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Medicare for everyone?
In general, an actuarial comparison to other health insurance plans shows that Medicare provides significantly fewer benefits than coverage for federal employees, small employers, or Medicaid.
That is from Medicare Matters: What Geriatric Medicine Can Teach American Health Care, by Christine K. Cassel. It should be noted that a) Cassel is much more positive about Medicare than that quotation alone would indicate, and b) this is an honest book which recognizes the weight behind many different points of view.
What percentage of the federal budget is Medicare? Will Medicare be? How many books on Medicare have you read?
Get the hint?
Addendum: I like supplying contrarian material; this article (registration but free) is an excellent critique of the usual libertarian defense of pharmaceutical companies.
Posted by Tyler Cowen on July 27, 2007 at 06:57 AM in Medicine | Permalink
Comments
The problem with Medicare is that it performs one function while people expect it perform two.
The one that it performs is to provide payments for serious, but not exceptional, health issues. This means that it has limits (deductibles) at the low end and limits on the high end (long hospital stays). Some of this is covered by various medi-gap policies.
To those at the bottom the deductibles and the medi-gap policies pose a real hardship. If you are living on Social Security and your family income is $25K having to pay $1000 or so in pre-coverage expenses is significant. So is the approximately $300 a month that the best medi-gap plans charge. These people want hassle-free coverage. In reality this wouldn't be too expensive to arrange since the amounts are relatively small. The opposition comes, of course, from the insurance industries which are making out quite well in the medi-gap market. No deductible coverage would eliminate their business.
At the other end there are the $1,000,000+ patients. These are relatively rare, but expensive. Catastrophic insurance premiums should, therefore, not be too high if this is all that they cover. Those patients who don't have catastrophic insurance face several options (this is true now as well).
1. They can use up all of their assets and then declare bankruptcy.
2. They can use up all of their assets and qualify for Medicaid.
3. The hospitals can provide treatment as a charity and make up for the loss by overcharging elsewhere.
4. They can be refused treatment and die.
In these cases, except the last, society ends up paying for the treatment indirectly.
A universal health care plan (not an insurance plan) would eliminate many of these issues. Those benefiting from the present arrangement are not going to get off the gravy train without a fight.
As for the projections that health care will continue to rise at recent rates, this is improbable. At lot of the high tech infrastructure is now in place (CAT scanners, MRI machines, etc) and the cost will shift from adoption to the replacement market. Advances in technology and medicine can be expected to lower the costs of treatment just like advances in other areas have made products cheaper.
The most expensive drugs will go off patent protection in the next decade or so and the costs will come down. There have been no real blockbuster drugs in quite awhile and even if a few are found they will only be for specialized conditions. Furthermore a drug which cures or stabilizes a disease allows the person to remain a productive member of society and is thus "cost effective". One just has to look at the overall picture.
Posted by: robertdfeinman at Jul 27, 2007 9:47:21 AM
Can someone at least summarize the substantive argument in TNR for me? Until I can get to my home
email to register (won't pass work spam filter), I can only see the summary, and from what I can tell:
1) It's going to take its sweet time getting to that "excellent" argument Cowen mentioned, and
2) it looks like it will have lots of bad economics, like talking about CEO and advertising pay, and so
will give me neither a new argument, nor a good one.
Help is appreciated.
Posted by: Person at Jul 27, 2007 10:39:46 AM
Don't bother with the "TNR" article, just read this:
http://www.theamericanscene.com/2007/7/25/milton-friedman-made-me-do-it
Posted by: Jeff Singer at Jul 27, 2007 10:48:27 AM
Thanks, Jeff_Singer. I predicted that the TNR article would say what the rebuttal in your link says
it does, and I guess I was right. I just didn't want to presume anything, since, Tyler_Cowen said it was
excellent. I guess I erred in thinking that meant it wasn't just a rehash of the old, poor arguments.
Jeff_Singer, your link saved me the time of registering, reading TNR, and saying the stuff in the rebuttal.
Thanks again.
Posted by: Person at Jul 27, 2007 10:56:38 AM
You're contrarian enough to provide the link, but not contrarian enough to mention that people in the "socialized" systems have the right to buy private insurance if they do not feel they are adequately covered by the state system.
How much do you know about parallel public/private provision in the countries you tend to reject as too socialized? How much of Canada's Chaoulli decision have you read?
Get the hint?
Posted by: Frank at Jul 27, 2007 12:41:29 PM
I did not finish the TNR article, but "excellent" seems like an
overstatement. Besides the poor economic treatment, I have already located somewhat tautological arguments, e.g.,
pharmaceuticals are not "ordinary goods" because
they are subject to FDA regulation and must be dispensed by physicians.
It's my own view that drugs should not be subject to FDA regulation or
require a physician's prescription. Thus, citing to the existence of a
stringent regulatory scheme does not effectively dispell the argument
that drugs SHOULD be treated as ordinary goods. I pretty much stopped
reading after that.
Posted by: Another person at Jul 27, 2007 2:16:57 PM
The TNR article basically rebuts pharma companies estimates of the cost of coming up with drugs.
The problem is not just pharma -- the problem is the intellectual property regime in general, including the music industry for example. When the government grants a patent they are creating a monopoly. Markets work because of competition, and here we have the government (note, libertarians -- the GOVERNMENT) granting an artificial protection from competition.
Friedrich Hayek, who argues that the point of law is to outlaw or at least minimize coercion, also believes intellectual property should not be treated the same way as ordinary property (because of the competition problem). For normal property, I steal it from you (coercion) then you no longer have the use of it. With intellectual property it is possible for all to simultaneously have the use of it.
One solution would be for intellectual property owners to simply state a percentage figure, say X%, and allow anyone to produce or distribute the product of that intellectual property, but pay X% of what they make to the IP owner. I think the music industry is slowly but reluctantly moving in that direction. Now if only pharma would follow...
Posted by: KP at Jul 27, 2007 2:32:09 PM
The article rebuts nothing about the cost of drug discovery and development. It simply asserts the costs are something different than what is listed as R&D in the SEC filings of pharmaceutical companies. Where he goes really wrong is when he tries once more the tired old saw about how drugs are more and more discovered in academic laboratories. This is simply untrue. Academic researchers do basic research. They do a lot of the research into disease targets, but not even all of this, and what they do isn't all funded by the government either. The process of finding the lead molecules, optimizing these molecules, and carrying out all of the studies required for FDA approval is almost exclusively done by pharmaceutical companies. And claiming that big pharma buys out the work of start-up companies is a completely irrelevant point unless the author really believes startups give stuff away otherwise.
On the issue of me-too drugs, so what? If the drugs are really worthless, as he wrote, then we wouldn't be using them, and the patents given for them are meaningless anyway. He complains that resources are wasted on me-toos when it could be devoted to ignored areas pharma research. Again, I say, so what? Pharma invests where it can make money. If those areas are being ignored, it is because they are unprofitable. If he thinks those areas should get research dollars, then he should form his own damned company and find investors.
The only area that I can really find some agreement with him is his attack on the intellectual property issue. However, if we continue to regulate drugs to the extent we do today, then companies will need either a monopoly grant, or a subsidy to guarantee a profit overall, otherwise drug discovery will end in the private industry- drugs are easily copied and manufactured once discovered, but it is the discovery and development that costs so much up front money, not the manufacture. You want to do away with patents, then you need to find an alternative way to induce the huge capital investments required for new drugs.
Posted by: Yancey Ward at Jul 27, 2007 4:21:12 PM
I think KP makes some very good points. It seems inconsistent to call those who are simultaneously in favor of robust patent protection and less direct government regulation of pharma "libertatians". For another somewhat indirectly related critique of Epstein's positions I recommend reading Dean Baker's blog at the American Prospect as well as his book, _The Conservative Nanny State_. As Baker continuously points out, the patent system creates large inefficiencies in the process of creating incentives for pharmaceutical innovation.
Posted by: Scot Johnson at Jul 27, 2007 5:14:18 PM
Tyler, I assume you're joking when you claim this "is an excellent critique of the usual libertarian defense of pharmaceutical companies." What is that defense? A defense of the patent system, which Epstein defends, and the "me too" drugs that are an outgrowth of patents? Relman pokes some holes in it, but as far as I'm aware he stops well short of calling for its abolition, which is what libertarians advocate, Lysander Spooner excepted.
Relman discssion of "me too" drugs overlooks the role of the patent regime in promoting these. (Maybe he mentioned this in his earlier work.)
One of the baneful effects of drug patents is that they encourage drug firms to slightly modify existing drugs to continue extracting more monopoly rents thanks to patents.
Relman is always on shaky ground in implicitly denying that patients have free will in choosing to use drugs, and that they are the pawns of their physicians. Relman thinks compos mentis adults are incapable of entering into beneficial contractual relationships. This has nothing to do with drug companies per se, so why even bring it up? I guess because it makes it easier to argue that doctors in turn are the pawns of drug firms, which is also nonsense. None of this is consistent with libertarianism, and in fact is an implicit denial of the most basic libertarian tenents.
Posted by: Bill Stepp at Jul 27, 2007 8:24:43 PM
Yancey Ward says:
However, if we continue to regulate drugs to the extent we do today, then companies will need either a monopoly grant, or a subsidy to guarantee a profit overall, otherwise drug discovery will end in the private industry- drugs are easily copied and manufactured once discovered, but it is the discovery and development that costs so much up front money, not the manufacture. You want to do away with patents, then you need to find an alternative way to induce the huge capital investments required for new drugs.
Monopolies are not only not required, they actually inhibit competition in drug development, just like in anything else. Drugs are easily reproduced by generic competitors, but the question is: can drug innovators earn back their cost of capital in the face of this competition? Relman explodes the myth that innovators can't earn competitive rents, and Boldrin & Levine do it even better. Btw, if you check your local pharmacies, you will notice that branded drugs (produced by innovators) generally continue to be priced at a premium to generic competitors. (Drug patent apologists never mention this. What are the implications of that for your theory? (Hint: lots of people like brand names and will pay a premium for them, including for drugs, just as they will pay a premium for Starbucks coffee, which supposedly is worse than Dunkin' Donuts. As a non-coffee drinker, I can't confirm this.)
Generic drug firms don't simply rush generics to market as soon as they copy them. The reason is they are subject to regulatory approval (albeit in a shortened form), and they prudently wait usually four years or so to determine if a drug will have a sufficiently large market to be profitable, and to see if there might be unexpected liability issues. In the meantime, proprietary firms earn uncontested (or at least not very contested) rents.
Personalized medicine is moving forward, and is lowering the cost of drug R&D, as well as drug manufacture, as I mentioned in a previous comment here once before. I would point you to the article mentioned in The Economist a couple weeks ago, or scroll back a couple weeks for a link to the article at www.againstmonopoly.org.)
Posted by: Bill Stepp at Jul 27, 2007 8:43:35 PM
I'm with libertarians like Stephan Kinsella against Epstein on patents: they are a government-granted monopoly that has not justified its existence, but is only assumed to be necessary because it has been around so long. There is even evidence it discourages innovation.
Posted by: TGGP at Jul 27, 2007 11:19:45 PM
Bill Stepp,
Drug companies absolutely do lose a lot in marginal profit when a drug goes off patent. While there's still a premium for brand-name drugs, the sales volume goes down considerably. The profit has been known as a "fish tail," with profits rising steadily after the drug is released and dropping suddenly after it goes off-patent
The New Yorker, in fact, had an excellent article about the drug industry. The article came to the conclusion that it's all about information and recommended all readers to investigate drugs thoroughly before dropping big bucks on brand names.
Posted by: Matthew at Jul 28, 2007 4:46:48 AM
TGGP: Just a heads-up: regular property rights are a government-granted monopoly as well. Not saying that property rights are bad; they're just no different from IP in that respect.
Another heads-up: you're not "with" Kinsella about the consequences of patents -- he doesn't care about those at all except to make half-hearted arguments he quickly backs away from.
Bill_Stepp: Are you saying drug profits aren't high*er* than they otherwise would be without patents? If so, that's ridiculous.
I agree that companies earn a sort of "rent" on their branding, and drug companies are no different. But they earn that from investing in branding, not in scientific research, and drug companies that actually discover the drugs are at no advantage to those that didn't. So yeah, they can feebly try to make back their investment by doubling up on the branding, but so can your competitors!
And for your heads-up, I'd point out that you're basically accepting in your argument that capitalists are capable of rooking people into overspending for drugs unnecessarily. Isn't that usually an argument *against* capitalism? Think about it.
Posted by: Person at Jul 28, 2007 7:32:03 AM
Person, property rights are not a government-granted monopoly. On the contrary, they are the best brake on government we could have. If you want to learn how property rights evolved without government, look at a book such as Bruce Benson, The Enterprise of Law.
Bill_Stepp: Are you saying drug profits aren't high*er* than they otherwise would be without patents? If so, that's ridiculous.
I'm not saying that at all. Patents cause drug firms to be able to earn monopoly rents, as opposed to comptetive rents. (I don't particularly like the term "rents" as used here, but that's how most non-Austrians use it.)
Capitalists don't "rook" people into overspending for drugs. Blame the state for the existence of drug patents.
Posted by: Bill Stepp at Jul 28, 2007 10:30:53 AM
Bill Stepp,
Branding rests on the same shaky intellectual grounds as patents- a monopoly on a name, so they are illegitimate if patents are illegitimate. In any case, I have examined the arguments you mention many times and from many different angles, and these people are simply wrong. Your new drug can be copied within weeks or months of you first selling it, and your market would not even reach maturity for years. The marginal cost of producing a unit of drug is almost always a tiny fraction of the market price. Without the monopoly, no pharmaceutical company would have a real chance of recovering the up front capital costs involved in discovery and development. What nearly everyone forgets is that investing profits in drug discovery is not the only thing a pharmaceutical company can do. If the return to finding new drugs falls below a certain point, the business will invest capital in something else with a higher return.
I am quite sympathetic to the libertarian arguments against patents, and I work as a pharmaceutical researcher, but I don't delude myself that new drugs would continue to be brought forward if we scrap patents altogether without getting rid of the major cost barriers that are also put up by the government-I have first hand knowledge of the hurdles any new drug has to overcome to make it to the market. What I find annoying is that the majority of the people wanting to scrap the patent system don't want to make the other changes while, in the same breath, try to make their arguments seem utilitarian. If you are willing to abolish the FDA as well, then you and I can find a lot of common ground since I can also see that the present system does alter the innovation profile from what might be the ideal one.
Posted by: Yancey Ward at Jul 28, 2007 11:00:38 AM
Yancey,
There's an article, "Napsterizing Pharmaceuticals," by three business school professors (you can google it) in which they argue for drug patents--but only by using a discount rate of about 5%, which would earn a first-year B school student a failing grade. With a discount rate above that patents are unnecessary and the industry makes money. In the real world, pharma companies have a cost of capital of around 10%. Boldrin and Levine argue for using a discount rate of 15%, which builds in a margin of safety.
So who's fooling whom on patents and profitability?
As for branding, it doesn't rest on intellectual monopoly, any more than any other name does.
Of course, trade marks would not exist in a libertarian world, but there would be laws against fraud. So if you produced a box of something with a Trix label on it and tried to pass it off as a knock off of the real Trix cereal, you'd be defrauding anyone who bought it--with or without a trademark system.
According to Jean Lanjouw's research, generic drug firms do wait to introduce generic drugs.
Yes, if the return to producing and selling a drug is less then the cost of capital to produce it, a drug firm will call it a dud and redeploy its capital, just like in any other industry.
So what? There have been drug failures, just like the Edsel was a dud.
Of course, as a libertarian I want to see the FDA abolished. It's a criminal organization, no doubt about it. China at least executed its FDA-equivalent head, so in that regard they're more civilized than we are. Karl Hess pointed out that the Soviet Union shot Beria, whereas we let J. Edgar Hoover go scot free. So they were ahead of us in one regard.
Btw, I don't think it would be a tragedy if a lot of drugs on pharmacy shelves didn't exist.
I think the idea that health can be found in a pill is absurd.
In my view, the best drugs are fruits and veggies (raw and organic) and exercise. You won't find even an aspirin in my house and hopefully never will.
Posted by: Bill Stepp at Jul 28, 2007 8:37:46 PM
Drug companies absolutely do lose a lot in marginal profit when a drug goes off patent. While there's still a premium for brand-name drugs, the sales volume goes down considerably. The profit has been known as a "fish tail," with profits rising steadily after the drug is released and dropping suddenly after it goes off-patent.
Matthew,
This may be the case, but the empirical questions are: What is the payback period for a drug? Do they earn back their cost of capital (either within the monopoly period or during the whole life of the drug)? Even if they don't, so what? Is there a law that says under capitalism a company is guaranteed to earn its cost of capital for any product it produces? Patent advocates (especially for drug patents) implicitly argue for this, as did the framers of the Constitution, who were better politiicans than economists.
I'm sure drug firms do garner enough rents to earn back their cost of capital for lots of drugs, even if not all of them; and I'd bet dollars to donuts they would in a patent-free market too.
Posted by: Bill Stepp at Jul 28, 2007 9:03:16 PM
Another point to bring up: a free market is one without tax-theft. Drug firms pay lots of tax-theft-tribute. Deep six tax theft and that gives their profits a nice filip, another nail in the patent coffin.
And of course ditto for all regulation as well.
Did someone say Relman just had a stroke?
Posted by: Bill Stepp at Jul 28, 2007 9:06:45 PM
Bill Stepp,
I have read the paper in the past. I think the discount rate they used is pretty solid and conservative, but if one wants to make up whatever discount rate they want, then you can always argue that the lost benefit to the future is less than the benefit to the present of eliminating patents. Otherwise, there are so many assumptions in their paper that I more or less discounted it myself.
As to the branding, it is only fraud if the item sold is not the same as the named item, in a world without trademarks. With drugs, it is possible to copy them exactly. In any case, branding is less effective today than it was even a decade ago, and one of the reasons is that patent coverage of marketed drugs has been declining. It is declining because it is taking longer to bring a drug all the way through development. In a world without patents, there will be far less time to build brand loyalty, even in a world with trademarks. I think the paper vastly overestimates what branding will be worth in a world without patents.
Companies won't abandon a drug as a dud if it can't cover the cost of capital, the drug won't get discovered at all. This is not the situation you compared it to where a drug gets abandoned. What won't get discovered includes the drugs that would have made it to market and added to social welfare.
Like you, I find many drugs to be basically worthless, but this is not always true, or even true for a majority of drugs that are sold. Many really do make life better for many people, and make life longer for many people. We can agree that there may be better ways of living that won't require such necessary drugs, but not everyone can live this way.
Posted by: Yancey Ward at Jul 29, 2007 12:31:53 AM
Yancey,
The discount rate they use is deeply flawed, as the whole paper. I'm shocked that it could get published.
Branding may be less effective now, as you say; surely drug regulation has something to do with the longer time you cite to develop a drug.
You say:
Companies won't abandon a drug as a dud if it can't cover the cost of capital, the drug won't get discovered at all. This is not the situation you compared it to where a drug gets abandoned. What won't get discovered includes the drugs that would have made it to market and added to social welfare.
There was an interesting article in a recent business magazine (Business Week or Fortune, I think) about how Merck is changing its business model by encouraging scientists and marketing people to work together more closely all the way from the beginning to the end. The idea is to embrace failure, so the whole team can identify duds and kill them before they do real damage, and then more on to something better more quickly than before.
So I disagree with your statement that they won't abandon a drug if they can't cover their coc; on the contrary, it's imperative that they do so quickly. If I were the CFO of a drug firm, that would be a big initiative. Drug discover per se has nothing to do with whether they can cover their coc, which is a longer term question that involves marketing, etc.--things that are not tied into R&D per se.
Drugs that can't cover their coc shouldn't make it to market, in my view.
Lastly, I agree that some drugs are good, but not all drugs. There's no doubt that lots of drugs are bad. Vioxx anyone?
Posted by: Bill Stepp at Jul 29, 2007 7:35:52 AM
Check this out:
http://www.businessweek.com/magazine/content/07_32/b4045052.htm
The article concludes that "with echinacea, it's impossible to know who is right."
So let the market decide, and fire the regulators. If drug firms want to do their own trials, fine. The certainly would--or face the wrath of the market and the law (not the law works well, but then it is a government monopoly).
Posted by: Bill Stepp at Jul 29, 2007 8:54:41 AM
Bill Stepp,
We are misunderstanding each other. If the expected return falls below a certain level for the final products, the research to discover them won't even be started, and the company will invest capital in some other business activity. This is different from deciding that a particular project has no hope of recovering it's up from costs.
The Business Week article you wrote about is really nothing particularly new. No project goes forward without close involvement with the business side to determine if there is even a profitable market to be served. The only real "new" idea in the article was to encourage the project teams themselves to step up and recommend termination rather than plug along waiting for management to kill the program for them. There is a natural human tendency to not want to give up on something you have personally worked on, but unsuccessfully. I have personal experience with this in pharmaceutical research on more than one occassion. However, we have always been encouraged to accept failure and terminate or regroup and redirect. So, even this aspect is not particularly new to me (No, I don't work at Merck). Yes, reducing the numbers of failures, or shortening the work done on such projects, can lead to an overall lowering of the required rate of return, but it will probably never be possible to eliminate even half the failures that early-biological systems are damnably difficult to predict.
Also, it isn't the regulatory process that is responsible for the shorter patent lifes of drugs on the market. Indeed, the approval process is significantly shorter today than it was 15 years ago. The shorter life is due to the longer discovery/development process in research. The biological screens that molecules must pass to advance to the clinic is significantly more extensive than it was 15 years ago. We do this to sort out the bad apples before they reach the really expensive stages of research, but the downside is that fewer and fewer compounds get advanced, and you spend more time starting over at previous squares. This is also one of the reasons the numbers of new, approved drugs has been falling in recent years. And we are adding new screens every year, so the effective patent life is likely to get shorter still. I don't have any data yet that can show the percentage of failures in late-stage development is any less, but they are probably lower in absolute numbers, just like the successful drugs.
Posted by: Yancey Ward at Jul 29, 2007 12:36:18 PM
Damn, that should have read "up front costs", not "up from".
Posted by: Yancey Ward at Jul 29, 2007 12:37:32 PM
If the expected return falls below a certain level for the final products, the research to discover them won't even be started, and the company will invest capital in some other business activity. This is different from deciding that a particular project has no hope of recovering it's up from costs.
Not necessarily true. Surely drug researchers do lots of research on quirky long shots, no doubt sometimes even without their bosses knowledge, just as Googlers are required or at least encouraged to spend something like 10-20% of their time on stuff of personal interest that has no corporate mandate. Some of these have resulted in products, such as Google Finance.
How many drugs resulted from research that wasn't mandated, or even known about initially, by the suits upstairs? Lots, I'd wager. Probably some drugs had no formal financial models behind them either, at least to start.
The BW article seems to be about formalizing failure. The other article I alluded to (which is better, but unfortunately I can't find it) emphasized that failure is ok, as in anything else, as long as you watch it and not let it get out of hand. No pain, no gain, if you will, but feel the pain. "I feel your pain," as a politician once said. (Bring him back!)
I'm guessing that the advances in personalized medicine will eliminate some of the failures. My understanding is that computer models, etc. (and open source?) will reduce the time/cost of research (as well as development and manufacturing).
We do this to sort out the bad apples before they reach the really expensive stages of research, but the downside is that fewer and fewer compounds get advanced, and you spend more time starting over at previous squares. This is also one of the reasons the numbers of new, approved drugs has been falling in recent years. And we are adding new screens every year, so the effective patent life is likely to get shorter still.
There is a tradeoff, as you say, but I don't see it as a downside, particularly if it culls duds and deadends faster than before. Presumably the marginal benefit of this method is > than the marginal cost, else it wouldn't be used. So the downside has to be valued at less than the upside, at least ex ante.
Posted by: Bill Stepp at Jul 29, 2007 4:50:50 PM
