, I’ve just been dealing with a bureaucratic hiccup at the office. They had a problem with my last trip report. Something about how cigars and scuba equipment might possibly not be legitimiate business expenses.

64

RS 04.13.05 at 1:18 pm

“we should still take pharma companies to task for what they DO chose to bring to market – that is, not malaria medication that would save millions of lives, but male pattern baldness cures and other such rubbish.”

And McDonalds doesn’t provide nutritious meals for the poor of Africa, your point?

65

saurabh 04.13.05 at 1:27 pm

Ugh. My point is, why extol the virtues of a market-based system if it isn’t actually being that productive? If it’s just being a hindrance, a parasite? We could cut Bristol-Meyers-Squib entirely out of the equation and leave drug development to entities like the National Cancer Institute, resulting in cheaper drugs, better directed towards the needs of the population. There’s no need to coddle the pharmaceutical industry with tax breaks, patent regimes and protective trade barriers when it’s (a) less than capable of fulfilling human needs and (b) charging too much for whatever it does put out. The government should spend its money and efforts better.

66

RS 04.13.05 at 1:32 pm

With respect to research, I found an interesting paper that I’ve now lost (it was some sort of Australian govt thing, no idea what the date was) that shows that public investment in medical research, as a % of GDP, is highest in Switzerland, above average in the US and Denmark, below average in the UK, and lower still in some other European countries, Canada and the Antipodies. On top of that the UK has very high charity contributions to research (Wellcome Trust and the cancer researc charities) and the US also has high per capita charitable funding.

So I guess the rest of the world could be described as benefiting from higher US research on both an absolute and relative level, but, of course, that is nothing to do with their health care system

67

abb1 04.13.05 at 1:47 pm

Sebastian, I read the above discussion as a vindication of my impression. It seems to me that if not for the patents (that they don’t deserve because they don’t do the R&D), the pharmaceutical industry would’ve had about 25% of the capitalization it has now with the same or better results. It still could be market-based; I think in this case the lack of market that’s the problem (i.e.: patents), not too much market.

68

Kieran Healy 04.13.05 at 1:57 pm

_According to the OECD data, per capita spending on healthcare in the USA in 2002 was $5267.

44.9% of that was public spending._

Steve – yes, I highlighted that fact in the fourth paragraph of the post above:

The figure doesn’t show it, but it’s worth noting that despite not having a national health system, U.S. public expenditure on health in the 1990s was higher in terms of GDP than in Ireland, Switzerland, Spain, Austria, Japan, Australia and Britain.

Comparative health care stuff is complex. The state still plays a big role in the U.S., just not very efficiently, it seems.

69

RS 04.13.05 at 2:03 pm

“The figure doesn’t show it, but it’s worth noting that despite not having a national health system, U.S. public expenditure on health in the 1990s was higher in terms of GDP than in Ireland, Switzerland, Spain, Austria, Japan, Australia and Britain.

Comparative health care stuff is complex. The state still plays a big role in the U.S., just not very efficiently, it seems.”

To be fair, because the system is largely private, it leads to inflated medical bills for everyone, including those the state is paying for.

70

RS 04.13.05 at 2:05 pm

“Sebastian, I read the above discussion as a vindication of my impression. It seems to me that if not for the patents (that they don’t deserve because they don’t do the R&D)”

What is that supposed to mean? That the R&D they do do, doesn’t reflect the actual costs of the basic research that preceded it? Or, this bizarre meme, that pharmaceutical companies employ all those scientists, and have all those labs, to do bugger all?

I’m a frickin socialist and I know there is a hell of a lot of work and expenditure in developing a drug and bringing it to market – and that is not all done by NIH, whatever you think!

71

abb1 04.13.05 at 2:19 pm

Switzerland probably has the ultimate private healthcare system. I am not 100% sure, but it is my impression that they don’t have anything like Medicare or Medicate. You’re required by law to buy a private insurance policy and if you can’t afford it, the government will buy it for you. But it’s all private. A garden variety doctors visit (20 minutes waiting, 10 minutes with the doctor) is 150chf, that’s E100 or $130US. Across the border in France the same visit will cost you about E20 cash. It’s a strange world we’re living in.

72

jet 04.13.05 at 2:26 pm

Pfizer claims that the US pharma industry spends 18 billion on research each year. It would appear that a few cuts in the Dept of Ag (long coming) and a few base closings (decades coming) and the government could match pharma’s R&D easily. Would this be a good thing? Probably not. I’d say that fresh 18 billion should be added to the 13 billion already spent on NIH, and let the market figure out what to do with the extra generated drug leads.

And by definition, no one is going to spend 500 million doing research on a “cheap” anti-malaria drug. At a $1 profit a treatment it would take ~25 years to break even. So if it isn’t your tax dollars, then it is nobody.

73

saurabh 04.13.05 at 2:37 pm

jet – That’s what I said. And anyway, I don’t believe that it costs $500 million to get a drug to market. Can you cite a non-industry study to back that figure up?

74

Stephen 04.13.05 at 3:06 pm

It costs $500 million if you include the Super Bowl commercials and tons of free crap they hand out to doctors, etc.

Is it possible to watch an hour of network televison without seeing an advertisement for a
prescription drug ?

75

Sebastian Holsclaw 04.13.05 at 3:25 pm

“Let’s say for the sake of argument that it’s an established fact that our high health-care costs pay for essential pharma R&D on which other countries free-ride. WHY should we go on doing that?”

Same reason we let Europe free ride on international security–especially of the oceans for shipping, if we don’t do it it doesn’t get done and the world (including us) end up much worse off. It is the same reason free rider problems exist in all sorts of areas. The US attempts to deal with it through bilateral trade deals to protect patents–which if I remember correctly are looked down upon at Crooked Timber.

“I read the above discussion as a vindication of my impression. It seems to me that if not for the patents (that they don’t deserve because they don’t do the R&D), the pharmaceutical industry would’ve had about 25% of the capitalization it has now with the same or better results. “

Your parenthetical is flatly incorrect, they do a very difficult part of the R&D, and a part that the government is notoriously bad at. The phrase beginning with ‘the pharamaceutical industry would’ve…’ is complete gibberish so far as I can tell. Are you Sokal?

I would strongly suggest that you read Derek Lowe regularly, including this article. I don’t know how I would characterize his writing generally. He viciously attacks Pharma’s many glaring flaws, but he doesn’t agree with you at all about the idea that the pharmaceutical companies are just freeloaders off of the NIH.

76

Steve LaBonne 04.13.05 at 3:34 pm

Same reason we let Europe free ride on international security—especially of the oceans for shipping, if we don’t do it it doesn’t get done and the world (including us) end up much worse off.

I’m sure that will be a great comfort to the people who wait for hours in emergency rooms to get treatment, and to the middle-class people bankrupted by medical bills after losing a job and the accompanying insurance. If we want to be so noble, why not just pay for drug developemnt directly as we do for basic research, rather than via an excruciatingly inefficient and unjust health care system?

But go ahead, feel free to propagate this argument as widely as you like- I can imagine what a political winner it’d be. ;)

I read Derek Lowe myself, but as a chemist rather than a biologist, and one whose paycheck comes from the pharma industry, he wears some blinkers that a reader of his stuff ought to keep in mind. But as you admit, he’s no fan of pharma’s current business model and I doubt he’d buy your argument that we’re stuck with the current health-care system if we want useful drugs.

77

Steve LaBonne 04.13.05 at 3:35 pm

Please bring back preview. ;)

78

abb1 04.13.05 at 4:03 pm

Sebastian, you told me to read the discussion above. I did.

The fact is that the R&D that the pharma companies do tends to be looked down on by academic researches as boring, mundane, and non-original. Which it is.

How does this boring, mundane, and non-original work deserve patents and all that dough and glory? It doesn’t. The government should hold the patents, based on real R&D that it organizes and finances.

If not for the patents, all those glorious pharma companies would be as rich and famous as the company that tests your tap water, and the drugs would cost a small fraction of what they do now – because of the competition, which is something you should be happy about.

Where am I wrong on this? I am open, just explain where you disagree and why.

79

Sebastian Holsclaw 04.13.05 at 4:13 pm

You are wrong at ‘the drugs’ which is positing the very thing that would not be researched under your system.

80

gaius marius 04.13.05 at 4:19 pm

and, for all the US spends, we leave what percentage uninsured? i see little of that discussed above, but it’s an important point. none of the other systems we’re discussing leave a significant slice of their population out of the system.

I mean, if you can give Americans the legendary glories of French health-care while simultaneously cutting their public health-care expenditures by 14%, who’s going to complain?

part of the problem, mr burton, may be that the private system is what has to go in order to dispel the inefficiency. the multi-payer system — the private component — is by far the largest source of inefficiency. what support could be found among the right in america to cut private insurers (and their profits) entirely out of healthcare? and how much lobbying cash to they spend annually?

81

RS 04.13.05 at 4:20 pm

“Same reason we let Europe free ride on international security—especially of the oceans for shipping, if we don’t do it it doesn’t get done and the world (including us) end up much worse off.”

Doesn’t the US also have a strategic interest in being the only military game in town, which would explain why it openly fights against increased European military cooperation?

82

saurabh 04.13.05 at 4:26 pm

While I agree that bringing drugs to market is important work, even if it is boring and mundane, I think the pharmaceutical industry vastly overstates its contribution to this process, as well as the difficulty of actually going through clinical trials. This is not billion-dollar research, here. It is not $500 million dollar research. That’s enough money to fund a thousand academic labs. What in the name of god are they doing for all that money, tell me? I don’t buy it, Sebastian. It’s bullshit.

83

Javier 04.13.05 at 4:27 pm

Interesting article here from Tech Central Station about Swiss health care. I can’t vouch for the accuracy of this article, but it is provocative. Swiss health care might be a middle way between the United States and more statist single-payer systems. The Swiss system has virtually universal coverage and yet still leaves many allocations of resources to the market (althought it is still highly regulated). The Swiss system also bears resemblence to the system that Bailey proposes in this Reason article. Yes, the Swiss system is expensive, but unlike the US system, it actually seems to deliver superior results.

However, like I said, I can’t claim to know much about the Swiss system, so others who know more should comment.

84

Javier 04.13.05 at 4:27 pm

Woops, damn the link feature didn’t work. The Tech Central Station article is here:

http://www.techcentralstation.com/011105F.html

85

Javier 04.13.05 at 4:31 pm

Saurabh, I found this quote from a person who claims to have worked in both academia and pharma companies. It may help explain the “500-800 million” figure of drug development costs.

Lets take the $800 million. He tells us it costs only $100 million and not $800 million to develop a drug. Well, that is not quite what that number means. The $800 million is the cost for the one drug that made it to market, and the 50 that failed in research. That is called an absorbed cost. You see, the vast majority of drugs that are developed never see the pharmacist’s shelf. I worked on one such drug that was abandoned after my company spent over $50 million developing it. Now if you are a stockholder, you think you might want a return on your investment. That one successful drug is it.

86

saurabh 04.13.05 at 4:31 pm

Also, some drugs ARE developed outside of the pharmaceutical industry, the most famous example being Taxol, which was researched by NCI and then handed off to BMS for the money-making portion of the project.

87

saurabh 04.13.05 at 4:34 pm

Okay, javier – that’s a fine conjecture, but it’s totally absurd. Are 50 drugs really failing in Phase III clinical trials for every 1 drug that makes it true? Hardly. Probably not even a tenth of that. This is all hand-waving, anyway – where’s the real numbers to back it up?

88

Sebastian Holsclaw 04.13.05 at 4:34 pm

“I think the pharmaceutical industry vastly overstates its contribution to this process, as well as the difficulty of actually going through clinical trials. This is not billion-dollar research, here. It is not $500 million dollar research.”

Why do you think that?

89

Javier 04.13.05 at 4:43 pm

Okay, javier – that’s a fine conjecture, but it’s totally absurd. Are 50 drugs really failing in Phase III clinical trials for every 1 drug that makes it true? Hardly. Probably not even a tenth of that. This is all hand-waving, anyway – where’s the real numbers to back it up?

You’re right, I don’t have the numbers. I would be interested in seeing them if you could track them down. However, that quote does make me think that the issue may be more complex than you’re letting on.

90

Sebastian Holsclaw 04.13.05 at 5:14 pm

According to this report, more than 90% of drug candidates fail to get to Phase III trials. About 40% of those that make it to Phase III trials end up failing at that point. That suggests an approximate 6% success rate for drug candidates. And if you read Derek Lowe, you would know that it is difficult to rule out drugs very early, and that Phase I and II trials are hugely expensive as well (though less than Phase III). It is perfectly possible for large numbers of PhDs working full time careers in drug research to have no research contact to a successful drug. You have to pay those people somehow.

91

Nicholas Weininger 04.13.05 at 5:20 pm

Steve Burton’s raising a very important point here. If the claims of single-payer advocates about its efficiency gains, and the portability of those gains to the US, are true– if, in short, Kieran’s graph means what he thinks it means– then there should be a way to provide some form of basic, carefully rationed universal health coverage without raising anybody’s taxes. Actually, there should be several ways, given the number of countries whose governments spend a lower percentage of GDP on health care than the US government and manage to get universal coverage out of it.

So where are the lefty health care economists with plans like this? Where are the people advocating, for example, that we set a strict budget constraint for total government health spending equal to the current level– guaranteeing no tax increases– then cover a rationed list of procedures for that amount, using perhaps a rank-ordering system like the one Oregon used to have and sorta-kinda still has for Medicaid? If the efficiency claims are right, that budget constraint should still allow lots of stuff to be covered; after all, the list of stuff covered by those other systems where the governments spend less than our government is supposedly quite comprehensive.

This would not only answer one of the major libertarian/conservative objections, it’d make the plan much more politically palatable to the notoriously tax-increase-averse American public. Hell, I’d go for it; it’d probably result in a decrease in the total level of government control over health care, since it’d be politically easier to deregulate the private portion of the market if there were a minimal-backstop universal plan in place. No tax increase + less overall intervention = a step in the libertarian direction. Universal basic coverage = a step in the lefty direction. What’s not to like?

But I strongly suspect that we don’t see such plans discussed because the cost controls required are just not as easy to get through as people think. Somebody would have to have government health dollars redistributed away from them, and they’d yell too loudly to make the thing work.

92

me2i81 04.13.05 at 5:32 pm

Universal required insurance with some assistance at the low-end (e.g. Switzerland as claimed) is preferable to, say, France because…it’s more expensive but free-market-pure? I don’t get it. Why would one prefer a slightly worse but vastly more expensive system to a slightly better but much cheaper system? It baffles me. Seems like adverse selection would make it less efficient, but keep rich folks from having to go to the same clinics as the rabble, which I guess is a plus for many Americans, who would like to think of themselves as rich. Still, we’d be better off with either model than what we have. I’m really tired of living in a place where 40-something-percent of the population has no health insurance. It’s not civilized.

I haven’t figured out why non-healthcare businesses like the current system at all (of course many don’t, given the endless cost spiral.) My only guess is that it keeps a tight tether on much of the working population who might otherwise be more mobile–stick around or you lose your health benefits. Not such a big deal for an unmarried 20-something, but a huge deal for those with families and huge mortgages.

93

Javier 04.13.05 at 5:49 pm

I’m really tired of living in a place where 40-something-percent of the population has no health insurance.

Do you mean ten percent?

Anyway:

Universal required insurance with some assistance at the low-end (e.g. Switzerland as claimed) is preferable to, say, France because…it’s more expensive but free-market-pure? I don’t get it.

I’m in favor of preserving a substantial free market in health care for reasons that others have already been layed out in this thread: (1) despite what many have argued, I still believe that a free market health care system will produce a much more rapid pace of innovation in medical technology and pharmaceuticals, and these innovations do improve the length and quality of people’s lives over the long term, (2) there are significant productivity gains from free market health care, the prelimary evidence indicates that the U.S. system is more productive than nationalized health care in Europe, (3) many nationalized systems suffer from long waiting times, etc.

Thus, if there is a solution that can sustain a free market in health care without having a mass amount of uninsured people, then I’m very eager to hear it.

94

liberal 04.13.05 at 5:52 pm

Here’s a relevant post from USENET:

Socialized medicine—the *provision* of medicine, not just medical insurance (so-called “national health insurance”)—is inevitable for reasons of economic efficiency. This follows from the unique nature of the
health care market, as made clear from this excerpt from Phillip Longman, “The Best Care Anywhere,” Washington Monthly, Jan/Feb 2005, pp. 39–48. [note: VHA = Veterans Health Administration]

————————————–begin
excerpt—————————————————–

Why care about quality?

Here’s one big reason. As Lawrence P. Casalino, a professor of public health at the University of Chicago, puts it, “The U.S. medical market as presently constituted simply does not provide a strong business case for quality.”

Casalino writes from his own experience as a solo practitioner, and on the basis of over 800 interviews he has since conducted with health-care leaders and corporate health care purchasers. While practicing medicine on his own in Half Moon Bay, Calif, Casalino had an idealistic commitment to following emerging best practices in medicine. That meant spending lots of time teaching patients about their diseases, arranging for careful monitoring and follow-up care, and trying to keep track of what prescriptions and procedures various specialists might be ordering.

Yet Casalino quickly found out that he couldn’t sustain this commitment to quality, given the rules under which he was operating. Nobody paid him for the extra time he spent with his patients. He might have eased his burden by hiring a nurse to help with all the routine patient education and follow-up care that was keeping him at the office too late. Or he might have teamed up with other providers in the area to invest in computer technology that would allow them to offer the same coordinated care available in veterans hospitals and clinics today. Either step would have improved patient safety and added to the quality of care he was providing. But even had he managed to pull them off, he stood virtually no chance of seeing any financial return on his investment. As a private practice physician, he got paid for treating patients, not for keeping them well or helping them recover faster.

The same problem exists across all health-care markets, and its one main reason in explaining why the VHA has a quality performance record that exceeds that of private-sector providers. Suppose a private managed-care plan follows the VHA example and invests in a computer program to identify diabetics and keep track of whether they are getting appropriate follow-up care. The costs are all upfront, but the benefits may take 20 years to materialize. And by then, unlike in the VHA system, the patient will likely have moved on to some new health-care plan. As the chief financial officer of one health plan told Casalino: “Why should I spend our money to save money for our competitors?”

Or suppose an HMO decides to invest in improving the quality of its diabetic care anyway. Then not only will it risk seeing the return on that investment go to a competitor, but it will also face another danger as well. What happens if word gets out that this HMO is the best place to go if you have diabetes? Then more and more costly diabetic patients will enroll there, requiring more premium increases, while its competitors enjoy a comparatively large supply of low-cost, healthier patients. That’s why, Casalino says, you never see a billboard with an HMO advertising how good it is at treating one disease or another. Instead, HMO advertisements generally show only healthy families.

In many realms of health care, no investment in quality goes unpunished. A telling example comes from semi-rural Whatcom County, Wash. There, idealistic health-care providers banded together and worked to bring down rates of heart disease and diabetes in the country. Following best practices from around the country, they organized multi-disciplinary care teams to provide patients with counseling, education, and navigation through the health-care system. The providers developed disease protocols derived from evidence-based medicine. They used information technology to allow specialists to share medical records and to support disease management.

But a problem has emerged. Who will pay for the initiative? It is already greatly improving public health and promises to bring much more business to local pharmacies, as more people are prescribed medications to manage their chronic conditions and will also save Medicare lots of money. But projections show that, between 2001 and 2008, the initiative will cost the local hospital $7.7 million in lost revenue, and reduce the income of the county’s medical specialists by $1.6 million. An idealistic commitment to best practices in medicine doesn’t pay the bills. Today, the initiative survives only by attracting philanthropic support, and, more recently, a $500,000 grant from Congress.

For health-care providers outside the VHA system, improving quality rarely makes financial sense. Yes, a hospital may have a business case for purchasing the latest, most expensive imaging devices. The machines will help attract lots of highly-credentialed doctors to the hospital who will bring lots of patients with them. The machines will also induce lots of new demand for hospital services by picking up all sorts of so-called “pseudo-diseases.” These are obscure, symptomless conditions, like tiny, slow-growing cancers, that patients would never have otherwise become aware of because they would have long since died of something else. If you’re a fee-for-service health-care provider, investing in technology that leads to more treatment of pseudo-disease is a financial no-brainer.

But investing in any technology that ultimately serves to reduce hospital admissions, like an electronic medical record system that enables more effective disease management and reduces medical errors, is likely to take money straight from the bottom line. “The business case for safety remains inadequate [for] the task,” concludes Robert Wachter, M.D., in a recent study for Health Affairs in which he surveyed quality control efforts across the U.S. health-care system.

If health care was like a more pure market, in which customers know the value of what they are buying, a business case for quality might exist more often. But purchasers of health care usually don’t know, and often don’t care about its quality, and so private health-care providers can’t increase their incomes by offering it. To begin with, most people don’t buy their own health care; their employers do. Consortiums of large employers may have the staff and the market power necessary to evaluate the quality of health-care plans and to bargain for greater commitments to patient safety and evidence-based medicine. And a few actually do so. But most employers are not equipped for this. Moreover, in these days of rapid turnover and vanishing post-retirement health-care benefits, few employers have any significant financial interest in their workers’ long-term health.

That’s why you don’t see many employers buying insurance that covers smoking cessation programs or the various expensive drugs that can help people to quit the habit. If they did, they’d be being buying more years of healthy life per dollar than just about any other way they could use their money. But most of the savings resulting from reduced lung cancer, stroke, and heart attacks would go to future employers of their workers, and so such a move makes little financial sense.

Meanwhile, what employees value most in health care is maximum choice at minimal cost. They don’t want the boss man telling them they must use this hospital or that one because it has the best demonstrated quality of care. They’ll be their own judge of quality, thank-you, and they’ll usually base their choice on criteria like: “My best friend recommended this hospital,” or “This doctor agrees with my diagnosis and refills the prescriptions I want,” or “I like this doctor’s bedside manner.” If more people knew how dangerous it can be to work with even a good doctor in a poorly run hospital or uncoordinated provider network, the premium on doctor choice would be much less decisive, but for now it still is.

And so we get results like what happened in Cleveland during the 1990s. There, a well-publicized initiative sponsored by local businesses, hospitals and physicians identified several hospitals as having significantly higher than expected mortality rates, longer than expected hospital stays, and worse patient satisfaction. Yet, not one of these hospitals ever lost a contract because of their poor performance. To the employers buying health care in the community, and presumably their employees as well, cost and choice counted for more than quality. Developing more and better quality measures in health care is a noble cause, but it’s not clear that putting more information into health-care markets will change these hard truths.

95

me2i81 04.13.05 at 6:19 pm

“I’m really tired of living in a place where 40-something-percent of the population has no health insurance.”

Do you mean ten percent?

No, neither 10 percent nor 40 percent–we were both wrong. It’s around 45 million, which is, what, around 20 percent.

I’m not sure why, say, the French model is not a free market in health care. I support a free market in health care, just not a free market in health insurance. I don’t think anybody here is arguing that we need to replicate Britain’s NHS. We could do a single-payer insurance scheme, or do something as straightforward as eliminate the ability of insurance companies to look at a person’s health history, age, or zipcode, i.e. make a single risk pool and compete on price, service, and glossy marketing message without adverse selection ruining everything for the “everyone elses” of the country.

Since everyone loves anecdotes, here’s mine: my wife got really sick in Italy, and spent a week in the city hospital. Bottom line: you share a ward with 5 other people, but the food is much better, and you get offered wine with dinner. They also gave me dinner since I was sitting there. The city hospital also had a full bar, which made better coffee than any Starbucks on the planet. Now that’s healthcare! The hospital stay was free. The biggest hassle was that the doctor didn’t speak English, and neither of us spoke Italian, so I got to talk to the doctor in my high-school French.

96

baa 04.13.05 at 6:37 pm

Maybe this is a dead thread and I am wasting my breath. But…

1. There is an argument to be had about how to structure reimbursement for health care. It seems to me very unlikely that moving from the hodge-podge system in the US (some private, some public)to an entirely public system will achieve massive increases in efficiency. Here are some good arguments to doubt that this can happen

2. Pharmaceutical company profits, although a target of much ire, are not the major source of the health care cost crunch. This study (see figure 1) shows that prescription drug spending accounts for 22% of US healthcare costs. Let’s imagine that half of that is profit (it’s actually, far less than that, but I’m being kind). If so, completely removing pharma profit makes health care 10% cheaper. That’s good, but not the huge effect many would imagine.

3. Drug research is, in fact, tremendously expensive. Pharmaceutical companies do many sleazy things. BMY ripped of the NCI, no doubt other pharma cos ripped off the government too. That is not, however, standard operating procedure, nor does it mean that drug development is cheap. It is immensely expensive. I work for a biotechnology company, so perhaps this rules my opinion out as a self-interested party. We have raised (to date) $80mm, and this will not suffice to bring a single drug to market. If we want new drugs someone will need to pay for this. If we think having the government do it directly, will be more efficient, fine. But we will not get new drugs without substantial investment.

97

Steve LaBonne 04.13.05 at 7:11 pm

Baa, the linked “good arguments” article claims, based on conjecture, that cutting costs by limiting access to high-tech procedures would sacrifice outcomes. Bur we don’t have to guess! That’s exactly what’s going on in some of the single-payer systems that demonstrably produce better outcomes. This shows that in the US we are, in fact, overusing procedures (which are very profitable for medical practices that own their own machines- a built-in perverse incentive) in a way that boosts costs without contributing to health, giving us a real opportunity to restrain costs by introducing more disipline into the system. We’ve already seen in the US that HMOs tried, but were not allowed to exercise this restraint for long- only single-payer plans have ever exhibited success in doing so. I would conjecture that such a system’s uniformity and perceived fairness are politically necessary in order to convince a population to accept such tradeoffs, which are not accepted when people are being denied by private insurers they perceive (rightly or wrongly) as selfish fatcats.

The tendency of American health-care conservatives to ignore the (rest of the) real world in favor of their ideologically-based musings is really infuriating.

98

mw 04.13.05 at 7:21 pm

We could…do something as straightforward as eliminate the ability of insurance companies to look at a person’s health history, age, or zipcode, i.e. make a single risk pool and compete on price, service, and glossy marketing message without adverse selection ruining everything for the “everyone elses” of the country.

Doesn’t work. Insurance companies could still manipulate their risk pools by fiddling with the benefits and services they offer to make themselves attractive to the least expensive people to insure and unattractive to unhealthy expensive customers.

99

Javier 04.13.05 at 7:25 pm

No, neither 10 percent nor 40 percent—we were both wrong. It’s around 45 million, which is, what, around 20 percent.

Okay, that’s fair–but let’s split the difference: 45 million/294 million = 15 percent.

100

lawnorder 04.13.05 at 7:30 pm

That’s all nice and well, but my sister is having her first baby in Amsterdam (the Netherlands) and the govt. subsidized “health plan” gives her 2 choices for birth: At home with a midwife or 2 hours in the hospital then home.

At this rate they will offer leeches for any post partum problem she might have!

101

saurabh 04.13.05 at 7:47 pm

The $800 million comes from a Tufts study, and better than half of it represents opportunity costs. I can’t take that seriously; that’s not an expense. There’s other serious flaws in the Tufts study, like not including tax breaks, being based on only 10 (non-represntative) companies, etc. It’s irresponsible to be quoting these figures without an independent assessment; they are essentially propaganda.

102

Randolph Fritz 04.13.05 at 7:52 pm

Disagreement on shape of earth, now in progress.

103

Nicholas Weininger 04.13.05 at 8:15 pm

Steve, that same linked-to article gives reasons to question whether the commonly cited measures of outcomes– infant mortality and life expectancy– really say what proponents think they say about the quality of health care provision. “Demonstrably better outcomes” are not nearly so simple to demonstrate as you think.

104

jet 04.13.05 at 8:35 pm

Don’t let this thread die yet, I feel I’m almost to post-beginner knowledge of the world health care industry (which makes me an expert by DC standards).

105

Mill 04.13.05 at 8:39 pm

When I was in the UK the doctor _punched me right in the face_! And then he said my treatment wasn’t covered by the NHS! So I went back to the US where my wounds were healed by the magic power of Laissez-Faire Capitalism — although I retain some scars, because of the New Deal.

I have to say I’m really enjoying these posts. Please keep it up. I guess the next step is to consider objective ways to measure quality of health care and incorporate that into the comparison too. I say “ways” because obviously different people have different POVs on what constitutes quality health care, especially w/r/t end-of-life stuff…

106

Peter 04.13.05 at 9:04 pm

Mill,
I hope you threw him a beatin’ back. After all, the standards for ethical conduct have risen dramatically since Russell Crowe arrived on the scene.

107

Jayanne 04.13.05 at 9:13 pm

>>>
. It seems to me very unlikely that moving from the hodge-podge system in the US (some private, some public)to an entirely public system will achieve massive increases in efficiency.
>>>>

Otoh, the UK’s hodge-podge system (most public, some private) can’t be shown to have led to increased efficiency (can it?!)

Note to Matt. I’ve never had a GP who didn’t do blood tests, and I’ve lived in West Wales, South Wales, Lancashire, North Yorkshire and London (and in London I changed doctors as I moved around the city). If I wanted a blood test and they wouldn’t do one, I’d pay, but I’d have to get someone else to do it. So your experience at the Belgravia Clinic was unusual, I’d say.

108

Jake McGuire 04.13.05 at 9:28 pm

The $800 million comes from a Tufts study, and better than half of it represents opportunity costs. I can’t take that seriously; that’s not an expense.

Cost of capital, not opportunity costs, and if you don’t think cost of capital is a real expense, give me $10,000 now, and I’ll give you $10,000 in ten years.

109

Josh 04.13.05 at 9:51 pm

Fckng cmmnsts.

110

saurabh 04.13.05 at 10:41 pm

A pharmaceutical company is not a bank; it is not in the business of speculation or investment. It’s an R&D budget for a reason. It’s stupid to account “cost” that way. Not to mention deceptive.

111

sd 04.14.05 at 12:49 am

saurabh,

Your ignorance of basic economics is staggering. That or you find the truth distasteful, so you choose to believe in falsehood because it makes for a more comfortable worldview.

Look, pharma companies exist because investors choose to invest their money in the enterprise. They provide capital. Those investors can do other things with their money. So in order to get them to invest they must be compensated. They are compensated by returns on their capital. Thus for the pharma company capital is costly – they have to pay returns to their investors. And the cost continues to accrue for every year that passes in which the pharma company holds on to its investors’ capital without paying them a return.

The cost of capital for a company rises as the inherent riskiness of the enterprise increases. Thats because investors demand a greater return for funding a risky company than for funding a non-risky company. Pharma is a very risky business – a company like Eli Lilly or Merck could easily go out of business if it failed to uncover enough blockbuster drugs. And R&D cycles in pharma are very long – after capital is initially invested in a project it takes years to earn any return that might come from it.

Again, if you disagree, please loan me $100,000. I’ll gladly pay you back the $100,000 I borrowed in 30 years.

112

laura 04.14.05 at 2:18 am

Hate to break it to those who go on about the US sacrificing itself for “freeriders” (in “security” too, yeah, because “security” today is exactly the same thing as invading other countries, absolutely) – but the Europeans who get “free” health care are not actually getting it for “free” but you know, paying it themselves through a little thing called *taxes*.

The big-name costly drugs, besides, you still have to pay for those, extra, when you need them. Unless you’re below a certain wage, or above a certain age. But even there, it’s not the US that kindly distributes medicines to the rest of the world, it’s the taxpayers of that country that subsidise those who need subsidising and help.

Now for the anecdote series, my father, who lives in Italy, was recently in hospital for surgery for an aortic aneurism, two weeks in hospital plus surgery plus all the pre and post tests and doctor visits, with some of the best specialised surgeons for that kind of operation, all “free” because… he’d paid taxes all his life, a much higher portion of his income than he’d have had to pay if he was in the US. For medicines he continues taking after leaving the hospital, he pays half the price on them, because his income was the average worker income, not below the level where it’s fully subsidised. That’s how it works.

So if you want to bitch about how the US pharmaceutical industry gets government subsidies, please, take into consideration they do it in their own interest, not the US or much less the European taxpayers. Much like the mega billionaire military budgets for Iraq are certainly not “giving a free ride” to other countries in “international security”, not least because now after Iraq the threat of terrorist attacks in train stations and cities all across Europe is a lot higher and who’s spending the money to keep police and intelligence and security at work in Europe? The European taxpayers.

And if you have a problem with the US keeping military bases across the world, please address the complaint to your own Defense Department, because today they don’t add anything in terms of security to the countries they’re located in, in fact, they require extra security, and it’s definitely not out of a generous impulse for motherly protectiveness that the US wants to maintain them. Just a thought, you know. About reality.

113

dave heasman 04.14.05 at 4:16 am

The only Belgravia Clinic a Google search throws up is for hair-loss.
The name itself suggests private-sector, there are a number of drop-in centres springing up in the centre of town these days.
To be fair, my GP surgery doesn’t do blood-tests. They send you to the open-all-day health centre 200 metres down the road. And I imagine single-doctor GP practices won’t do them either. But they too will probably refer you.

As for this “basic economics” provided by sd : –

“Look, pharma companies exist because investors choose to invest their money in the enterprise. They provide capital..”

This might have been true when they were starting up, but obviously market dealings by mega-funds in mega-pharma are not about providing working capital for the organisations.

114

abb1 04.14.05 at 5:27 am

Rs,
I’m a frickin socialist and I know there is a hell of a lot of work and expenditure in developing a drug and bringing it to market – and that is not all done by NIH, whatever you think!

My question is: their portion (characterized by sd as ‘non-original’) of the total amount of work involved – why should it give them the exclusive right of ownership of the final product for a number of years?

If you invented an engine that runs, say, on dog crap and,say, GM designed and crash-tested a car that makes use of your discovery – yes, the GM has done a lot of work and without them the final product would’ve never existed, that’s all true – but should the GM own full unlimited copyright on this car and be able to turn around and offer it to you at some ridiculous arbitrary price? It doesn’t seem to make sense. I can imagine a whole spectrum of much better deals you could make with car companies.

Thanks.

115

Jayanne 04.14.05 at 2:39 pm

>>>>>
That’s all nice and well, but my sister is having her first baby in Amsterdam (the Netherlands) and the govt. subsidized “health plan” gives her 2 choices for birth: At home with a midwife or 2 hours in the hospital then home.
>>>>>

The Netherlands has a two-tier or multi-tier system (depending on how you look at it…)within its general health system, as does France. I don’t want to defend that, just make the point, which is important partly because US discussions of the merits of changing your current system may depend too heavily on specific instances from other countries. If you knew the waiting lists for orthopaedic appointments in my city (Cardiff) and took that as a representative example of “socialized medicine”, you’d almost certainly stick with yours, but if I hadn’t told you that but had told you I can see my GP — or if he isn’t available for some reason, one of his partners — within 6 hours, free of course, and a maximum of £100 p.a. for all drugs prescribed you might decide the system here is really terrific. So, 1. I’d like to see more comparative data here but 2. I’d like an understanding that not all that’s bad in certain “socialized” systems is inevitable.

116

Sebastian Holsclaw 04.14.05 at 3:22 pm

“This might have been true when they were starting up, but obviously market dealings by mega-funds in mega-pharma are not about providing working capital for the organisations.”

Huh? This doesn’t contradict the explanation at all. They fund because of the high rate of return on successful companies which outweighs the risk nature of investing in pharmaceuticals. Take away the high rate of return and you are left with a risky investment that mega funds won’t invest in either.

117

RS 04.14.05 at 4:33 pm

Abb1:

But the point I’m trying to make is that basic research rarely, if ever, throws up the compound that treats the disease. It normally suggests a biological pathway to try and target. Millions of dollars and much effort later, a drug company finds a compound that will target this pathway in a useful manner. Then it tries it to see if it a) doesn’t kill people, b) actually works on the disease. I admit, I don’t know what the rules are in the US, but in the UK, if you find a therapeutic compound and you work for the public sector, you patent it and licence it to the drug companies – sharing the benefits all round.

You can make the argument that drug companies piggy-back basic research – true enough – but to claim that it is all done for them by NIH is pure fantasy land stuff.

I know very few academic labs capable of true therapeutics level high throughput discovery (some are capable of research level high throughput for tracers etc., but that isn’t the same), and none that could fund clinical trials and basic safety and toxicity testing of the level to get a drug to market and FDA (plus the rest of the world) approval.

118

abb1 04.15.05 at 2:06 am

It normally suggests a biological pathway to try and target.

I understand, but what do you get for suggesting a biological pathway to try and target?

I mean, what portion of the whole effort does the basic research amount to and what share of control over the final product does the entity that suggested the pathway receive?

119

RS 04.15.05 at 4:56 am

Abb1:

Well that is a pefectly good point. But similar arguments are true of any high-tech industry relying on discoveries in basic research. I suppose the point they would make is that they pay their taxes in order for this sort of research to get done (although, of course, a lot of it is also done in countries other than the one in which they are based).

But more practically, how do you measure the importance of any given bit of basic research in the final development of a drug? I think the patenting of genes for diseases has shown the disadvantages of this kind of reasoning.

120

RS 04.15.05 at 5:03 am

Abb1:

I suppose you can also extend that kind of reasoning to ask who pays for all the expensive training of these MDs, pharmacologists, medicinal chemists and chemical engineers necessary for BigPharma’s survival.

121

abb1 04.15.05 at 5:37 am

Rs,
the big pharma seems different from other high-tech industries because it heavily relies on patent protection.

See, for example, Tim Berners-Lee working at CERN came up with the idea of the WWW, it’s been expanded and enhanced by private businesses, but you don’t have to pay every time you’re clicking an IE button, individual HTTP tags are not patented, we don’t have to pay royalties to someone every time we italicize a word (although Bezos did try to patent a button) – even though many businesses that enhanced this technology in general and found specific solutions in particular did spend years and millions of dollars. Somehow it did work out well with this technology and almost no one is complaining. Doesn’t seem to work that well in bio-research/pharma area.

122

RS 04.15.05 at 6:05 am

Abb1:

But isn’t the IT sector full of patents? Just because totally generic ideas haven’t been patented (and only because they can’t, not out of some kind of altruism) doesn’t mean that there aren’t hundreds and thousands of proprietary systems out there – e.g. operating systems, computer programs, file formats, protocols etc. While people are within their rights to try and design workarounds that can achieve the same result without infringing the patent (e.g. Windows vs. Mac OS) the same is the case in the pharmaceutical industry (e.g. fluoxetine vs. paroxetine).

123

RS 04.15.05 at 6:11 am

Abb1:

Of course software has copyright protection as well.

And I suppose the most obvious difference is the development cycle in pharma requires patent protection more than the IT development cycle which is necessarily much quicker.

124

abb1 04.15.05 at 7:23 am

No, I don’t think you can protect your file formats and protocols so that no one else can use them; you can protect your code, of course, and algorithms in some cases. Somehow they created an environment where mammoth like Microsoft has to constantly defend itself against little guys working out of their garages.

I understand that pharma is different in many respects, but still, it’s hard to believe that the current system is the best government could come up with (in regards to the IP laws in this area) – assuming they were thinking about the public good, of course.

125

RS 04.15.05 at 8:06 am

Well to create a file format or protocol you will need an algorithm – which is patentable, e.g. LZW and the .GIF format. Not my specialist field but communications companies and the IT sector are massive producers of patents.

I’m curious as to what you think should be done about the IP laws? I mean, as you say, a lot of internet based coding can be easily spread amongst hobbyists – as has been demonstrated by the open source movement (although, of course, it isn’t exactly responsive to commercial pressures). But if you started relaxing IP law when it comes to pharmaceticals, who is going to develop the drugs and run the trials, it isn’t going to be academic departments without massive extra public support, and it isn’t going to be pharmaceutical companies because everyone else can quickly jump on board with generics, making R&D unprofitable.

126

RS 04.15.05 at 8:14 am

I think Qualcomm and CDMA might be a good example of what I mean in the comms sector.

127

abb1 04.15.05 at 1:46 pm

Well to create a file format or protocol you will need an algorithm – which is patentable, e.g. LZW and the .GIF format.

Hmm, I am sure you can write your own gif viewer if you know the format. Real Player can play Microsoft audio files. OpenOffice works with Microsoft Office files in the same manner Microsoft Office does. I think the IP laws are quite liberal in the world of software.

With the pharma, they could, for example, create a central agency that hires all these private companies to do what they do, just like the pentagon hires defense contractors; and that agency would hold all the patents. That would be kinda radical.

What they could also do is to force the patent-holder to share the formula (well, it can be easily analysed anyway) with other companies for some kind of a compensation. This would be very similar to what they did with the AT&T, when they required it to lease the lines to all other long-distance companies. After that, long-distance rates fell in some cases to 10% of what it was under AT&T monopoly.

Hey, I am no expert – what do I know. It just feels like there must be a better way.

128

RS 04.16.05 at 7:31 am

Abb1:

“With the pharma, they could, for example, create a central agency that hires all these private companies to do what they do, just like the pentagon hires defense contractors; and that agency would hold all the patents. That would be kinda radical.”

So essentially state directed pharmaceutical research? But where would the money come from to pay the companies (because the state wouldn’t be able to profiteer in the same way)?

“What they could also do is to force the patent-holder to share the formula (well, it can be easily analysed anyway) with other companies for some kind of a compensation. This would be very similar to what they did with the AT&T, when they required it to lease the lines to all other long-distance companies. After that, long-distance rates fell in some cases to 10% of what it was under AT&T monopoly.”

They could do. But, again, in a market based capitalist economy, where does the money come from to provide the incentive?

Personally, I’m all for nationalising these things, but most people here wouldn’t agree (and it won’t work worldwide)…I was just arguing against infantile claims that pharmaceuticals companies don’t do anything for their money, not claiming we’re in the best possible world, which we clearly aren’t.

129

abb1 04.16.05 at 9:03 am

Rs, what do you mean where does the money come from? In the ‘Pentagon’ scenario from the taxpayers, later replenished by sales of drugs, in the ‘AT&T’ scenario – from investors. AT&T is still profitable, even though it’s ownership of its infrastructure has been weakened.

Another scenario would be a ‘utility company’ scenario, where a monopoly operates under strict regulations; it would be a trade-off: much smaller but guaranteed profits, a lot of people invest in utilities.

130

RS 04.16.05 at 10:51 am

Abb1:

But in the pentagon scenario, taxes would need to be very high to pay for development – remember, that profits from sales will be -much- lower, and you need to make pay-offs sufficient to justify the R&D on failed projects – just like the current market. That is why so much of the US budget is military spending.

In the At&T scenario, again, the company would need to be sufficiently reimbursed to make R&D worthwhile (otherwise you’re in the cloud cuckoo land of people that moan that generics are so much cheaper than branded drugs, so therefore, drug companies are ripping us off).

I don’t think a utility company model would work for pharmaceuticals – R&D isn’t a commodity in the same way.

131

abb1 04.16.05 at 12:51 pm

My assumption is that the actual R&D costs are a relatively small fraction of the totality of what pharma companies spend now (which also includes TV commercials, lobbying, bribing doctors, profits, execs salaries, etc); certainly less than a half, perhaps much less. And for some categories of drugs there is no need to organize it differently than it’s done now: hairloss drugs, vgra, and so on. So, the initial investment doesn’t necessarily have to be huge and the price doesn’t have to be very high to cover it.

And I think there are utility companies that are somewhat similar: you need huge initial investment to build, say, a hydro power station and then you sell electicity and recover your investment over time and then some more. But utility companies (unless de-regulated) have to justify their expenses, prices and profits; it’s a standard procedure. So, why would anyone build a hydro power station? Well, because it’s profitable enough.

I think auto-insurance rates are regulated the same way, at least in Massachusetts.

132

RS 04.16.05 at 2:48 pm

Abb1:

But under the US model, health insurance picks up the tab for drugs, but this way you are transferring costs to the state. Also, while R&D is obviously less than the total costs of the drug, there would stilll be a staggering cost to develop the drugs – i.e. even if R&D is less than half the cost (plus factor in manufacture and distribution), BigPharma is a multibillion dollar industry – half of that is still a multibillion dollar industry!

With regards to utilities, the analogy breaks down when you consider the uncertainty – build a power plant, costs lots, sell electricity, recoup investment and make profit. Do drug R&D, costs lots, find bugger all, make nothing, fold, lose all investment – the only way to make it worth while is to have staggering returns on the drugs that do work – and that is the current system of patents.

133

abb1 04.16.05 at 4:02 pm

I don’t know if insurance will pay for er*ction and hair improvement – and that must be a good chunk of the industry. And in the end, it doesn’t really matter who pays, it’s obvious that we all pay one way or another; what does matter is whether you can cut the waste: tv commercials, ceo salaries, etc. while making sure new useful drugs are being developed at least at the same rate they are now.

As far as uncertainly, I don’t know for sure, but I suspect there must be some statistical certainty, so that you know that you need to spend between $X and $Y to discover with 95% probability something that will be worth $Z over the next 5 years (or something like that). And X and Y have to be close enough or private industry just wouldn’t be possible.

134

RS 04.16.05 at 4:23 pm

“As far as uncertainly, I don’t know for sure, but I suspect there must be some statistical certainty, so that you know that you need to spend between $X and $Y to discover with 95% probability something that will be worth $Z over the next 5 years (or something like that). And X and Y have to be close enough or private industry just wouldn’t be possible.”

Don’t think so. In fact I’m almost certain that isn’t the case, if you look at the pretty limited discovery of useful drugs over the last few years. In fact, as the easy drugs have been developed, new drug production has slowed down. Fortunately, at the moment, small biotech has taken up the slack.

I get your point about the need for returns to make private industry possible, but at the moment, as far as I can tell, the pharmaceutical companies are thinking that easy development (me too drugs, new uses for old drugs) are the bread winners, and scaling back R&D.

135

Jobo 04.16.05 at 4:50 pm

Abb1,127:

An essential part of the GIF format was indeed patented until quite recently. Obviously, if you know the format, you can program your own GIF codec.

However, that was illegal (also merely using your program), which is the entire point of getting a patent — the government grants you a temporary monopoly in return for disclosure.

If you want to know more about software patents, an interesting example is amazon’s one-click patent.

136

abb1 04.17.05 at 4:59 am

Although the GIF was originally developed in 1987 by a Compuserve special interest group, it has been regarded as an open, non-proprietary format since 1994, when Unisys negotiated with Compuserve to offer a limited, non-exclusive, royalty-free license for the format to the entire viewing on-line community.

Again, my only point is to demonstrate that in the software industry somehow it does work to everyone’s satisfaction (more or less).

I did mention Amazon’s patent. Patent and the lawsuit against B&N generated a huge controversy, activism, threats of boycott, etc. I’m not sure, but I don’t think it was enforced in the end. Again, somehow things did work out OK.

It doesn’t seem to happen in the pharma industry. One of the reasons is, probably, that getting a pill that might save your life is not the same as viewing a picture – you have a huge insentive to pay whatever they ask. If so, then it’s one the typical market failures, usually corrected by specially designed laws and regulations.

137

RS 04.17.05 at 6:01 am

Abb1,

I think in the US the problem is more that you don’t have cost-benefit analyses to the same extent as other countries. For example, in the UK, NICE (the national institute for clinical excellence) determines whether a given treatment is worth the price, and therefore, whether the NHS will fund it, and of course, on top of that, the NHS can negotiate big discounts.

In the US, with your direct to patient marketing, and pay-for-treatment healthcare, the market can squeeze more out of you.

As for .GIFs, the story is a bit more complicated than that as Compuserve popularised the .GIF format as a free and defacto standard, only later did people realise it used the LZW algorithm patented by Unisys, who, when it was popular, tried to ring money out of commercial users. It is now out of patent. Rather than some kind of success of the internet community working together, it was just dumb luck that Unisys realy had little chance of chasing up private users.

The internet is actually the domain of all kinds of ridiculous and trivial patents, because challenging them is so difficult, so I’m not sure it is a great example – at least Pharma companies actually produce something tangible that actually does something.

If you look at Qualcomm and CDMA you get a much better idea of what happens when patent rights are enforced from the outset in the technology sector!

Comments on this entry are closed.