September 17, 2002
Drug (Pharmaceutical) Money

The Wall Street Journal's Alan Murray wonders why America's pharmaceutical companies get such bad press. So do I. It is certainly true that there are a lot of places where America's health care system could be squeezed to get a lot of money without harming Americans' health or reducing their life expectancy. But I don't think the pharmaceutical companies are one of them.

The benefits from a continued rapid pace of pharmaceutical research are so great. And to get that rapid pace the drug companies need to smell the money at the end of the research-and-development trail. Yeah, it's unfair that their profits are so large, and its sleazy how they market their products, but the consumer surplus benefits are so huge.

Me? I think this is a place where you have to blame Democratic politicians, so eager to grab for an issue with traction that they have forgotten what their jobs really are.


WSJ.com - Article: ...Sen. Johnson: "I don't take drug money. John's taken $34,000. ... I had a $1,000 contribution from DuPont. I gave it back when I discovered they had a drug-company affiliate." This vilification of the pharmaceuticals industry isn't new. It was a standard in the 2000 campaign, driven by Democrats appealing to concerns about the high cost of prescription medicines.... Almost no politician in America is willing to stand up and utter this simple truth: The nation's pharmaceuticals makers have done more to extend and improve the lives of ordinary Americans than any industry in history.

"It's a fascinating dichotomy," Republican pollster Peter Hart says. "If you talk to the American public about the importance of pharmaceuticals, and the difference it makes in their lives ... everybody can tell you a story. Then you turn around and talk about the industry ... and it is as though it is totally divorced from the product they make." In a June Wall Street Journal/NBC News poll, only 21% of respondents said they had a positive view of the industry, while 54% said they had a negative view.

So how has an industry that has done so much good earned a reputation for such evil?...


Update: see also http://markarkleiman.blogspot.com/2002_09_22_markarkleiman_archive.html#85479635

September 17, 2002

POLITICAL CAPITAL

By ALAN MURRAY

Rx for Drug Makers: A Dose Of Clarity May Improve Image

Saddam Hussein may lead President Bush's list of evildoers. But in the 2002 battle for control of Congress, it is the nation's pharmaceuticals companies that get top billing.

Consider the following exchange that took place during last month's senatorial debate in South Dakota between Democratic Sen. Tim Johnson and his challenger, Republican Rep. John Thune. Both candidates spit out the words "drug money" -- i.e., legitimate and legal political contributions from pharmaceuticals companies -- as if they were talking about the Cali cocaine cartel:

Sen. Johnson: "I do not take drug money. I made a pledge in 1999, and have not accepted it."

Rep. Thune: "You may not be taking drug money here today at 7:30 this evening on Aug. 27th. But you have accepted drug-money contributions for your campaign for the 2002 re-election to the Senate."

Sen. Johnson: "I don't take drug money. John's taken $34,000. ... I had a $1,000 contribution from DuPont. I gave it back when I discovered they had a drug-company affiliate."

This vilification of the pharmaceuticals industry isn't new. It was a standard in the 2000 campaign, driven by Democrats appealing to concerns about the high cost of prescription medicines.

But in some ways, the industry's position is even worse than it was two years ago -- partly because health-maintenance organizations have managed to get out of the political crosshairs. In Missouri, for instance, Sen. Jean Carnahan has made "standing up to the big pharmaceutical companies" a centerpiece of her campaign. Countless fellow Democrats are echoing that theme, while Republicans are running for cover.

Almost no politician in America is willing to stand up and utter this simple truth: The nation's pharmaceuticals makers have done more to extend and improve the lives of ordinary Americans than any industry in history.

"It's a fascinating dichotomy," Republican pollster Peter Hart says. "If you talk to the American public about the importance of pharmaceuticals, and the difference it makes in their lives ... everybody can tell you a story. Then you turn around and talk about the industry ... and it is as though it is totally divorced from the product they make." In a June Wall Street Journal/NBC News poll, only 21% of respondents said they had a positive view of the industry, while 54% said they had a negative view. (See full poll results.4)

So how has an industry that has done so much good earned a reputation for such evil?

The answer, in part, is the inevitable result of an aging society that is spending ever more of its hard-earned dollars on health care. And, in part, it is the result of an effective campaign by Democrats to make an issue out of drug prices among seniors.

But much blame lies with the companies. "It is an industry that does not explain itself very well," says Mr. Hart.

That is why drug maker Pfizer Inc. is launching an advertising campaign for the industry, as reported Monday by The Wall Street Journal. (See article.5) Pfizer folks downplay any breach with the Pharmaceutical Research and Manufacturers Association (PhRMA), the industry group. But industry executives can't be happy with the job PhRMA has done looking after their reputation.

PhRMA's problem is that in its efforts to support friendly politicians, it has eroded the trust of the public. Americans aren't stupid. When they see PhRMA pouring tens of millions of dollars into political ads run by front groups such as "United Seniors," "60 Plus" and "Citizens for Better Medicare," they have to wonder: Why is this industry hiding? If the pharmaceuticals companies have such a great story to tell, why are they lurking in the political equivalent of Afghan caves?

The industry clearly needs a new approach. For starters, here are two suggestions:

 Tell the truth. Give up the front groups. Americans love their drugs, and most are willing to pay for them. The industry needs to do a better job explaining, in its own name, how drug prices finance more research and development and better medications.
 
 Rethink marketing. Public relations and political strategies alone won't solve this mess. Most intelligent people can understand that research and development is in their interest; they also understand that exorbitant marketing costs aren't. It isn't just advertising that's a problem; companies employ armies of salespeople who do everything but shine the shoes of doctors who prescribe their drugs. It is costly, and smells of kickbacks.
 

If the drug industry wants less criticism from the public, it will have to start by giving people less to criticize.

Posted by DeLong at September 17, 2002 07:32 AM | Trackback

Email this entry
Email a link to this entry to:


Your email address:


Message (optional):


Comments

"The nation's pharmaceuticals makers have done more to extend and improve the lives of ordinary Americans than any industry in history."

Is this really true? The greatest achievements of pharmaceuticals are aspirin and antibiotics. But sanitation, vaccination and better pre-natal care (efforts of government agencies) have done even more for long life.

Vish

Posted by: Vish Subramanian on September 17, 2002 08:59 AM

The X-Efficiency gains to be made from reorganizing/dismantling the HMO paradigm and Federalizing health care in the US far outweigh what benefits might accrue to further villification of Big Pharma. However, their expropriation of taxpayer financed R&D is a disgrace to any progressive approach to intellectual property rights.......

Posted by: Ian on September 17, 2002 09:28 AM

Come on, Brad, this is pretty lame marginalist analysis. In order to keep doing what they do, drug companies need to "smell money at the end of the trail". How much money? There is a common public perception that they could do just fine on much less than they actually get, and that a substantial proportion of their profits represents pure rent. If the public is wrong about this, let's bring on some numbers to prove it ....

Of course, since the relevant numbers will be the return on capital employed, we'll need to work out whether drug companies are best off producing products which create a steady stream of revenues pretty quickly, or products which produce a much larger expected return further in the future ... whcih as we've discussed elsewhere, might prove difficult.

Posted by: Daniel Davies on September 17, 2002 09:32 AM

Although I agree that demonization of the pharma industry is out of hand (if only because it detracts from cool-headed analysis), I can think of a number of legitimate reasons to view Big Pharma as less than wonderful:
1. Socializing costs, privatizing profits. The heavy lifting of pharma research is publicly funded; pharma companies buy the patents on the cheap (admittedly not their doing, just as it's not ranchers' fault that public grazing is underpriced), do the legitimate work of bringing product to market, and then charge the hell out of the public, and deny any social responsibility.
2. Shady patenting practices. Essentially renaming existing drugs in order to acquire a new patent, to get another 7 years of protection from generics. It must be noted that this is a much more profitable path, with 0 social benefits. Theoretically people should know better, but that brings us to...
3. Marketing. Set aside the insidious magazine ads that contribute enormously to the [over]drugging of America. The bigger issue is the enormous effort put into pushing new drugs on doctors, who don't have the time or resources to properly evaluate claims. If the FDA says it's good enought, then what doctor will do the enormous diligence of determining whether a given new drug is the most effective _and_ cost-effective treatment. I'm an architect, and am constantly beset by product reps selling the latest paints, waterproofing, concrete admixtures, what have you. Having gone to a technically-oriented school, I have a decent capacity for evaluating these claims, but I still don't feel like I know the products with certainty. And these are simple issues of physics - will this repel water, will UV degrade that? - not almost impossibly complex issues of microscopic, biochemical systems. So what does all that add up to? Medical payola, pay to prescribe (Hey, I just came up with those on the spot - do you think the DNC would pay me for them?).
4. AIDS & the 3rd World. I find it hard to believe that mainstream Demos are hip to this issue, but certainly among progressives, the strenuous insistence on massive "IP" protectionism at the cost of millions of lives per annum makes Big Pharma look as bad as Big Oil.

So that's off the top of my head; I can only imagine that someone more informed could develop even sounder reasons to be suspicious of the motives of Big Pharma.

Posted by: JRoth on September 17, 2002 09:38 AM

I accept the argument: curbing drug costs hurts research, which will hurt health. On the other hand, if the U.S. is the only country which does not curb drug costs (and most countries do, don't they?), the U.S. consumer and taxpayer are essentially paying for research that benefits *everyone* in the world. Why this is mighty generous, it is also basically unfair. I guess if Americans are silly enough to let themselves be taken advantage of in this respect, then that is their problem. (It's sort of like the way Americans have let themselves pay for the Olympics, by permitting its networks to compete against themselves for the broadcast rights. Mighty nice, the Olympic Committee thanks Americans kindly, but it's not really value-for-the-money.)

Posted by: Andrew Boucher on September 17, 2002 09:54 AM

Then there is international price descrimination - why is that drugs cost enough less in Canada than in the US to have created a little import market? Regulation of prices in Canada hasn't meant consumers don't have access, just that they pay less. Yes, it is a smaller market, so the argument about social benefits doesn't suffer much, but it suggests there is room for some rejiggering to allow greater social benefit for US consumers.

There are other problems, problems which serve the drug makers interests. There is already an enormous arsenal of drugs available, many of which, according to the WSJ (last Friday, I think) are cheap, effective and not much prescribed because the only easy source of information about them, drug company marketing offices, have no interest in promoting them over more expensive drugs. Can't blame the drug companies, but isn't there a potentially large tank of untapped social benefit from getting out there and undercutting drug companies' interest by educating doctors about cheap, effective drugs?

By the way, Vish, among better sanitation, vaccination and better pre-natal care, the latter two involve drug company products.

K

Posted by: K Harris on September 17, 2002 09:57 AM

September 21, 2000

Eexamining Differences in Drug Prices
By HAL R. VARIAN - New York Times

PRESCRIPTION drugs have become politicized. Al Gore recently criticized the manufacturer of the arthritis drug Lodine for selling it for $108 a month when prescribed for humans and $38 when prescribed for dogs. It's not just the doggy divide that has politicians upset; international price differences for drugs are another flash point. The House and Senate recently approved a measure allowing pharmacists to import prescription drugs from countries where they sell for substantially less than in the United States.

Charging different prices for humans and animals, or different prices to consumers in different countries, is what economists call "third-degree price discrimination." It is a common practice for pharmaceutical companies. A month's supply of the antidepressant Zoloft sells for $29.74 in Austria, $32.91 in Luxembourg, $40.97 in Mexico and $64.67 in the United States.

This kind of differential pricing is motivated in part by drug companies' cost structure and in part by differences in bargaining power. It can cost millions of dollars to research, develop, test and market a new drug. Once these fixed costs are incurred, however, actually producing the drug may cost very little. Since the market price is often far greater than the marginal cost of production, there is always a temptation to cut prices to generate incremental sales and profit. The problem is that cutting prices across the board tends to reduce revenue.

The natural strategy is to selectively cut prices and set different prices for different markets. Drugs sold for humans generally sell for more than drugs sold for animals. Drugs in rich countries tend to cost more than drugs in poor countries. A daily dose of the AIDS drug PLC sells for $18 in the United States and $9 in Uganda, while a generic equivalent sells for $1.50 a day in Brazil. Even at $9 a dose, the drug company makes a profit on incremental sales. But if the drug were sold at $9 to everyone, profits would be substantially lower than they would be under differential pricing.

The United States ends up paying more for drugs since it is much richer than the rest of the world and tends to spend a large fraction of that wealth on health care. Furthermore, in most countries, a single governmental health care provider bargains over drug prices. America's health care system is much more fragmented, which tends to reduce the bargaining power of health care providers in negotiating drug prices.

Price discrimination is not popular with consumers, especially those paying the higher price. What does economics say about whether this kind of differential pricing is good or bad? To answer this question, we have to ask what price would prevail if only one price could be charged.

Imagine that there are only two countries involved, the United States and Uganda, and PLC sells for $18 here and $9 in Uganda. If the drug company had to charge the same price in each country, what would it be? In this case, it is likely that the price would be closer to $18 than to $9. True, sales would drop significantly in Uganda, but that loss in revenue would be very small compared with the revenue loss in the United States from setting a price close to $9 because it is a significantly larger market. In this case, mandating a fixed price makes the Ugandans a lot worse off and does little for American consumers.

But it could work out differently. Imagine an antimalarial drug that lots of people in Uganda might buy at $2 a dose and a few people in America might buy at $10 a dose. If the Ugandan market is more than five times the American market, the drug company, if it could set only one price, would make more revenue by setting that price at $2. If the manufacturing cost of the drug is small enough, this would also be the more profitable price.

The critical question, from the viewpoint of economics, is whether differential pricing or a flat price leads to more people getting the drug. In the case of the AIDS drug, differential pricing leads to more total consumption; in the case of the antimalarial drug, it is the other way around.

When two different prices are charged, people paying the higher one are convinced that if the company were forced to charge one price, it would be the low one. Alas, it's not always so. Sometimes forcing one price results in just cutting off the small market, rather than lowering the price to the large market.

In fact, public health advocates have argued for a long time that pharmaceutical companies have little incentive to invest in developing drugs for tropical diseases, since they tend to be a problem only in poor countries, where people can't afford to pay for drugs anyway.

All the money is in the rich countries, and drug research focuses on health problems of interest to those markets, like obesity, heart disease and cancer, virtually ignoring diseases that strike the residents of poor countries.

From the economic viewpoint, this behavior is entirely understandable: that is the way the incentives are set up. If you want to change the drug companies' behavior, you have to change their incentives. The World Health Organization has advocated offering monetary prizes for companies that develop effective drugs for tropical diseases, as long as they subsequently sell the manufactured drug at marginal cost.

There is no easy answer as to whether price discrimination, in general, is a good thing or a bad thing. It tends to raise additional revenue that can be plowed back into research and development, which creates better incentives to invest in drug development. When it allows markets to be served that would otherwise be ignored, price discrimination will tend to be socially useful. But if differential pricing is just an excuse to raise prices that would otherwise be low, it doesn't have much to recommend it.

Posted by: on September 17, 2002 10:29 AM

K,

I think Vish is talking about vaccination that was developed 'on the cheap' such as Polio. Better pre-natal care does not just mean the consumption of pre-natal vitamins and folic acid - it also means better education, better nutrition and avoiding junk like cigarettes and alcohol while pregnant.

But where do the drug companies get off profiting on research funded by the NiH? Or on replacing Claritin with Clarinex as soon as the patent is about to expire?

Why does the drug company feel compelled to tell you constantly to 'ask your doctor if (insert favorite drug here) is right for you'? Why should they 'patent' turmeric or Neem - used in India for millenia?

It is such cravenness that has earned them the well deserved moniker of 'greedy'

When drug companies are tempted to prevent shipment of cheap AIDS drugs made by CIPLA (India) to impoverished Africa, they lose their 'mantle' as lifesavers and instead reveal themselves for who they really are: 'ther's gold in them thar hills!'

Posted by: Suresh Krishnamoorthy on September 17, 2002 10:35 AM

As economists, shouldn't we be looking at measurable outcomes and costs?

How do average life expectancy and spending on healthcare in America compare with other affluent countries? From what I recall of the data, average life expectancy is a little on the low side in comparisons with peer group countries while the per capita spend is pretty well above that in every other country. Doesn't seem a good deal to me.

Posted by: Bob Briant (UK) on September 17, 2002 10:53 AM

Removing the ban *we* have on reimportation of drugs would certainly clear up the Canadian/U.S. price difference.

Posted by: Jason McCullough on September 17, 2002 11:04 AM

Brad,
That was an uncharacteristicly slick and shallow piece.

The pharmaceutical industry could definitely be "squeezed" to produce substantial savings for the healthcare sector.

Firms typically produce all kinds of new (read monopoly via patent protection) products whose marginal benefits are clearly less than the marginal costs. Such new products are the subjects of the "sleazy" marketing campaigns.

Essentially, by convincing physicians and consumers that the new product offers SOME improvement over existing technology, the firms create a market as opposed to responding to an existing one. A lot of money is spent in the process. Again, more is spent than is gained through consumption.

If the firms were forced to introduce only those products where the marginal benefits equaled the marginal costs and/or pricing was set so that this would be the case, then significant savings would be realized in the sector.

I don't know how this could be achieved short of establishing a pharmaceuticals review board within a socialized healthcare system as found in Australia.

Under such a regime the firms would still have incentive to do R&D, but its direction would be toward real technological enhancement and creating value.

If you doubt my premise, take a look at a PDR and observe the great number of drugs that do essentially the same thing, look at the costs, look at the benefits, see if patent expiration and the subsequent introduction of generics coincides with the introduction of "new" products.


Posted by: E. Avedisian on September 17, 2002 11:05 AM

Your basic premises is wrong. Drug companies spend more on advertising than on research. The notion that curbing costs will limit research is nonsense. In fact, given the enormous sums this industry spends on lobbying against consumers, they are not being demonized enough.

Posted by: Mike on September 17, 2002 11:13 AM

There seem to be fine drug companies in Europe, Japan, Canada, and Israel. Again American drug companies have ample earnings selling drugs in developed countries with somewhat more controlled markets for drugs. I do not see that American drug makers are in danger of having the profit incentive taken away here of in other developed countries.

What I am concerned about is how to give drug companies enough of a profit incentive to develop and sell drugs of particular use in poorer countries. How are the millions of Africans who are suffering from HIV/AIDS infections to be treated?

We are in the midst of what may be the greatest health crisis women and men have ever experienced, I do wish we were giving more thought to this and working harder to ameliorate the dire problem in Africa.

Posted by: on September 17, 2002 11:25 AM

Mike, you missed my point, I think.

If the pharmaceutical firms were to produce only those products that represent a true improvement over existing ones and if those products were priced such that the cost equals the benefits incurred through consumption, then the firms would not have to spend so much on lobbying and advertising. They would be meeting demand instead of inducing demand.

The advertising is to convince physicians and consumers - who are not price concious due to financing of purchases via insurance - to purchase products at prices that exceed value.

The lobbying is to maintain the ability to price discrimate and to employ other practices that allow the firms to enjoy excessive rents.

I agree that the industry sector deserves demonization.

E. Avedisian

Posted by: E. Avedisian on September 17, 2002 11:32 AM

Why don't we just legalize marijuana and use the taxes to fund pharmeceutical research? A win-win proposition.

Posted by: Dave Romm on September 17, 2002 12:25 PM

You all are assuming that people use a rational analysis to arrive at an opinion of the industry. I believe that people are expressing an emotional analysis to arrive at their opinions. Something like this (allowing for anthropomorphism of pharma corp.):
I would give you the shirt off of my back if you were bleeding and needed a bandage to stop bleeding.
I wouldn't charge you anything for the shirt.
I need drug x to solve my health problem y.
You have drug x.
You won't give it to me for a 'reasonable' charge.
You are immoral.

I think people aren't taking into account the relative sizes of the parties, and the number of participants in the discussion (i.e. each persion assumes it's one to one when in reality it is many to one.) You'll note how often the price is expressed as 'They have millions, and it only costs hundreds per patient'; skipping the multiplication of hundreds of thousands of patients.

My two cents.

Posted by: MWD on September 17, 2002 12:50 PM

MWD, that is a good point. I find this discussion very interesting as it is in my field and I have done a fair amount of work analyzing what is known as "the backlash" against HMOs.

To some extent the "backlash" against HMOs and the demonization of the pharmaceutical industry is due to emotional rable rousing by disenfranchised - or just plane ignorant - consumers, as you stated.

The strong emotional climate is then siezed upon by some politicians and the whole issue becomes a political football.

On the other hand, a good deal of anger directed at the pharmas is indeed based on more sober analyses conducted by think tanks, economists, and yes even some politicians. Much of this has filtered down to consumers, who in turn are reinforced in their belief that something is not quite right in the pricing of pharmaceutical products.

When I talk to the average Joe or Jane on the street they typically express a disdain for the pharm. ads on tv; recognizing them for what they are (see several of the thoughtful posts on this thread). They also have a pretty good grasp of the way price discrimation operates in the sector and they don't like it one bit. Finally, they read enough financial news to know about the large profits enjoyed by the sector's firms.

Posted by: E Avedisian on September 17, 2002 01:32 PM

RE:

>>The pharmaceutical industry could definitely be "squeezed" to produce substantial savings for the healthcare sector.

Firms typically produce all kinds of new (read monopoly via patent protection) products whose marginal benefits are clearly less than the marginal costs. Such new products are the subjects of the "sleazy" marketing campaigns.

Essentially, by convincing physicians and consumers that the new product offers SOME improvement over existing technology, the firms create a market as opposed to responding to an existing one. A lot of money is spent in the process. Again, more is spent than is gained through consumption. If the firms were forced to introduce only those products where the marginal benefits equaled the marginal costs and/or pricing was set so that this would be the case, then significant savings would be realized in the sector.

I don't know how this could be achieved short of establishing a pharmaceuticals review board within a socialized healthcare system as found in Australia.<<

I would say that with that last sentence I rest my case. With the current structure and politics of health in America, drug company bashing is likely to do more hard than good. At least, I can't figure out a non-destructive politically-realistic way to squeeze the drug companies.

But we should also remember that a pharmaceuticals review board might well wind up making the "wrong" decisions some proportion of the time because of its own biases. There are powerful benefits to decentralized decision making, and to allowing local knowledge to directly influence resource allocation decisions.

Posted by: Brad DeLong on September 17, 2002 01:35 PM

Brad

Perhaps you noticed that China is opting to produce generic copies of several AIDS drugs to begin to treat patients. Interestingly, the companies whose drugs are being copied are quiet as mice and so are the governments where those companies are based. China essentially has opted to "Steal" the drugs for patients, to use Lawrence Kohlberg's [Harvard] phrasing.

Brazil has long been copying drugs to treat AIDS patients, though we complained and threatened. India has been like Brazil. Thailand as well. As for Africa, there has really been little progress. Interesting and important in wyas I do not well understand.

Posted by: on September 17, 2002 02:09 PM

Brad, thanks for responding.

I basically agree with you and will make a final point on this topic.

One of the reasons -probably the primary reason - the pharmaceutical industry has been able to engage in the strategies outlined in the postings above is that the whole game is being financed by the insurance companies, who then pass the costs on to consumers in the form of higher premiums, higher copays, and reduced access.

This has worked because insured consumers, divorced from the cost of consumption at the point of purchase, lacked incentive to purchase based on value. There also exists markets failures, like asymmetry of information, that fuel the process.

Now, with insurance coverage becoming prohibitively expensive, consumers are lashing out at not only the insurers, but the drug makers as well.

True, demand for pharma.s may be pretty inelastic, but if you can't afford it....well you can't afford it. Consumers are being forced to become more informed about alternatives.

So maybe the current bashing combined with a potential increase in demand for affordable relatively effective generic products will ultimately result (via the invisible hand) in the pharma. firms altering their approach to R&D and marketing.

Posted by: E. Avedisian on September 17, 2002 02:19 PM

Interesting thread, with several good points. It needs to be recognized, however, that many, many, people are wholly uncomfortable with the prospect of rationing something that can be as vital as healthcare, hence any entity which is perceived as facilitating that unavoidable phenomena is sure to be demonized by some. Of course, this is why those that hold conflicting viewpoints regarding how health care is distributed in the United States are almost always unwilling to acknowledge that rationing will occur under any system adopted, therefore some people will not receive the health care that they might otherwise benefit from, and that the debate is merely about whether rationing is best performed by pricing mechanisms, restriction of supply by political bodies, or what mixture of the two methods would be optimum. No politician wishes to speak about the inevitable nature of scarcity, particularly in regards to a good or service that can be essential to life, and is extremely subject to scarcity, due to it's dependence on cutting edge technology. To complicate matters in regards to drugs, it is extraordinarily difficult to determine how much protection to afford intellectual property in order to provide for optimal results. Given the unavoidable, unpleasant, implications of scarcity in regards to an often crucial good or service such as health care, and the difficulty in empirically determining, exactly, to what extent intellectual property should be protected, it isn't much of a wonder that somebody is demonized. Change the regime significantly, and a new demon will be found.

Posted by: Will Allen on September 17, 2002 02:53 PM

Europe and Canada seem to get along just fine with their rationed healthcare. The reason rationing in the U.S. angers so many is that it's done on an income basis.

Posted by: Jason McCullough on September 17, 2002 03:11 PM

Why is it then that those who advocate rationing by political bodies so often use rhetoric which dishonestly , or employs bald faced lies, to imply that rationing of health care does not occur in those places? I suspect that they do so because in the absence of such dishonesty a real debate would occur in which a reasonable question would be asked and a reasonable answer would be demanded; namely, why would it be supposed that rationing by political bodies provides a more optimal result than rationing by pricing mechanism (which you call rationing by income), when we largely accept that such rationing by political bodies in other contexts is plainly inferior? In regards to drug development, I think it is clear that the regions which ration health care largely through political bodies benefit from the fact that a large, prosperous, market which does some rationing through pricing does exist. Hell, if it is believed that rationing by price is so inferior, we could simply stop providing patent protection to pharmaceuticals, and bye-bye price rationing, given the low marginal cost of making the next batch of drugs. Go ahead and make the case as to why this would be good policy. Granted, there are places where price rationing is viewed as so unfair as to make rationing by political bodies the inevitable alternative, but that doesn't mean that such places don't benefit from the existence of price rationing elsewhere, or that abandoning price rationing in those places that still employ it would lead to more optimal results.

Posted by: Will Allen on September 17, 2002 03:51 PM

Will, you're going to need to provide examples of this "dishonest rhetoric."

'.....namely, why would it be supposed that rationing by political bodies provides a more optimal result than rationing by pricing mechanism (which you call rationing by income), when we largely accept that such rationing by political bodies in other contexts is plainly inferior?'

There's a fuzzy line between "stuff that's nice to have" and "stuff that is life itself," but food and health care are definitely on the essential side. Food is so cheap that its unequal distribution isn't that big of a deal; no one starves, and the income-distributed differences in food are all Geo Metro/BMW quality differences.

By contrast, the "market" for health care in the United States has persistently resulted in low-income sectors of society having health care far, far below what they should be able to afford on an income basis. The distribution inside income levels appears to be entirely random; is there a good reason part-time workers find it virtually impossible to find reasonably priced health care, if at all, while those with full-time jobs always have it, for example?

The U.S. market for health care is broken, badly. If government rationing isn't the solution, then I want to hear what's going to make the market produce acceptable outcomes. The current situation is untenable.

On prescription drugs, I have no problem with subsidizing the third-world, but become a tad bit annoyed when I think of our first-world neighbors freeloading on our research. Perhaps a per-nation reimportation regime would take care of things.

Posted by: Jason McCullough on September 17, 2002 08:13 PM

Brad wrote:

<

"I would say that with that last sentence I rest my case. With the current structure and politics of health in America, drug company bashing is likely to do more hard than good. At least, I can't figure out a non-destructive politically-realistic way to squeeze the drug companies."

One reason progressive/populists bash drug companies is because they think that the drug companies *themselves* are significantly responsible for influencing "the current structure and politics of health in America" so that it works to promote their interests to the detriment of the public interest.

How did U.S. IP and medicare policy get the way it is today? Certainly not without significant prodding, lobbying, and targeted spending on the part of big pharma.

To the extent the above is true, pharma company bashers have a valid point.

Posted by: Eric Tam on September 17, 2002 09:44 PM

Will wrote:

>>'.....namely, why would it be supposed that rationing by political bodies provides a more optimal result than rationing by pricing mechanism (which you call rationing by income), when we largely accept that such rationing by political bodies in other contexts is plainly inferior?'<<

Of course, we don't. We accept that the organisation of the production and distribution of consumer goods by political bodies is plainly inferior, but every time that there is a real need for rationing a quantity, we look to the government.

Posted by: Daniel Davies on September 17, 2002 11:29 PM

I am going to be brief here, especially considering the complexity of the topic. To refer to the current regime as a failure of rationing by price doesn't reflect the degree to which the regime is a hybrid of rationing via price and political bodies. Jason refers to the inability of part time workers to obtain coverage, which of course begs the question as to what economic value is added by having the employer act as a middleman in the acquisition of coverage. Look, from an insurance perspective, the key to stable coverage is to get people covered while they are young and healthy, and to receive commitment from the insured that they will maintain the coverage. Nearly everything we do works against this principle, from medicare, to employer participation, and many other aspects, and these aspects exist due to previous government action. Also, I am not saying that there is no role for government action in this area; mandatory purchase of some type, similar to auto insurance, may be appropriate, and this implies government paid care for those that are uninsurable at even a very young age. What I object to are those that attempt to sell either rationing by price or rationing by political bodies without admitting that under any regime adopted some people will suffer from not receiving care that they might otherwise receive, if not for the ugly little reality of scarcity. It is my belief that rationing largely accomplished by price will in the long run provide the greatest amount of high quality goods and services to the most amount of people, and provide the highest rate of innovation. Many believe the opposite; that rationing largely via political bodies will provide the greatest amount of high quality goods and services and the most amount of innovation. It would be nice if the debate could occur on these terms, absent the demagoguery. Well, on to other dreams...

Posted by: Will Allen on September 18, 2002 08:08 AM

I am going to be brief here, especially considering the complexity of the topic. To refer to the current regime as a failure of rationing by price doesn't reflect the degree to which the regime is a hybrid of rationing via price and political bodies. Jason refers to the inability of part time workers to obtain coverage, which of course begs the question as to what economic value is added by having the employer act as a middleman in the acquisition of coverage. Look, from an insurance perspective, the key to stable coverage is to get people covered while they are young and healthy, and to receive commitment from the insured that they will maintain the coverage. Nearly everything we do works against this principle, from medicare, to employer participation, and many other aspects, and these aspects exist due to previous government action. Also, I am not saying that there is no role for government action in this area; mandatory purchase of some type, similar to auto insurance, may be appropriate, and this implies government paid care for those that are uninsurable at even a very young age. What I object to are those that attempt to sell either rationing by price or rationing by political bodies without admitting that under any regime adopted some people will suffer from not receiving care that they might otherwise receive, if not for the ugly little reality of scarcity. It is my belief that rationing largely accomplished by price will in the long run provide the greatest amount of high quality goods and services to the most amount of people, and provide the highest rate of innovation. Many believe the opposite; that rationing largely via political bodies will provide the greatest amount of high quality goods and services and the most amount of innovation. It would be nice if the debate could occur on these terms, absent the demagoguery. Well, on to other dreams...

Posted by: Will Allen on September 18, 2002 08:08 AM

One issue that needs to be raised here is that of information problems. The claim that "rationing by price," i.e. a market in medical "goods", is efficient relies on all participants having access to reliable information. Yet consumers of medical goods are typically extremely ignorant (look at all the people who buy bottled water, or who buy soaps augmented with antibacterial agents). My own personal experience (combined with my reading about medical issues) is that doctors aren't all that much better.

Regards,

sjfromm

Posted by: Stephen Fromm on September 18, 2002 05:48 PM

Information problems are real and loom large. There is evidence that this is slowly improving.

Also, few like to discuss it because we still like to feel that a sacred trust exists between physician and patient, but there is a pricipal/agent problem as well.

Physicians are only human afterall. They can and do respond to financial incentives that may not necessarily result in the optimal outcome for the patients.

One direct incentive is in the form of kick backs from the pharmaceutical companies for writing favorable (to pharma.s) prescriptions. There are less direct incentives, like relying on the drug reps info instead of thoroughly researching alternatives because doing so saves time.

Posted by: E. Avedisian on September 19, 2002 11:16 AM

The information problem definitely exists, but among the best ways to reduce that problem is to have consumers seek doctors for advice, not permission. With the exception of antibiotics, in which incompetent usage of the drug reduces utility for all, consumers should be asked to take greater responsibility for their health care, which entails changing the nature of the patient/physician relationship.

Posted by: Will Allen on September 19, 2002 01:47 PM
Post a comment
Name:


Email Address:


URL:


Comments:


Remember info?