Beware Pols Bearing Health-Care Fixes

by Don Boudreaux on November 12, 2006

in Health

In today’s Washington Post, Alberto Mingardi of the Istituto Bruno Leoni in Italy draws lessons from his country’s experience to warn Americans against increasing Uncle Sam’s role in providing medical care.  Here’s his concluding paragraph:

So by attempting to hold down drug prices, the Italian government has
deprived its citizens of the best care without reducing health-care
spending. And it has deprived the country of what could be a vibrant
sector of the economy. In their rush to revamp Medicare, U.S. policy
leaders should be careful not to make the same mistake.

Bruno Leoni (1913-1967), by the way, wrote a wonderfully deep and profound book on the nature of law, entitled Freedom and the Law.

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{ 12 comments }

tarran November 12, 2006 at 11:46 am

A business does not only compete with other businesses that produce the same product, but with every other business that produces a product the consumer may wish to purchase.

This holds prices down even when only one company makes something like mp3 players; if the price is too high, a person may decide to spend money instead on line-dancing lessons, or to add the money to savings.

Now, if someone were to offer to assist consumers in purchasing mp3 players by offering to pay 9 dollars out of every 10 demanded by the seller, so that the consumer paid 1/10th the asking price, it would have the effect of shifting the dmeand to hold curve dramatically upward. In other words, there would be a large number of consumers now wanting the mp3 player, and in the absence of an increase in the quantity produced, the seller would constantly running out of stck until he raised prices to the point where once again he was just barely selling all his stock.

In the end, assuming no increase in production of mp3 players, consumers would end up paying the same amount of money out of pocket, but the asking price demanded by the seller would be 10X the original asking price.

This phenomenon is quite visible in two areas of the U.S. economy, health-care and education.

In both sectors, govenrment officials have crafted laws that directly subsidize consumer spending, or enhance it by taxing money spent in those sectors less than money spent on other purchases.

The result is a rise in prices that far outpaces the rise in prices in the rest of the economy due to the Fed's inflationary policies.

There is only one way to reduce prices of a good or service. Allow the supply to expand through a combination of increased productivity, reduced supply costs or increases in the labor force.

To do this in the medical industry, the government must stop creating shortages via
1) Limiting the number of doctors trained every year.
2) Making the construction of facilities to manufacture prohibitively expensive.
3) Ending the requirement that doctors' prescriptions be required to purchase medicines.
4) Awarding patent protection to pharmaceutical firms.
5) Funding medical research via funds confiscated from private citizens.

Item 4 would surprise people, because tere is a myth that without patent protection nobody would research new drugs. "The first pill costs $600,000,000 to make, the second $0.25" is a common saying to argue for this grant of monopoly. However, this notion is patently false. Even without patent protection, medical research would take place because people would still be suffering and dying from disease. Those who are ill, or their survivors would still donate money (and would have more money to donate if taxes were significantly reduced) to charities that fund the research. Medical schools would seek the prestige that comes from finding new cures and treatments, which would translate into higher tuitions they could demand from those they teach. The increase in rivalrous competition would reward firms who identify the treatments most beneficial to the consumer (ie most effective, lowest cost, least disruptive). Currently I see the incentive as being to produce the most effective patentable treatment as opposed to one that is not.

The rest of my proposals, of course, are really pedestrian ideas to end various forms of rent-seeking, or encumbrances that limit competition.

tarran November 12, 2006 at 12:12 pm

Ooops – Item 3 should read
"Requiring doctors' prescriptions to purchase medicines."

Mace November 12, 2006 at 12:49 pm

"Those who are ill, or their survivors would still donate money (and would have more money to donate if taxes were significantly reduced) to charities that fund the research"

Given the very substantial costs associated with drug development, I'd call this dangerous Utopian nonsense.

Bruce G Charlton November 12, 2006 at 2:18 pm

I am in general agreement with Tarran's suggestions. My hope would be that this approach would allow the problem-solving creativity of markets to find out unforseen ways of providing better health care (a job at which human ingenuity has failed).

But I would tend to extend patenting rather than prevent it – because I notice that effective treatments are more-or-less ignored unless somebody can make money out of them – in which case they are advertized and marketed extensively, with great public benefit (overall).

Behavioural therapy for phobias is a good example – a highly effective cheap, simple, quick and side-effect free (more or less) treatment which is virtually unknown because it is so cheap simple etc and nobody can make money out of it.

Another example is the 'unofficial SSRI' antihistamines such as chlorpheniramine and diphenhydramine which are extremely cheap and available without prescription to do the same job as Prozac – but because they are not patent-protected nobody will even fund a trial – never mind market them. The effectiveness of chlorpheniramine was known in 1969, but it was out of patent, and Arvid Carlssen (Nobel laureate) had to persuade drug companies to invent the first (and patentable) SSRI (Zimelidine, later withdrawn) which led – 15 years and hundreds of millions of pounds later – to Prozac (modified from diphenhydramine).

So – in reforming health care, we must bear in mind incentives – incentives not just for discovery, but also for marketing and usage.

Charles N. Steele November 12, 2006 at 7:03 pm

Tarran's argument argument against patents gives no reason why patents raise medical costs. Maybe such a case could be made, but it isn't here.

And the assertion that indirect rewards (e.g. higher tuitions) would more than compensate for loss of patent protection seems very doubtful. It *does* cost a fortune to make & test the "first" pill, and a few pennies to produce the second. If anyone can produce the second once the innovator has developed it, it's hard to believe that innovators will be as willing to bear research costs.

And Tarran even recognizes this when s/he says that the current system leads firms to pursue patentable as opposed to non-patentable remedies.

The problem posed by Charlton — lack of attention to non-patentable remedies — is one I've never really understood. Given that these alleged remedies exist, why does lack of patents reduce the incentives of doctors to prescribe them, or medical schools to study & promote them? This isn't a question of bearing the costs of discovering them, since in all the examples I hear of the alleged remedies are already identified, and hence "freely" available.

Bruce G Charlton November 13, 2006 at 1:48 am

Charles N Steele said:

The problem posed by Charlton — lack of attention to non-patentable remedies — is one I've never really understood. Given that these alleged remedies exist, why does lack of patents reduce the incentives of doctors to prescribe them, or medical schools to study & promote them? This isn't a question of bearing the costs of discovering them, since in all the examples I hear of the alleged remedies are already identified, and hence "freely" available.

Charlton says: Thanks for your response. I think what your comment illustrates is that first-pass common sense suggests that non-patented remedies will be used more than patented ones, but I am suggesting that this seems to be wrong in the context of modern, highly professionalized medicine.

This line of argument I am pursuing is somewhat new, and it is based mainly upon observations of what may be an atypical field, namely psychiatry. But the situation seems pretty clear that psychiatrists, en masse, use mostly new, patent protected drugs – and there is always an apparently compelling rationale for this when recent scientific literature is surveyed.

The work of David Healy has diseccted how this situation may have arisen, in which drug marketing is not any more mostly advertizing, but includes guest authorship of scientific research papers which are actually ghost analyzed and written by agencies paid by pharamceutical companies – indeed Healy has shown that these papers are 'authored' by the most prestigious psychiatrists, are published in the best journals and get the most citations.

Against this massive push for patented medicine, unpatented drugs seem (to physicians) to be old fashioned, shabby, supported by less weight of published evidence (and quite possibly published by less prestigious 'authors' in less prestigious journals etc.

Given the massive information overload, profeesional marketing effort is critical in modern society – this applies in health as much as anywhere else. From this I infer not that we should try to go back to simpler pre-marketing days, but that we should move forwards to enabling people to make money from selling a wider range of drugs, not just the new ones.

Russell Nelson November 13, 2006 at 1:56 am

Charles, these remedies are "off label", so doctors can't prescribe them. In order to get them on the label, you have to do drug testing, which costs huge amounts of money. Once they've been approved, anybody can market them. Bad government policy!

Lowcountryjoe November 13, 2006 at 6:18 am

Tarran's #4 has taken some heat, here, and maybe it does deserve a little. But what if Tarran had also included an elimination of the FDA or, at the very least, medications being availible for sale — given that there is proper disclosure that the drug in question had not yet been given the buracracy's approval — over-the-counter?

Bruce G Charlton November 13, 2006 at 11:42 am

Correction wrt Russell Nelson's comment: "…these remedies are "off label", so doctors can't prescribe them."

In fact, doctors prescribe off-label all the time (thanks heavens or there would be hardly any drugs for pediatricians or dermatologists!).

A 'license' is actually a license for marketing – without a license for a specific indication you cannot advertize that product for the specific indication. But that inability may mean – often does mean – that companies can't make money. So lack of a license for disease X may consign a drug to invisibility such that it may hardly be used for disease X.

BTW I would broadly support Tarran's points 1,2,3,5.

I also like the idea of someone at EconLog (I think) that drugs should very seldom be banned, but could instead have a prominent label to the effect that 'the FDA _wanted_ to ban this' and leave it up to the customers to decide what they put in their bodies.

Leonard Charlap November 13, 2006 at 9:01 pm

Let's look at the bottom line. Look at the basic measures of health, life expectency, infant mortality rate, etc. In every case, Italy does better than we do. Yet we pay over twice as much per patient as does Italy. You can substitute any wealthly developed country for Italy. If the free market is so great, why do we pay more for worse healthcare than other countries? As for drug innovation, see my letter in today's Post.
(for verification of these statements see pnhp.org)

tarran November 14, 2006 at 9:59 am

Leonard,

The U.S. does not, repeat not have anything approaching a free market in health care.

It is heavily manipulated by the U.S. and state governments to keep prices high by limiting supplies.

vincent March 20, 2007 at 12:07 am

tarran said:
"the government must stop creating shortages via
1) Limiting the number of doctors trained every year."
"keep prices high by limiting supplies"

1975-2002
total US pop. increased by 35%
the number of active MDs more than doubled.
http://www.cdc.gov/nchs/data/hus/hus04trend.pdf

how does your theory fit in with these facts?

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