March 23, 2004

The Decembrist on Medicare Prescription Drug Coverage

The Decembrist--Mark Schmtt--rants about the Medicare prescription drug bill. "Where's the money going?" he asks. His answer: "Drug companies, insurance companies, and the bribes to employers to maintain coverage." It is very sad: it's hard to avoid thinking that if we in the Clinton administration had had $540 billion to spend on prescription drug coverage over the next ten years, we could have gotten the public much more for their money.

The Decembrist: The Verdict is in on Medicare: If you remember how obsessed I was with the Medicare bill last fall (back when no one read this blog, and most people who looked at it ran away because all I ever seemed to write about was M-E-D-I-C-A-R-E over and over again), guess how much I am enjoying the latest events? Answer: a lot. Not only did Tom Scully of CMS (the sub-agency that oversees Medicare and Medicaid) threaten to fire his agency's actuary, whose independence had been written into law by a Republican Congress, if he revealed the real cost of the bill, it now turns out that Doug Badger of the White House -- the purest of hacks -- may have pressured Scully as well.

Conning the American taxpayers out of almost $150 billion -- that has to be a big deal. Working in the federal government, or in a foundation, one becomes a little inured to big numbers, but not numbers this big. This is $555 per man, woman and child in the United States! Will someone ask a Republican member of Congress if there is a definition of "high crimes and misdemeanors" that includes oral sex, but not grand larceny?...

...

The issue can't just be the cost. Cost is an abstraction. To keep this story going, we need to open up two more fronts: First, did members of Congress understand that the premium for the prescription drug benefit was not really $35 as advertised, but some amount that is estimated as likely to average $35. Only after the bill passed did the director of the Congressional Budget Office say publicly that the $35 was an estimate based on many "moving pieces in the formula." (Another way to put it is that the private-sector providers are going to be able to charge what they want to charge, within some loose parameters.) How much is this really going to cost seniors? What does Richard Foster think it's going to cost them? Did members of Congress know this?

Second, where is all the money going? I can only do the roughest back-of-the-envelope math here, but according to the numbers I can find, there will be about 43 million Medicare recipients in 2006. At $550 billion, that's about $12,800 per Medicare recipient, over the seven years covered by the bill. (It's a ten-year cost estimate, but the benefit doesn't kick in until year three.) Many are not going to take the benefit at all, because they have other prescription coverage. Of the rest, 80% spend less than $5,000 on prescription drugs; by law, they won't get more than $1500 worth of benefits in any year. More than half will get much less than that.... So, if 75% of the recipients participate, the cost to the public, or the addition to the debt, is about $2200 per recipient per year, over the seven years of benefits. But the vast majority won't be able to get more than $1500 even if they have very high drug costs, and those with average drug costs will get only about $750. There's inflation and population growth, and all that, but the question should still be, where's the money going? Drug companies, insurance companies, and the bribes to employers to maintain coverage is the answer. But we've got to keep it simple. It's a bad deal all around, and an example of why we can't afford four more weeks of this kind of government.

Posted by DeLong at March 23, 2004 12:07 PM | TrackBack | | Other weblogs commenting on this post
Comments

Yeah, I know...if the Democrats were running the show we'd all be living in paradise. I must have missed Clinton's brilliant Medicare and Social Security reforms in the eight years he had to work on the problem.

So, how would you have done it? Massive price controls on the drug companies? Just go for it and give the government monopoly control on all medical care, which is what you are all shooting for?

It would be interesting to apply Mark's math to a number of other favorite social spending and entitlement programs, and see just how much of that money is ending up with the recipients.

Face it, what really pisses people off is an entitlement program with Bush's name on it instead of Kennedy's.

Posted by: tbrosz on March 23, 2004 12:22 PM

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http://www.cbpp.org/3-22-04socsec.htm

Understanding The Social Security And Medicare Projections - 3/23/04

Leaked material about the Social Security and Medicare trustees' reports scheduled for release March 23, which suggests that the programs' finances are in much worse shape than previously understood, rests on misleading use of data.

Posted by: anne on March 23, 2004 12:32 PM

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http://www.cbpp.org/3-22-04health.htm

Substantial Flaws in Trade Health Insurance Tax Credit Need To Be Addressed Before Consideration of an Expansion - 3/23/04

A tax credit enacted in 2002 for the purchase of health insurance by workers losing their jobs due to trade suffers from design and implementation flaws that have substantially limited enrollment among eligible individuals.

Posted by: anne on March 23, 2004 12:35 PM

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Agree that the Medicare bill is a disastrous sell out to the insurance industry. It would be bad even without the dishonest concealment of its true costs. The disagraceful thing is that Congress doesn't want to know the true cost of anything, including the Iraq disastre. Yes, Foster should have been able to level with Congress. No, Brad, I don't think that the Clinton administraiton would have done any better. They used the same shell game that the Bush-Pakistan propaganda machine has used about their "high value target" (isn't it amazing how eagerly the press swallowed that crap- it distracts from unpleasant realities)only focused on law enfrocement and healthcare. Power corrupts and only the rich in this country have the ability to check the power of Congress and the President. When the market is up, they are content.

Posted by: Maracucho on March 23, 2004 12:36 PM

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THE BEST PART OF THIS LAW IS THAT IT'S NOT A DEMOCRAT LAW.

My Democrat friends tell me about the obscene drug company profits that the Dems would squeeze out. Last I looked Pharm Cos averaged less than 5% in profits.

Like all Dem whiners, they just don't know what they're talking about.

I don't particularly like this Bush idea, but it's way better than any Dem program that would scourge the Drug Cos and rape the private medical research that has kept so many of us alive.

GOD BLESS THE BEST HEALTH SYSTEM IN THE WORLD right here in the US of A. We must stop the Dems from crippling our health system the way their European and Canadian soul mates have screwed their's.

Adrian

Posted by: Adrian Spidle on March 23, 2004 12:42 PM

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Spidle - "Last I looked Pharm Cos averaged less than 5% in profits."

Pls provide source.

Posted by: jack O'donnell on March 23, 2004 12:52 PM

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Adrian, I guess I'm a Dem whiner who doesn't know what I'm talking about. Luckily for me, however, you, who know so much more, can inform me so that I might improve.

You assert that the U.S. has the best health care system in the world; surely, you have some evidence to support this assertion. Perhaps you can share this evidence with us. I am sure that you, who know so much, would not make uninformed, unsubstantiated assertions in your posts. I happily await the knowledge that you will impart.

Posted by: joe on March 23, 2004 01:01 PM

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The United States is the only industrialized country without some form of control on the prices of drugs.

The U.S. accounts for more than half of Pharmaceutical industry's profits.

Since 1999, the drug industry has given more than 45 million dollars in political contributions, and it's spent hundreds of millions more on an army of more than 600 lobbyists to work its will on Capitol Hill.

“…the truth is that they (Big Pharma) spend less in R&D then they make in profits. And far less then they spend on marketing. And they don't make that many miracles in the first place … The problem is, is that we're (American citizens) no longer getting our money's worth.”
------------Dr. Marcia Angell, who was executive editor of The New England Journal of Medicine for 11 years, is currently writing a book on the drug industry.

http://www.cbsnews.com/stories/2004/03/12/60minutes/main605700.shtml

Posted by: jack o'donell on March 23, 2004 01:08 PM

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The notion that medical care is not excellent in France or Germany or Sweden or Switzerland or Japan or Australia ... is absurd.

Posted by: anne on March 23, 2004 01:49 PM

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Last time I checked (I did a report on this very recently), drug companies budget something like $8000-$12000 per licensed MD annually just for marketing (detailing & sampling). They're definitely not spending it all on R&D.
http://www.nofreelunch.org/

Posted by: locus on March 23, 2004 02:19 PM

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I go with tbrosz on this one. How can anybody doubt that the best possible solution to this problem is to shovel as many of our tax dollars as possible directly into the pockets of corporations? Especially when all the available evidence tells us that the cause of high drug prices is the lack of profits in the insurance and pharmaceutical industries.

Yep, this is one entitlement program that has Bush's name all over it: An entitlement program that does little or nothing for people, but guarantees tremendous corporate windfalls at taxpayer expense. Brilliant!

Posted by: Derelict on March 23, 2004 02:24 PM

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No doubt the bill has many boondoggle aspects, but the Decembrist post quoted here doesn't seem quite fair to it. It doesn't address the fairly extensive coverage for people with extremely high "catastrophic" prescription costs. These are only a small part of the population, but they amount to a large part of drug spending, which surely explains some of the bill's cost. There's also the bill's more generous provisions for low income seniors.

Posted by: rd on March 23, 2004 02:30 PM

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http://www.cbpp.org/11-18-03health2.htm

Of particular concern on the fiscal front is the legislation’s failure to include true cost-containment provisions that would moderate the escalating cost of drugs to both the federal Treasury and American consumers. The legislation could have used Medicare’s enormous purchasing power to negotiate significantly lower prices for drugs (as, for example, the Department of Veterans Affairs and the Medicaid program do). Instead, at the apparent behest of the pharmaceutical industry, the legislation prohibits Medicare from playing this role. The legislation also fails to include a meaningful provision to facilitate the reimportation of drugs at reduced prices from Canada and contains only a weak provision to make generic drugs more widely available.

Given that the legislation will cover less than one-quarter of the prescription drug costs of elderly and disabled people, the failure to include meaningful cost-containment measures will not only swell the costs that the legislation will impose on a federal budget already deep in deficit, but also will cause consumers to pay more for drugs than would have been the case under better-designed legislation.

In addition, while bypassing true cost containment, the legislation contains a so-called cost-containment measure that could lead to increases in premiums, deductibles, co-payments and payroll taxes in the name of controlling Medicare costs and that would be triggered even if Medicare costs rise more slowly than projected and Medicare drug costs turn out to be lower than projected. This so-called cost control mechanism is designed in a regressive fashion. Increases in premiums and payroll taxes — which would heavily affect low- and middle-income households — could be used to moderate Medicare cost increases, but increases in progressive income taxes could not be.

Posted by: anne on March 23, 2004 02:44 PM

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Mark Schmtt wrote:

“Second, where is all the money going? I can only do the roughest back-of-the-envelope math here, but according to the numbers I can find, there will be about 43 million Medicare recipients in 2006. At $550 billion, that's about $12,800 per Medicare recipient, over the seven years covered by the bill. (It's a ten-year cost estimate, but the benefit doesn't kick in until year three.)”

Which comes to approximately $1827 per recipient per year ($12800 divided by 7).

“Many are not going to take the benefit at all, because they have other prescription coverage. Of the rest, 80% spend less than $5,000 on prescription drugs; by law, they won't get more than $1500 worth of benefits in any year.”

If I understand what Mark Schmtt is saying, there is a cap on Medicare prescription drug benefits of $1500 per recipient per year(1). Which should means then that 43 million recipients at $1500 annual benefits for 7 years makes the cost of the new prescription drug benefit about $451.5 Billion rather than $550 Billion.

“More than half will get much less than that.... So, if 75% of the recipients participate, the cost to the public, or the addition to the debt, is about $2200 per recipient per year, over the seven years of benefits. “

Two questions – what's the basis for only 75% of the recipients participating and if “by law” the maximum benefit is “$1500 worth of benefits in any year” how does he now figure the cost is “$2200 per recipient per year?”

His original math put the cost of the benefit per recipient per year at about $1827 per recipient per year and that was before he said that most recipients would get less than $1500 per recipient per year and now he is saying it is $2200 per recipient per year.

TW

(1) If I am wrong in that understanding, I trust that someone will correct it and clarify what Mark Schmtt meant when he said that recipients “won't get more than $1500 worth of benefits in any year.”

Posted by: Thorley Winston on March 23, 2004 02:46 PM

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Here are some stats that will have us all feeling sorry for those poor drug companies and their poor executives. (Most recent I could find.) Thank god this bill eliminated the possibility of negotiating reduced costs for drugs. I don't know how they would have survived.

http://www.citizen.org/pressroom/release.cfm?ID=1088

The pharmaceutical industry topped all three of Fortune magazine’s measures of profitability for 2001. It was a year when average prescription prices increased 10 percent, even though the government inflation rate was a mere 1.6 percent. For three decades, the industry has been at or near the top in all three of these measures.

Collectively, the 10 drug companies in the Fortune 500 had the greatest return on revenues, reporting a profit of 18.5 cents for every $1 of sales, which was eight times higher than the median for all Fortune 500 industries (2.2 cents). The drug industry also led others by realizing a return on assets of 16.5 percent – almost six times the median (2.5 percent) posted by all industries. Pharmaceutical companies completed the sweep with a return on shareholders’ equity (33.2) percent, which was more than three times the median of all Fortune 500 industries (9.8 percent).

The drug industry maintains that it needs extraordinary profits to fuel risky R&D into new medicines. But companies plow far more into profits than into R&D. Fortune 500 drug companies channeled 18.5 percent of revenue into profits last year. Yet they spent just 12.5 percent of revenues on R&D.

http://www.actupny.org/reports/drugcosts.html

Washington, D.C. - A report by the consumer health organization Families USA refutes the pharmaceutical industry's claim that high and increasing drug prices are needed to sustain research and development. Among the nine pharmaceutical companies examined in the report - Merck, Pfizer, Bristol-Myers Squibb, Pharmacia, Abbott Laboratories, American Home Products, Eli Lilly, Schering-Plough, and Allergan - all but one (Eli Lilly) spent more than twice as much on marketing, advertising, and administration than they did on research and development, and Lilly spent more than one and one-half times as much. Six out of the nine companies made more money in net profits than they spent on research and development last year.

The report also documents profligate spending on compensation packages for top pharmaceutical executives.

The Five Drug Company Executives Salaries
with the Largest Unexercised Stock Options in 2000


C.A. Heimbold, Jr.
Chairman and CEO
Bristol-Myers Squibb Company
$227,869,513

Raymond V. Gilmartin
Chairman, Pres., and CEO
Merck and Co., Inc.
$181,252,976

William C. Steere, Jr.
Chairman
Pfizer Inc.
$130,944,439

K.E. Weg
Vice Chairman
Bristol-Myers Squibb Company
$84,282,547

John R. Stafford
Chairman and CEO
American Home Products Corporation
$81,847,569

Posted by: Dubblblind on March 23, 2004 02:54 PM

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AP text on that Medicare Trustees report:

"Medicare will have to begin dipping into its trust fund this year to keep up with expenditures and will go broke by 2019 without changes in a program that is swelling because of rising health costs, trustees reported Tuesday.

"The deteriorating financial picture for the health care program for older and disabled Americans is a result, in part, of the new Medicare prescription drug law that will swell costs by more than $500 billion over 10 years, according to the annual report by government trustees."

Posted by: Jeff on March 23, 2004 03:33 PM

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"The deteriorating financial picture for the health care program for older and disabled Americans is a result, in part, of the new Medicare prescription drug law that will swell costs by more than $500 billion over 10 years, according to the annual report by government trustees."

Makes me awfully glad that we did not pass either of the Democratic alternative bills which were supposed to cost $600 and $900 billion compared to the current $540 Billion.

Posted by: Thorley Winston on March 23, 2004 03:57 PM

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1) The idea that drug companies spend more on marketing (which is almost always mis-understood as advertising by the ill-informed people making this charge) than they do on R&D is just plain wrong - a relic of accounting conventions that mask the true value of R&D spend. A true (economic) breakdown of drug companies' spend reveals that R&D is a far bigger cost component than marketing. And even if it were not: so what? Marketing is a legitimate cost of doing business, and in the case of high-tech products like drugs almost always consists heavily of information-spreading activities that are critical to the ongoing adoption and use of the product. Or perhaps the critics of drug companies think it would be a good thing if a new chemo drug made its way into the bloodstreams of only 10 patients instead of 100 because advertising to patients and selling to doctors is icky?

2) The Public Citizen press release linked above is bunk. Yes, the profits for companies that make non-discretionary products not subject to cyclical forces will be higher than those of companies that make discretionary products subject the cyclical peaks and valleys of demand during 2001 - an economic meltdown year. So what? Healthcare companies don't bottom out during recessions. Besides, the measures of profitability cited are not good measures. What matters is profits in excess of the cost of capital, and the cost of capital for drug companies is higher than the average for other companies, because they compete in a risky business. The Public Citizen folks either don't know what they're talking abaout, or do know what they're talking about and distort the facts intentionally. I wouldn;t bet against either possibility.

3) Along those lines, the Marcia Angell quote above suggests that drug companies make more in profits than they spend on R&D. Again, this is based on under-counting R&D expenditures. But it also assumes that accounting profits are economic profits, which they are not. It takes a huge amount of capital to run a drug company, and the providers of that capital demand a return commensurate with the risk they assume. That's why when someone who knows what the fuck they're doing analyzes the performance of a company, they subtract the cost of capital from the accounting profits to get a true measure of profitability. I'm sure Dr. Angell would be upset if a banker with no medical training tried to operate on one of her patients. She seems to think its OK for herself, with evidently no training in business economics, to opine on things that she doesn't understand though.

4) As has been pointed out here, drug companies make a dis-proportionate share of their profits from the US market. So what exactly do you think would happen if prices were slashed in the US market? Oh yeah, all those moneybags CEOs would get smaller bonuses and there would be absolutely no effect whatsoever on the amount of R&D spending.

Posted by: sd on March 23, 2004 04:00 PM

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Thorley,

Thank goodness for the fiscally prudent Republicans! Just think: If Gore had been selected president, maybe we'd now have an unbelievable, $500B deficit! Can you imagine the financial disaster that would entail?

Posted by: joe on March 23, 2004 04:06 PM

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"Along those lines, the Marcia Angell quote above suggests that drug companies make more in profits than they spend on R&D. Again, this is based on under-counting R&D expenditures."

That assertion might be worth the electrons it was printed on if you included the slightest explanation or source for it. If wishes were horses...

Posted by: Ian Montgomerie on March 23, 2004 04:53 PM

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OK, first, whichever one of you regulars said nice things about tbrosz a while back, you need to stop it. Then maybe he’ll (she’ll?) try harder to play nice. Along with the usual nasty, know-it-all tone, we get yet another claim that he knows what the “other side” wants – in this case, government control of medical care. Since I stopped believing in mind-reading a few years back, I can only assume this is nothing more than schoolyard shouting. You know the kind – “you wear sissy underwear!” – to which one is expected to answer “do not!” so that the antagonist can shout “do so!” Then there’s a repeat performance, when tbrosz speaks for others - without having their best interests at heart - telling us what really pisses us off. Now, sprinkle in a bit of misdirection. The bit about “massive price controls on the drug companies?” very nicely avoids the point that the government under the current law can’t even negotiate with drug providers over price. So clever. If it would be so interesting to “apply Mark’s math” to other programs, well, noboby’s stopping you, tbrosz. Get busy.

Now, about Spidle’s 5% analysis (which looks a little shaky anyway, given Dubblblind’s subsequent post). Whatever the margins reported by drug firms to date, they do not reflect the new law, so what exactly do we learn from looking at those margins? "Nothing" seems the likeliest answer.

If we’re gonna talk about policy issues, can we actually try to talk about policy issues, instead of just waving our little tribal political flags and making rude noises?

Posted by: K Harris on March 23, 2004 05:35 PM

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If we’re gonna talk about policy issues, can we actually try to talk about policy issues, instead of just waving our little tribal political flags and making rude noises?


Posted by: K Harris on March 23, 2004 05:35 PM

That wouldn't be fair. You would take away the two best tools in the conservatarians' armamentarium.

Posted by: non economist on March 23, 2004 06:38 PM

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Responding to Thorley Winston's questions -- which go to the complexity of this plan -- there is a chart on my site, from the Kaiser Family Foundation, that tries to explain the way the benefits work. I tried to simplify this, but evidently went too far. Basically, it is not that there is a $1,500 cap on benefits, but the effect of the "donut hole" in benefits, meaning that no benefits are paid for prescription drug costs between $2,250 and $5,100. Up to $2,250, the program will pay 75% of the cost, after a $250 deductible. Hence, a senior with exactly $2,250 in drug costs would get $1500, and everyone with costs between that and $5,100 would receive exactly the same $1,500. According to other data I saw, less than 20% of seniors have drug costs over $5,000, so from that, I drew the conclusion that 80% of seniors could not receive more than $1,500 in benefits, and because the average drug cost is $1200, most would get less.

Then, instead of dividing the total cost by the total number of Medicare recipients, I calculated it based on the assumption that only 75% would participate. There seem to be different estimates of what participation would be, but many seniors have a better deal already, either through employers or a Medigap plan. It's anyone's guess whether those plans would survive or not. 75% participation is probably a reasonable/high estimate.

The discrepancy in the numbers is exactly my point. If you divide the total cost of the bill by the number of likely participants, it's about $2,200. Yet, given the effect of the "donut hole," the actual benefits to recipients cannot possibly average out to anything close to $2,200, and are probably closer to $1,000, even counting the small percentage of people taking $10,000 or more of drugs every year. The difference between the two is the money that's going someplace other than making prescription drugs affordable.

Also, Brad's hypothetical about what the Clinton Administration could have done with $540 billion is not just an imaginative historical what-if. The Clinton Administration in 2000 did propose a bill that cost $253 billion over ten -- not seven -- years, did not have donut hole, and covered 100% of costs over $400. That's a much better deal. Medical inflation would make that same bill more expensive today, but for even $350 billion, a far, far better program could have been created. And Bush and the Republicans could have created it too, and saved a few billion bucks, if they were at all serious about policy.

Posted by: Mark Schmitt on March 23, 2004 08:15 PM

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sd- “A true (economic) breakdown of drug companies' spend reveals that R&D is a far bigger cost component than marketing.”

So, provide a “true” breakdown (yours or someone else’s)

Yes, marketing is a legitimate cost of doing business. A junket to Marco Island, for 150 of your closest physician friends, the members of P&T committees (and their spouses) is currently recognized by the IRS as a legitimate business expense.

Actual ground breaking research by Big Pharma is rare any more. Universities, government (DOD) and small firms do most of the original work these days. Big Pharma spend most of its time researching “me too” drugs (little risk there). Their expertise is development, which is expensive, prohibitively so for small firms or a university. So Pharma gets to cherry pick the original research of others.

Posted by: jack o'donnell on March 23, 2004 09:14 PM

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I cannot say much about US medical services, not having used them much, but one thing about the drug companies here that I noticed since I came to this country is the massive TV advertisements for "diseases" and "conditions" that are not even known in Europe, and that are (from my layman's perspective) so obviously related to an unhealthy lifestyle -- lack of sleep from too much work, unhappy life related to similar reasons (too much work and having to deal with all kinds of shit in your spare time instead of relaxing), bad nutrition (devouring of fast food because of too much work, but I'm repeating myself), kids being kept at home or under close watch because of crime concerns, and ensuing "social anxiety disorder" due to not having learnt how to deal with social situations, etc. etc.

For all of this there is a pill of course. I'm not saying that these symptoms which can be quite debilitating, which I don't want to downplay, are not available in Europe. They increasingly are, as a lifestyle similiar to the US one is increasingly being adopted, and ADD diagnoses, Ritalin prescriptions etc. for kids are on the rise. But it strikes me that the pharma industry engages in "defining diseases" to promote its drugs. It's not that the drugs won't help or at least provide relief, but the symptoms may be addressed more effectively by improving your lifestyle. (For example, I have a tendency of being a bit overweight when eating to my heart's content and drinking too much beer. Instead of swallowing pills, I'm successfully eating less, not necessarily drinking less :-), and watching what I eat and trying to replace it by stuff that is both healthy and that I enjoy -- and fortunately I'm financially in a situation to be able to afford this, which is another related factor. Now (serious) weight-loss pills are not promoted very hard; I just want to cite a concrete example. Similar for other things; many of the things for which pills are promoted can be alleviated by adopting _slightly_ different lifestyles, at least when problems have not gotten serious yet.)

Neither do I want to throw dirt on the US. I'm living here, and I came here for reasons. I'm just making observations and citing examples. (But coming from Europe I see a difference in lifestyles and want to point it out.)

Posted by: cm on March 23, 2004 11:29 PM

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Regarding Pharma's advertising costs versus R&D, FWIW I did come across this little tidbit:

"The vice president made an attack on drug companies that conflicts with independent studies. Gore claimed that drug makers “are now spending more money on advertising and promotion -- you see all these ads -- than they are on research and development.”

In fact, the industry spent between $5.8 billion and $8.3 billion on promotion and $21 billion on research and development in 1998. There has been a 20-fold increase in TV drug advertising over the past six years."

Source: Associated Press analysis of St. Louis debate Oct 17, 2000

http://www.issues2000.org/2000/Al_Gore_Health_Care.htm


Posted by: Thorley Winston on March 24, 2004 06:18 AM

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"Adrian, I guess I'm a Dem whiner who doesn't know what I'm talking about. Luckily for me, however, you, who know so much more, can inform me so that I might improve.

You assert that the U.S. has the best health care system in the world; surely, you have some evidence to support this assertion. Perhaps you can share this evidence with us. I am sure that you, who know so much, would not make uninformed, unsubstantiated assertions in your posts. I happily await the knowledge that you will impart.

Posted by: joe on March 23, 2004 01:01 PM "


Free-lunch medicine
Thomas Sowell (archive)


November 13, 2003


It is always fascinating to see elementary economics make front-page news. It was front-page news in the Wall Street Journal of November 12th that there are long waiting times for seeing medical specialists in Canada and in other countries with government-controlled medical care systems -- but not in the United States, where some politicians are trying to get us to imitate these countries.

Shortages where the government sets prices have been common in countries around the world, for centuries on end, whether these shortages have taken the form of waiting lists, black markets, or other ways of coping with the fact that what people demand at an artificially low price exceeds what other people will supply at such prices.

This principle is not limited to medical care. There were waiting lines for food, undershirts, and all sorts of other things in the Communist bloc countries in Eastern Europe before the collapse of Communism in that region. You had to get on a waiting list to buy a poorly made car in India before they began to free up their economy from government controls.

You could go back literally thousands of years and find shortages under price controls in the Roman Empire or in ancient Babylon. But it is still front-page news today because elementary economics has not yet sunk in.

An OECD study shows that the percentage of patients waiting more than 4 months for elective surgery in English-speaking countries is in single digits only in the United States, where we "lack" the "benefits" of a government-run medical system. In Canada 27 percent of patients wait more than 4 months and in Britain 38 percent. Elective surgery includes some heart surgery.

Depending on what you are suffering from, and how much you are suffering, longer waits can be a cost that far outweighs monetary savings under price controls or government subsidies. Sometimes the wait can be fatal.

There is another kind of waiting -- waiting for new medicines to be developed for scourges like cancer, AIDS, and Alzheimer's. Countries with price controls on pharmaceutical drugs have far fewer of such drugs created than the United States does.

Yet Americans, who produce a wholly disproportionate share of the world's new life-saving drugs, are being asked to imitate price control policies in countries where such policies have dried up the costly research behind such discoveries.

These countries have left the development of new drugs to the United States. But if we follow their example by killing the goose that lays the golden egg, who can we turn to for developing new medicines? This could be the most costly free lunch of all.

None of the various schemes for lowering the prices of medicines seems willing to face up to the simple fact that each new medicine developed costs hundreds of millions of dollars. This huge inescapable fact seems to just evaporate from the discussion as politicians vie with one another for the best way to make these medicines "affordable" at "reasonable" prices.

Politicians who claim to be able to "bring down the cost of health care" are talking about bringing down the prices charged. But prices are not costs. Prices are what pay for costs.

No matter how much lower the government sets the prices paid to doctors, hospitals, or pharmaceutical drug manufacturers, none of this reduces the costs in the slightest.

It still takes just as much time, equipment, and training to turn a medical school student into a doctor. It still takes just as many hospitals to care for the sick. It still takes just as many years of scientific research and clinical trials to create a new medicine.

Those who are dying to control the prices of pharmaceutical drugs are oblivious to the fact that other people may be literally dying unnecessarily if they succeed. There is no free lunch, even though politicians get elected by promising free lunches.

Government price controls on medicines and medical care simply mean that these costs do not all get covered. This works in the short run -- and the short run is what politicians are interested in, because elections are held in the short run. But the rest of us had better think ahead, if we value our health.

Posted by: Adrian Spidle on March 24, 2004 07:06 AM

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I am all for capping drug company profit margins, but only if the federal government caps the top tax rate to match.

Drugs are not free, and never will be.

Posted by: Mcwop on March 24, 2004 09:16 AM

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Adrian,

In the entire article you quoted, I see two relevant data points. First, that there are long waiting lines to see specialists in some other countries, and second that the wait for elective surgery is longer in other countries.

Is that the entire evidence to sustain the contention that the U.S. has the world's best health care system? No evidence of relative longevity, infant mortality, etc.? Just that Americans who get to see specialists and surgeons get to see them sooner?

Is it possible that the reason that there is a shorter wait in America is that only some of the population, those with insurance, get to see these doctors, while in the other cited countries everyone gets in? If so, would you amend the contention to state that America has the best health care system only for those who can afford it?

Posted by: joe on March 24, 2004 09:41 AM

____

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I also have this funny image of someone having the boss and his/her husband/wife over for that ladder climbing dinner and suddenly that someone's 6 year old daughter (who's been watching TV) comes in and asks "Daddy, what's erectile dysfunction?"

Posted by: Dubblblind on March 24, 2004 10:15 AM

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Free-lunch medicine: part II
Thomas Sowell (archive)


November 14, 2003


Any attempt at a rational discussion of the economic realities of government-controlled medical care is almost certain to run up against the trump card of the political left: The Poor.


The image that is often invoked is that of the elderly poor, forced to choose between food and medical treatment. Who could be so heartless as to abandon them to the vagaries of the free market?

This has proved to be a very effective political strategy for extending government power, not only over medical care but also over housing and other sectors of the economy.

The phoniness of this argument becomes apparent the moment you suggest that money be set aside specifically for dealing with the special problems of the poor, rather than bringing whole sectors of the economy under the dominance of politicians, bureaucrats and judges.

The amount of money needed to take care of the poor is often some minute fraction of what sweeping new government programs cost. But, while big government liberals are willing to use the poor as human shields in their political battles, their more basic strategy is to proclaim that everyone has a "right" to some "basic need" that they want the government to provide.

As a matter of practical politics, programs for the poor alone do not have as large a constituency as programs to give everybody some benefit, so that we can all have the illusion of getting something for nothing -- or at some arbitrarily defined "reasonable" or "affordable" price.

It is completely unreasonable to talk about reasonable prices.

Such talk amounts to saying that economic realities have to adjust to what we are willing to pay, because we are not going to adjust to economic realities. The biggest economic reality that gets ignored in discussions of medical care is that developing a single new medicine or training a single new doctor takes huge amounts of resources.

What we think we can afford has nothing to do with what pharmaceutical drugs cost to develop. Nor does it have anything to do with the costs of training a new doctor or building a new hospital. We are either going to pay those costs or we are not going to get the quantity or the quality that we want.

Schemes for re-importing American drugs from Canada or buying in bulk from pharmaceutical companies are essentially ways of shifting costs around -- without reducing these costs by one cent. Already government agencies, HMOs and others are engaged in shifting medical costs onto somebody else. But, for society as a whole, there is no somebody else.

No matter how much the costs are shifted around in clever shell games, those costs do not go away. That is the hard reality which no political rhetoric can change.

The only reason such rhetoric has even the appearance of plausibility is that price controls work in the short run -- and that is good enough for politicians, since elections are held in the short run. After all, when the government drives down prices paid to doctors, hospitals or pharmaceutical companies, there is not much that they can do about it immediately.

Doctors are not going to give up practicing medicine and become truck drivers. Medical schools are not going to be turned into bowling alleys or hospitals into skating rinks. Pharmaceutical companies cannot suddenly shift to manufacturing cars. So price controls seem to work in the short run -- but only in the short run.

When you confront doctors with more hassles with bureaucrats and lower payments for their services, do not expect the medical profession to remain as attractive to bright young people deciding what careers to follow. In the long run, every single doctor is going to have to be replaced by someone from the younger generation, or else we are going to have a shortage of doctors.

Britain, for example, has had government-run medical care for decades and nearly half their doctors are imported, often from Third World countries with lower standards of medical training. Canadian hospitals have less modern equipment available than American hospitals do. They depend on American medicines after destroying incentives to develop their own with price controls.

Is this what we are supposed to imitate?


Posted by: Adrian Spidle on March 24, 2004 10:15 AM

____

Shorter Adrian: "Let them eat cat food."

Posted by: Dubblblind on March 24, 2004 10:21 AM

____

Adrian,

This article does not even address the issue, and I'm still in need of improvement - where's the evidence that the U.S. has the world's best health care system?

Posted by: joe on March 24, 2004 10:23 AM

____

This "best health care in the world" assertion comes up pretty often, and is just as wiggly as any other good political statement. "Best" is a qualitative judgement. If we decide what criteria we want to use to judge delivery of medical care, then there is a way to discuss this "best" business. Fact is, price is a rationing system, but not the only one. Using the market to determine who gets particular health care services will mean that lines are short (apologies to anyone who has spent time in the waiting room of a US medical facility in the last 2 weeks), relative to places where price is not the rationing system in place. That is as far as this bit of analysis can go, without additional information, but it is exactly what one would have expected had one looked into an elementary econ text.

So (haven't we talked about this before?), the more useful approach would be to discuss actual outcomes, which include child mortality, longevity, morbidity, incidence of preventable disease, as well as access. The more useful approach would be to discuss rationing systems directly, rather than implicitly by claiming the inevitable results of one or another rationing system is the one and only measure of the quality of health care.

So, what do we want from the market for health care?

Posted by: K Harris on March 24, 2004 11:00 AM

____

Adrian,

It seems to me that the most that you've established is that someone who wants, and can pay for, a tummy tuck or a boob job can get that surgery sooner if she lives in America than if she lived elsewhere. I hardly think this evidence proves that the American health care system in toto is superior to all others.

Posted by: joe on March 24, 2004 11:07 AM

____

Adrian Spidle wrote, "It is completely unreasonable to talk about reasonable prices."

True and false. It's true that drugs aren't developed for free, and that reimportation from Canada is nothing of a solution.

If the statement is taken to mean that drug companies should be able to charge whatever they want...that's another matter. Drugs are given patent protections, which are a government-granted monopoly. As such, the "usual" market mechanisms for setting prices---free competition, convergence to marginal costs, etc---don't apply. Furthermore, since the government granted the monopoly and is often the largest purchaser of the product, it seems reasonable for government to have a role in setting the price.

Now of course pharmaceutical companies have to recover fixed (sunk) costs of research and development, but it doesn't follow from that alone that they should have free rein to charge monopolist prices.

Posted by: liberal on March 24, 2004 11:50 AM

____

Liberal says:

"If the statement is taken to mean that drug companies should be able to charge whatever they want...that's another matter. Drugs are given patent protections, which are a government-granted monopoly. As such, the "usual" market mechanisms for setting prices---free competition, convergence to marginal costs, etc---don't apply. Furthermore, since the government granted the monopoly and is often the largest purchaser of the product, it seems reasonable for government to have a role in setting the price."

NOT QUITE RIGHT. Competition from other drugs that compete with the patent protected drug has a price supression effect.

Price controls' main impact would be to reduce R&D as well as reduce the spread of new therapies.

Those countries where government controls prices provide a much lower standard of care and more of their citizens die prematurely than in the US.

Examples:

1- More Europeans and Canadians die prematurely of heart attacks because they don't use STATINs like ZOCOR. This is because draconian price controls eliminate the incentive to advertise and promte (read - educate clinicians) therefore these drugs aren't used as much as they are in the US - the home of the world's best healthcare system.

2- My friend who sells the latest generation of MRI machines told me how Canada has onlt two of these machines in the whole country while Boston (where I live) hospitals have over seventy of them. These aren't just new gizmos for the sake of being new. They do a much better job at finding situations that need care.

It seems that we (as nations) get the care we're willing to pay for. Pretty radical, huh?

Adrian Fellow of the GRWC

Posted by: Adrian Spidle on March 24, 2004 12:19 PM

____

Adrian,

According to the WHO, life expectancy in Canada is 79.8 years, in France it's 79.7 years, in the UK it's 78.2 years, and in the U.S., it's 77.3 years. Why do you think Canadians live two and half years longer than Americans if the U.S. has such a superior health care system?

Posted by: joe on March 24, 2004 12:49 PM

____

"Why do you think Canadians live two and half years longer than Americans if the U.S. has such a superior health care system?

Posted by joe "

BECAUSE THE US HAS A HIGHER PERCENTAGE OF ETHNIC GROUPS THAT DON'T LIVE AS LONG AS THE WHITE FOLKS THAT DOMINATE CANADA & EUROPE.

Adrian

United States—U.S. Statistics—Mortality
Life Expectancy at Birth by Race and Sex, 1930–2000
All races White Black
Year Both sexes Male Female Both sexes Male Female Both sexes Male Female
20011 77.2 74.4 79.8 77.7 75.0 80.2 72.2 68.6 75.5
2000 77.0 74.3 79.7 77.6 74.9 80.1 71.9 68.3 75.2
1999 76.7 73.9 79.4 77.3 74.6 79.9 71.4 67.8 74.7
1998 76.7 73.8 79.5 77.3 74.5 80.0 71.3 67.6 74.8
1997 76.5 73.6 79.4 77.2 74.3 79.9 71.1 67.2 74.7
1996 76.1 73.1 79.1 76.8 73.9 79.7 70.2 66.1 74.2
1995 75.8 72.5 78.9 76.5 73.4 79.6 69.6 65.2 73.9
1994 75.7 72.4 79.0 76.5 73.3 79.6 69.5 64.9 73.9
1993 75.5 72.2 78.8 76.3 73.1 79.5 69.2 64.6 73.7
1992 75.8 72.3 79.1 76.5 73.2 79.8 69.6 65.0 73.9
1991 75.5 72.0 78.9 76.3 72.9 79.6 69.3 64.6 73.8
1990 75.4 71.8 78.8 76.1 72.7 79.4 69.1 64.5 73.6
1989 75.1 71.7 78.5 75.9 72.5 79.2 68.8 64.3 73.3
1988 74.9 71.4 78.3 75.6 72.2 78.9 68.9 64.4 73.2
1987 74.9 71.4 78.3 75.6 72.1 78.9 69.1 64.7 73.4
1986 74.7 71.2 78.2 75.4 71.9 78.8 69.1 64.8 73.4
1985 74.7 71.1 78.2 75.3 71.8 78.7 69.3 65.0 73.4
1984 74.7 71.1 78.2 75.3 71.8 78.7 69.5 65.3 73.6
1983 74.6 71.0 78.1 75.2 71.6 78.7 69.4 65.2 73.5
1982 74.5 70.8 78.1 75.1 71.5 78.7 69.4 65.1 73.6
1981 74.1 70.4 77.8 74.8 71.1 78.4 68.9 64.5 73.2
1980 73.7 70.0 77.4 74.4 70.7 78.1 68.1 63.8 72.5
1979 73.9 70.0 77.8 74.6 70.8 78.4 68.5 64.0 72.9
1978 73.5 69.6 77.3 74.1 70.4 78.0 68.1 63.7 72.4
1977 73.3 69.5 77.2 74.0 70.2 77.9 67.7 63.4 72.0
1976 72.9 69.1 76.8 73.6 69.9 77.5 67.2 62.9 71.6
1975 72.6 68.8 76.6 73.4 69.5 77.3 66.8 62.4 71.3
1974 72.0 68.2 75.9 72.8 69.0 76.7 66.0 61.7 70.3
1973 71.4 67.6 75.3 72.2 68.5 76.1 65.0 60.9 69.3
19722 71.2 67.4 75.1 72.0 68.3 75.9 64.7 60.4 69.1
1971 71.1 67.4 75.0 72.0 68.3 75.8 64.6 60.5 68.9
1970 70.8 67.1 74.7 71.7 68.0 75.6 64.1 60.0 68.3
1960 69.7 66.6 73.1 70.6 67.4 74.1 — — —
1950 68.2 65.6 71.1 69.1 66.5 72.2 — — —
1940 62.9 60.8 65.2 64.2 62.1 66.6 — — —
1935 61.7 59.9 63.9 62.9 61.0 65.0 53.1 51.1 55.2
1930 59.7 58.1 61.6 61.4 59.7 63.5 48.1 47.3 49.2
.

Posted by: Adrian Spidle on March 24, 2004 01:16 PM

____

Adrian,

If I understand your schedule, the life expectancy of whites only is 77.7 years. So, white Americans live only two years less than Canadians do. This proves your point that the U.S. health care system is the best in the world?

Posted by: joe on March 24, 2004 02:33 PM

____

Adrian Spidle wrote, "NOT QUITE RIGHT. Competition from other drugs that compete with the patent protected drug has a price supression effect."

You're wrong. There might be a competitive effect; there might not be. The fact remains that (a) no one else is legally allowed to produce that very drug while it's on-patent, (b) the price charged in the marketplace is orders of magnitude greater than the marginal cost.

"This is because draconian price controls eliminate the incentive to advertise and promte (read - educate clinicians) therefore these drugs aren't used as much as they are in the US -the home of the world's best healthcare system."

That's nuts. Advertising also promoted HRT for post-menopausal women. Turns out that wasn't such a good idea.

As for the US having the world's best healthcare system, Joe has already pointed out your folly.

"My friend who sells the latest generation of MRI machines told me how Canada has onlt two of these machines in the whole country while Boston (where I live) hospitals have over seventy of them. These aren't just new gizmos for the sake of being new. They do a much better job at finding situations that need care."

Balogne. To make such an assertion, you need to show that a given level of MRI usage leads to such-and-such outcomes. For all you know, MRIs might lead to a load of false positives, with attendant expenses and no improvement of final outcome.

And that's just for MRIs versus "no MRIs". You're making a finer point---that the latest generation of MRIs is somehow going to make a big difference. It's hard to see why that should be so, _a priori_, without empirical evidence. And your friend is hardly an unbiased observer on this point---he's sure to profit from rapid capital stock turnover in the MRI field.

Posted by: liberal on March 24, 2004 04:02 PM

____

"Those countries where government controls prices provide a much lower standard of care and more of their citizens die prematurely than in the US.

More Europeans and Canadians die prematurely of heart attacks because they don't use STATINs" -- Adrian --

Sorry Adrian, it just aint so. Are you just making this stuff up as you go along?

"Since the use of statins for primary prevention of CVD has been shown to increase all-cause mortality by 1% over a 10-year period,13 and has very little to no effect in secondary prevention of death,[9,11,14,15] it would seem that there is no cost-benefit in primary prevention, and very little for secondary prevention."

http://www.drugintel.com/drugs/statins/statins_critical_review.htm

Pravastatin did not reduce either all-cause mortality or CHD significantly when compared with usual care in older participants with well-controlled hypertension and moderately elevated LDL-C.

http://www.ncbi.nlm.nih.gov/entrez/query.fcgi?cmd=Retrieve&db=PubMed&list_uids=12479764&dopt=Abstract

In the pooled analysis, net benefit in terms of total mortality from cholesterol lowering was seen only for trials including patients at very high initial risk of coronary heart disease (odds ratio 0.74; 95% confidence interval 0.60 to 0.92). In a medium risk group no net effect was seen, and in the low risk group there were adverse treatment effects (1.22; 1.06 to 1.42). In a weighted regression analysis a significant (p < 0.001) trend of increasing benefit with increasing initial risk of coronary heart disease was shown. Raised mortality from causes other than coronary heart disease was seen in trials of drug treatment (1.21; 1.05 to 1.39) but not in the trials of non-drug treatments (1.02; 0.88 to 1.19). Cumulative meta-analysis showed that these results seem to have been stable as new trials appeared.

http://www.ncbi.nlm.nih.gov/entrez/query.fcgi?cmd=Retrieve&db=PubMed&list_uids=8518602&dopt=Abstract

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