Saturday, July 11, 2009

Innovation after Obamacare 

Glenn Reynolds links to Glenn Reynolds writing about "the hidden cost of national health care," which is the likely reduction in innovation in the pharmaceutical, biotechnology, and medical technology industries. Glenn focuses particularly on the consequences of bureaucrats choosing winners and losers, not only among specific technology but among disease states themselves.

But under a national health care plan, the "market" will consist of whatever the bureaucrats are willing to buy. That means treatment for politically stylish diseases will get some money, but otherwise the main concern will be cost-control. More treatments, to bureaucrats, mean more costs.

There is a slightly different and perhaps more straightforward way of looking at this issue. Will a "reform" plan reduce the rates of return on investment to pharmaceutical and medical technology companies and, even, physicians? If you cut costs to the "system" (which is different than to the economy taken as a whole) by reducing returns to drug and technology companies, then it follows ineluctably that it will be relatively more difficult to attract capital to develop new drugs and devices. Fewer projects will meet the requirements for expected returns, so fewer projects will get funded. Same thing for medical devices. As I wrote in my 2007 post "a few questions for health care reformers," reform advocates need to explain how much reduction in innovation ought to be acceptable. Some surely would be if the result were massively lower costs and universal coverage, but even those benefits would not be worth technological stagnation.

There is one other point in this discussion that has long interested me, and it begins with this question: Were you happy with your health care in 1992? Why 1992? Because every drug and device that was available then is off-patent today, and therefore can be bought for much lower prices than more recently developed products. I suspect that it would be possible to create a dirt-cheap plan that reimbursed only for off-patent products; I also suspect that few people would support it, because most voters at least feel entitled to all the innovative new products. Well, if you cannot take innovation away explicitly, why ought you take it away implicitly by overtly reducing the returns to drug companies?

Finally, you can make similar arguments around proposals that would reduce the incomes of physicians. From my "questions" post:
Will your plan decrease the incomes of physicians and other health care providers? If so, it will cause some people to choose other professions in lieu of medicine. At the margin, that will mean that less capable people will become physicians and nurses and so forth. If your plan reduces the incomes of physicians (in particular), please explain how your plan will mitigate the resulting impact on the quality of the personnel delivering health care. Two possible responses occur to me. First, you might argue that we do not need our absolutely smartest people competing to get into medical school. Apart from a few people in academic medicine, we could get along just fine with marginally less capable people in medicine. Second, you might claim that changes in your reform program will substantially increase the non-monetary satisfaction of medical practice, so we will be able to attract similarly bright people into medicine in the future. Do you have a different response?

Release the hounds.


By Anonymous Anonymous, at Sat Jul 11, 10:39:00 PM:

> That means treatment for
> politically stylish diseases

Well, here is a short but relevant story from Canada's National Post (http://www.nationalpost.com/news/story.html?id=992946)

OTTAWA -- The Carleton University Students' Association has voted to drop a cystic fibrosis charity as the beneficiary of its annual Shinearama fundraiser, supporting a motion that argued the disease is not "inclusive" enough.

Cystic fibrosis "has been recently revealed to only affect white people, and primarily men" said the motion read Monday night to student councillors, who voted almost unanimously in favour of it.

While this is far more about political correctness (and the quality of "student politics-ans", but it is still worth pondering about it.


By Anonymous Anonymous, at Sat Jul 11, 10:47:00 PM:

This post is written in jest.

I think this would be a good way to figure out how people are thinking about the health care's quality (and costs).

People should be able to buy cheap health insurance. For example, if somebody thinks that how cheaper health care was in, say, 1970, then there should be a health care which costs only as much as it was in 1970, but on the other hand, it only provides solutions which were available in 1970. You want cheap health care? The choice is yours. So for example, a heart operation wouldn't be a simple cut in the groins and be home in the afternoon, but a couple of hours long surgery, including the use of circular saw, a huge scar, etc...

Hey, if somebody wants to pay only on the level of say, 1860, then let's them do it. And they will get all kind of mercury based crap...


By Anonymous feeblemind, at Sat Jul 11, 11:07:00 PM:

Agree with the gist of your post TH, but I have a nit to pick. Are there not cases where drug companies can get extensions on patents? If so, are the extensions only good to make up for the patent time lost in the regulatory approval process?  

By Blogger JPMcT, at Sun Jul 12, 01:15:00 AM:

Several comments, in no particular order:

1. Healthcare reform will not require the "best and the brightest" physicians. Most physicians will be employees of larger healtcare delivery systems. The system will be reimbursed and the the system will decide how much of that reimbursement goes to the physicians. The actual "healthcare" will be doled out according to "Best Practice" guidelines. Deviation from the guidelines will not be easily tolerated.

A monkey could do it.

2. Similarly, physicians will not be the arbitors of what drugs, equipment and policies will exist in most hospitals. Vendors better have their products ready to sit next to all the others on the "generic" aisle. May the cheap man win.

3. I cannot conceive of any portion of the proposed healthcare plan that would make the "non-monetary" part of medicine more attractive. Which would it be? The lack of independent decision making? The loss of your ability to run your own business? The enjoyment of being a "brand" rather than a respected individual? The 30 day termination-without-cause clauses in most contracts for physician employment? Perhaps it's the 80 hour workweek maximum.

It certainly WONT be tort reform!

4. Don't worry...after a generation or so, most people will have forgotten about what it's like to receive care in a first class institution. Most people who are going into medicine will do so as a job to complement their spouses income - rather than a profession. Most complex illnesses, especially in the "elderly" (over 60) will not meet criteria for care.

People will get used to it.

Isn't that how the Russians did it?  

By Anonymous Anonymous, at Sun Jul 12, 10:48:00 AM:


I had one business foray in healthcare, where we failed but I learned a couple of things.

1) Most of our healthcare spending goes to chronic illness. People with chronic illness don't get cured, you have to manage them over time. Here's the big insight -- patient variability matters a lot with chronic illness. If you manage patients well -- mostly by keeping them healthier -- you can actually reduce costs. If instead you force "one size fits all," you'll get worse outcomes and higher costs. What really drives up the bill are hospitalization costs and invasive procedures that could have been avoided.

2) Our healthcare system is all about billing. Individual caregivers may care about the patient, but the system doesn't give a rat's ass about outcomes. All the Democratic reform proposals have been about getting some people to kick in more -- from the working rich ... to healthy 25-year olds who'd rather not pay in half their disposable income to subsidize someone else's grandma. Healthcare is perverted by its need to maximize financial results under whatever reimbursement regime the government hands down.

3) Medicare/Medicaid reimbursement is already a huge hidden tax. Any caregiver will tell you that federal reimbursement rates are too low, so that they have to make it up on the rest of us. Sometimes this discrepancy can be shocking. As a result, if you're a private patient you're forced to carry the burden of the government's patients. Given demographics, this will be an increasing burden. Importantly, it masks the burden of future deficits we're already showing in Medicare/Medicaid. These numbers are huge -- probably hundreds of billions per year already.

4) Obama has presented nothing innovative on healthcare. McCain put out more radical, innovative ideas during the campaign but was laughed down by MSM because he was ... well, John McCain ...

Sidebar: I have a relative who knows McCain well. He overheard a reporter making fun of how vain McCain was because the reporter saw someone combing McCain's hair. McCain tries not to let the world know that he can't raise his arms past his shoulders. If McCain looks "stiff", there's a reason for it.

5) I wish I could buy futures on diabetes and kidney failure (kidding). We do have twice as many obese people as any other nation. Diabetes alone is enough to break the bank over the next 20 years.

Nothing Obama is proposing will make things better. It'll only make it worse. Am I wrong?

Link, over  

By Anonymous JVDeLong, at Sun Jul 12, 12:22:00 PM:

I agree with your prediction of an anti-innovation bias and an effort to reduce returns to innovators. See "Saving the Goose"[http://www.convergencelaw.com/FOB_Policy_09-17-08.pdf]:

"Faced with such expensive treatments, governments and other third-party payers face unpalatable choices: either ration drug availability in some fashion, thus telling some people that they simply do not get the treatment, or find some way to transfer the money to pay the bill from one sector of the populace to support the medicinal needs of another. Given the political unattractiveness of both alternatives, their optimum political course is:
"(1) If such expensive drugs are developed, to introduce generic substitutes as quickly as possible;
"(2) To avoid any need to face the problem in the future by discouraging the development of such expensive drugs."  

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