The Virtues of Single-Payer Health Care

Paul Krugman writes about the virtues of single-payer:

Pride, Prejudice, Insurance - New York Times: Employment-based health insurance is the only serious source of coverage for Americans too young to receive Medicare and insufficiently destitute to receive Medicaid, but it's an institution in decline. Between 2000 and 2004 the number of Americans under 65 rose by 10 million. Yet the number of nonelderly Americans covered by employment-based insurance fell by 4.9 million.

The funny thing is that the solution - national health insurance, available to everyone - is obvious. But to see the obvious we'll have to overcome pride - the unwarranted belief that America has nothing to learn from other countries - and prejudice - the equally unwarranted belief, driven by ideology, that private insurance is more efficient than public insurance.

Let's start with the fact that America's health care system spends more, for worse results, than that of any other advanced country. In 2002 the United States spent $5,267 per person on health care. Canada spent $2,931; Germany spent $2,817; Britain spent only $2,160. Yet the United States has lower life expectancy and higher infant mortality than any of these countries. But don't people in other countries sometimes find it hard to get medical treatment? Yes, sometimes - but so do Americans. No, Virginia, many Americans can't count on ready access to high-quality medical care.... Americans are far more likely than others to forgo treatment because they can't afford it. Forty percent of the Americans surveyed failed to fill a prescription because of cost. A third were deterred by cost from seeing a doctor when sick or from getting recommended tests or follow-up.

Why does American medicine cost so much yet achieve so little?... The U.S. system is much more bureaucratic... because private insurers and other players work hard at trying not to pay for medical care. And our fragmented system is unable to bargain... for lower prices. Taiwan, which moved 10 years ago from a U.S.-style system to a Canadian-style single-payer system, offers an object lesson in the economic advantages of universal coverage. In 1995 less than 60 percent of Taiwan's residents had health insurance; by 2001 the number was 97 percent. Yet... this huge expansion in coverage came virtually free: it led to little if any increase in overall health care spending beyond normal growth due to rising population and incomes.... The economic and moral case for health care reform in America, reform that would make us less different from other advanced countries, is overwhelming. One of these days we'll realize that our semiprivatized system isn't just unfair, it's far less efficient than a straightforward system of guaranteed health insurance.

Comments

[anne]

http://krugman.page.nytimes.com/

November 7, 2005

On 'Pride, Prejudice, Insurance'

Lynne Koester, Yuba City, Calif.: Would it be feasible to convert Medicare into a national health insurance system? I realize that its present per-patient cost is high because of the age of those who qualify for Medicare, but if the pool were enlarged by including most all Americans, wouldn't the per-patient cost decrease? By eliminating the profits built into private health insurance companies, we could save even more money. Plus, when ill, many uninsured people presently use a hospital emergency room because they do not have medical insurance, but if they were covered by a national health insurance, they could be treated in a doctor's office, which is less costly than a hospital.

Paul Krugman: Yes, indeed. One way to implement national health care would simply be to expand Medicare to everyone.

Of course, doing that would require additional funds, probably in the form of an increase in the payroll tax. And that would elicit howls from the right. But the apparent rise in tax rates would be an illusion: it would simply substitute an explicit tax for the implicit tax that companies and workers pay in the form of insurance premiums. Given international experience, I have no doubt that overall spending on health care would actually fall, and that job creation would actually rise, after the supposed tax increase.

It's a simple solution, building on a program that we already know works. It would make the vast majority of Americans better off. And it's considered a complete non-starter politically. Now why is that?

[anne]

http://krugman.page.nytimes.com/

November 7, 2005

Notes on International Comparisons of Health Care

Some readers may want to follow up on my Nov. 7 column on international comparisons of health care. Here are a few useful links.

Trends in employer-based insurance: The underlying data come from the Census. Here is a shorter, useful summary of the data.(pdf).

International comparisons of health spending: The Factbook of the Organization for Economic Cooperation and Development, an international research organization supported by member governments, is available at www.sourceoecd.org. It provides comparative data on many economic, environmental, and social trends. Data on health care spending per capita are measured using “purchasing power parities” – that is, they are adjusted for international differences in the cost of living.

Two things stand out. First, the United States is off the scale in terms of the amount we spend per person. Second, the U.S. system is unique in its reliance on private spending.

Quality of Health Care: “Taking the Pulse of Health Care Systems: Experiences of Patients With Health Problems in Six Countries(pdf),” is a new study published in Health Affairs. Check out Exhibits 6 and 7, in particular.

Taiwan: A very interesting study, also online, is “Does Universal Health Insurance Make Health Care Unaffordable? Lessons from Taiwan(pdf).” Since it’s predictable that some of the usual suspects will attack my column by citing newspaper articles about runaway costs in Taiwan, it’s particularly interesting to read the paper’s discussion of how “political theater” – overstating the quite mild financial difficulties of the Taiwanese system – was used to sell a modest increase in premiums.

[anne]

http://economistsview.typepad.com/economistsview/2005/11/krugman_respond.html#comments

Mark Thoma provides Paul Krugman's health care comparison links, and further comment on the column :)

[palinal]

It would seem that you will only get change after a revolution. I just hope it is not too bloody.

[Fred Hapgood]

> Taiwan, which moved 10 years ago from a
> U.S.-style system to a Canadian-style
> single-payer system, offers an object
> lesson in the economic advantages of
> universal coverage...

It takes time for arms races -- in this case the race between the reimburser and the reimbursee -- to gear up; here, to create enough bureaucracy and paperwork for the system to get really dysfunctional. So any system will work ok for a few years. But it beggars common sense to think it will for long, especially here, where a) you are putting two trillion dollars in play, and b) there is an exponentially exploding list of drugs and devices ready to surge out of the pipeline over the next twenty years. There is no way in the world that the government, especially given the fiscal storm bearing down on us, can fund all these goodies for all the people who need them. So they will have to say no, and being Americans, very few of us will take that no as the last word. We will fight to get our procedures approved; the government will fight back the way it always does, by multiplying procedures and paperwork. People think there is some kind of magic distinction between private and public insurance such that moving to public insurance will change the character of the problems. But here as there, over the long term, the war between payer and payee will suck all the value out of the system.

[sm]

Fred Hapgood:

Maybe this would happen in the United States, but that doesn't mean the idea isn't good. It works quite well in Canada, and has for more than a few years.

People always criticize the Canadian system for being less than perfect. I'm not saying it's perfect. Just that it's worked very well for me and for the vast majority of people I know who have had catastrophic health problems.

Note that Canada has a trade surplus AND a fiscal surplus.

[anne]

http://economistsview.typepad.com/economistsview/2005/11/paul_krugman_fi.html

Paul Krugman: Fixing Health Care
By Mark Thoma

With so many companies such as General Motors and Delphi reducing medical benefits, with Wal-Mart's recent plans to cut healthcare costs by screening out high medical cost job applicants, with recent discussions about reducing the government's role in economic security, including healthcare, and with demographic realities in front of us, Paul Krugman examines the most efficient means of satisfying our health needs of the future, and what it will take to get there. He sees two factors standing in the way, prejudice that does not allow us to get over mistaken ideology that the private sector is always more efficient than the government, and the inability to overcome our pride and admit that other countries may have better ideas than we do in this area....

I agree. As discussed extensively at this site, there are important market failures in the provision of social insurance, moral hazard is one problem, adverse selection is another, the inefficiencies from fighting over who pays the bills identified by Krugman is yet another, that make the private sector provision of social insurance less efficient than public sector provision.

[derrida derider]

" There is no way in the world that the government ... can fund all these goodies for all the people who need them"
- Fred Hapgood

I've heard this line often in my own country (Australia) and it has always puzzled me. If government, using comulsory appropriation of individuals' resources (ie taxes) can't afford it, how can the individuals possibly afford it?

And if, per Krugman's argument, this is one of the relatively few cases where it is actually much cheaper for governments to do it than for individuals (because of the severe market failures - you've missed the point of the argument), then in fact the individuals will be *less* able to afford it than the government.

[sm]

The real objections to the single-payer system is that THOSE PEOPLE will get a free ride. You know, "goodies." Goodies should be reserved for "us." We have a god-given right to the fruits of all that medical research, after all.

[anne]

Derrida Derider

"And if, per Krugman's argument, this is one of the relatively few cases where it is actually much cheaper for governments to do it than for individuals (because of the severe market failures - you've missed the point of the argument), then in fact the individuals will be *less* able to afford it than the government."

Terrific....

[trostky]

I'm not fan of big government, but does anybody really love their private insurance company so much better?

Years ago, when FDR (I think) proposed universal health insurance, the American Medical Association fought it like tigers. I wonder what the doctors think today. I know many feel drastically squeezed.

[wogie1]

Extending Medicare to all is not as simple as it sounds. Every dollar earned is taxed. Those with higher income will resist subsidizing those above the poverty line. A flat fee per capita could work maybe.

[sd]

I'm a conservative and a member of the Republican party, yet I am very open to the idea that government should ensure a certain level of healthcare for all citizens, and I willing to pay higher taxes to fund such a move.

But I continue to be frustrated by the very shoddy arguments on the pro-national healthcare side. Take for example, the currently very "hot" meme that the US spends far more than other industrialized nations with far worse results. A classic apples and oranges comparison if there ever was one.

First, yes infant mortality is higher and life expectancy lower in the US than in most comparable countries. But this is largely due to a host of social and behavioral problems that have nothing - nothing whatsoever - with how we finance and run our healthcare system. Americans are more violent, more sedentary, and less likely to eat well than citizens of other industrial nations. We have a large African population at increased genetic pre-disposition for a host of life-shortening chronic ailments. We have a much higher birthrate among low income people who are less likely to be healthy and to seek out medical care. In short, we would expect infant mortality to be higher and life expectancy to be lower in the US even if we had the exact same healthcare system as Canada or Germany.

Second, yes we spend more on a per capita basis on healthcare than other industrialized nations. But a huge proportion of those costs are incurred in the final weeks of life, when Americans routinely order up exceptionally expensive life-prolonging care for their loved ones. There is some evidence (though at this point more anecdotal than systematic) that cultural differences in most of Western Europe make this much less likely to happen. When 80 year old Granny has a stroke in France, the attitude is more likely to be "Let her pass in peace" than "hook her up to $10,000 a week life support system so she can live to see next month." We can argue about where we should draw the line on life-prolonging care - as a society we probably should have that conversation. But changing the way the money flows through the system is simply NOT going to magically change Americans' attitudes about appropriate end of life care.

Further, a large and growing proportion of our healthcare spend funds drugs, which are much cheaper outside the US because national health systems negotiate lower prices. "Aha!" you might say "All we need to do is to nationalize drug benefits and we too can get the benefits of scale purchasing." And I want a pony for Christmas. The fact is, the exhorbitant prices on drugs in the US provide the bulk of the profits needed to cover the costs of capital for pharma companies, which are structurally quite high given the inherent instability of pharma returns. If we implemented the liberals' fantasy policy and bought all drugs through the government at reduced prices, the R&D pipeline would dry up, to one degree or another.

We can argue about the degree to which this will happen, but as sure as I know the sun sets in the west I know this: If you disagree that there would be at least some negative impact on R&D performance from nationalizing drug buying you are an idiot and a fool, and if you even try to quote that ill-informed, economically illiterate Marcia Angell book from a couple years ago, you're a bigger fool still. There is no such thing as a free lunch. Squeezing the drug value chain will impose costs on society, not just on drug company shareholders.

So yes, I am open to national healthcare. Yes, I think a decent and civilized society needs to take care of the health of its citizens, including those who are poor. And yes, I am willing to pay for it.

But the self-congratulatory "reality based community" needs a little dose of reality here. Nationalizing healthcare will be costly. It might very well lower the quality of care for people currently covered under the private insurance system. And it sure as shit won't add two years to American life expectancy, shave 20% off our infant mortality rate, and cut our total healthcare expenditures in half.

[qwerty]

Selfishness too often masquerades as ideology. Too many people look at healthcare in America and simply see nothing wrong.

[Fred Hapgood]

" There is no way in the world that the government ... can fund all these goodies for all the people who need them"
- Fred Hapgood

> I've heard this line often in my own
> country (Australia) and it has always
> puzzled me. If government, using
> compulsory appropriation of individuals' > resources (ie taxes) can't afford it,
> how can the individuals possibly afford
> it?

They can't, obviously. I just don't see how anyone looking even a few years down the road can think for one second that in the world we are entering any form of insurance, public or private, can exist that would give people a uniformly high standard of care. In the old days medical interventions were a rare and unpredictable event and chronic conditions were almost all untreatable. We are moving rapidly into a society in which chronic conditions, of which most of us have at least one distributed over our 80-odd tissues, will require a continuing expenditure. It will be a world in which rich people will be able to justify the expenditure of enormous amounts on their health, and in which the rest of us will all spend as much as we can. (Dwell for two seconds on the cost implications of the slow but steady increase in lifespan.) In this world basic comprehensive coverage with low deductibles makes no sense at all, whether the policy is public or private.

Of course there will always be a role for insurance, but that role will be for conditions that are genuinely rare and genuinely unpredictable, and such conditions are going to represent a diminishing fraction of hc procedures and expenditures. This is not perfectly obvious??

[stewart longman]

SD, I'm trying unsuccesfully to find a recent (last few days), which punctured that convenient myth about drug spending, noting that drug R & D spending is proportionately higher in Europe.
As for infant mortality, I wonder why Aruba and Cuba, with larger segments with African heritage and much less money, manage to come out better in the infant mortality stats than the US. Oh well, the US edges out Croatia (check out the CIA World Factbook for this data).
It is correct that health care will be rationed under any system. Is it better to ration it on the basis of income?

[sd]

stewart:

I'm familiar with the claim. the fact that multi-national pharma companies based in Europe equal or surpass the R&D spending of multi-national pharma companies based in the US (on an absolute or relative basis) is meaningless. Both European and US pharma companies depend on th elucrative US market - free of price controls - to earn their cost of capital.

I have no idea why Cuba and Aruba come out better than the US on infant mortality metrics. Though I suspect that counting differences play a role. A 28 week delivery is a "preemy" in the US - and racks up massive medical bills with uncertain prospects. I'm not so sure that a 28 week delivery isn't a "miscarriage" in Cuba.

I agree that our current system of healthcare rationing - based on income - is sub-optimal, probably immoral. And thus, as I said twice in my post, I would support nationalized healthcare (at least, nationalized healthcare done right), and would be willing to pay quite a bit in extra taxes to make such a system a reality. But the "we can get better healthcare at half the cost because there is $2000-$3000 in annual insurance company paperwork for every man woman and child in the US" argument is silly, shallow and wrong. I mean, think about it for a minute. Nationalizing healthcare will help control some costs - the horribly inefficient use of emergency rooms for non-emergency care by the uninsured for example - but will almost certainly lead to other costs esclating (c.f. the original cost estimates of the Medicare program compared to realized costs). And nationalizing healthcare will probably lower quality of care, all thing being equal, for the currently insured. I myself am willing to give up .5 years of life expectancy to add 1 year of life expectancy to the uninsured - but make no mistake, there is a real tradeoff to be made.

[Martin James]

The reason that we don't have national healthcare is that the uninsured are not an interest group and are not a significant voting block. There just is no meaningful group of voters for whom national healthcare is a swing issue.

Another point about national healthcare is that it is not necessarily a progressive redistribution of income. Either a flat tax or a payroll tax would decrease the net income level of the currently uninsured.

The reason is that most of the uninsured tend to be young people who have low healthcare expenses. They would have an increase in taxes without much increase in healthcare benefits.

[Carol]

"We have a large African population at increased genetic pre-disposition for a host of life-shortening chronic ailments. We have a much higher birthrate among low income people who are less likely to be healthy and to seek out medical care." sd

umph....and this is an argument to prove that the US infant mortality rate is due to choice I suppose, as opposed to lack of adequate health care? Let us not forget that England, France and Italy have a large population of persons of Black African descent too, and yet those people are on the average healthier than in the US. I don't think an assertion of violence and sedentary lifestyles explains infant mortality rates either.

The supposedly heavy investment of Big Pharma in research is a mirage of advertising, which is what Big Phrma actually invests in. Most of the research in the US is done on university campuses and funded by the good old government which is otherwise too inefficient to do anything except hand over the results to pharmaceutical firms which then figure out how to patent and make big profits from these discoveries (a little research on the part of our dear readers will show quite a few recent medical discoveries started on university campuses and got "improved" by patenting etc later). It is a delusion that Americans have that research by private industry only occurs here in the US because private industry is allowed to make horrendous profits as a reward for risk taking. Research is subsidized by tax incentives in Europe, and they too have discoveries and results. The irony here, of course, is that none of their research is considered valid in the US, instead is required to be duplicated and proven to the FDA and then protected with a patent here in the US before it can be used.

I think we have a system of perverse incentives, and they have very little to do with single payer insurance and a whole lot to do with mental bugbears that burden us here in the US.

Perhaps we should become like the Finns, and decide that a country that has a large population of poor, ill, suffering people is not a country that can progress and make full use of the talents of its citizens. That takes a triumph of moral will that Americans seem to not have the stomach for.

[Fred Hapgood]

> It is correct that health care will be
> rationed under any system. Is it better
> to ration it on the basis of income?

The argument for rationing by income is that the benefits don't get sucked out of the system. Rationing by deliberate decision triggers a war between reimbursor and reimbursee that over time burns up more and more of the value. Think of the difference in the paperwork between getting a government grant (like an NSF grant) today and getting one thirty years ago. For those of you who remember that far back.
If you ration by income the nexus of value
determination is inside one person, and people do not sue themselves.

[sd]

Carol,

People of African ancestry make up about 2% of the British population. In the US its more like 10-12%. The difference matters. Black Africans are at greater risk of heart disease, hypertension and stroke. There is a large non-Caucasian population in many European countries (though still much smaller than the racial minority population in the US), but it is composed mainly of people of Arab and Turkic ancestry, which, as far as I know, is not associated with elevated levels of chronic disease. Again, my point is simply that it is dangerous to compare aggregate health outcomes from country to country and then determine that whatever differences exist in the systems "explains" the difference in outcomes.

Private pharma companies invest billions of dollars every year in drug R&D. This is a fact, and it is indisputable. Under certain economically invalid accounting assumptions, large pharma companies can be shown to spend more on marketing than on R&D. To arrive at this conclusion, we would need to ignore the capital costs of R&D (something the economically illiterate Marcia Angell does in the book referenced above), while simultaneous counting the full market value of free samples of drugs given to doctors as a marketing expense. But let's assume that this dubious proposition is true. So What? The question remains - if we cut drug company profits by subjecting them to cartel buying power, will they still find it worthwhile to invest in R&D? The answer is clearly no - at least to some degree. Making it more difficult for drug companies to earn profits on the sale of new drugs will cause them to slash both R&D and marketing spend.

As to your point about the origin of medical discoveries. Yes, it is certainly true that the basic science underlying most drug discovery comes out of university and government labs. But what comes out of university and government labs is almost never medically useful. It takes years of development and testing research - something that drug companies are very good at but that universities and governments are not at all good at - to take a discovery from the lab bench to the bedside.

On the flip side, private enterprise is not very good at basic science research. We have been very well served by the current system in which universities and government labs are encouraged to licence medically promising compounds to pharma companies which then do the years of R&D grunt work to develop them into useful drugs. Well served to the point that the past 25 years of drug research have been more productive than the rest of human history.

[Mandos]

Pride? Umm, whose pride? I'd really like to see someone poll the public and ask them whether they are proud of the US healthcare system. Some may be fatalistic about it, may think that there can be nothing better, but PROUD? Really? If there's anyone who is proud, it's the political classes of the US. Understanding this is key to understanding many debates in the USA.

Anyway, I think part of the problem is the peculiar American obsession (among the political classes) with moral hazard.

[Michael Cain]

"The reason that we don't have national healthcare is that the uninsured are not an interest group and are not a significant voting block. There just is no meaningful group of voters for whom national healthcare is a swing issue."

My usual prediction is that we're ten years or so away from health insurance reform. The interest group that will emerge by that point is those aged 55-64, who will find themselves in the same boat that led to the creation of Medicare to cover those aged 65+: more than half of that group will be unable to purchase individual coverage at any price due to risk avoidance on the part of the insurance companies, and the remainder who can theoretically get coverage will mostly be priced out of it. Enough younger voters will go along once they realize that it's their moms and dads who are dying because they can't get insurance...

[Fred Hapgood]

"The reason that we don't have national healthcare is that the uninsured are not an interest group and are not a significant voting block."

The reason we don't have national healthcare is that it would essentially double the size of the government. We spend nearly two trillion dollars a year on hc right now; lord nows what that figure will be in five years. Our federal budget is about the same and is half a trillion out of balance. We need to double the present tax take to pay for this item. At least. Politically speaking, this is surely a total fantasy. There is considerable opinion that the drug benefit is unsustainable, and in the context of national health care that would barely be visible.

[Mandos]

The drug benefit is unsustainable because it's a fraud. There really is a simple measure of the sincerity of a drug benefit: how much it is expected to reduce pharma industry profits? Does anyone claim that the drug benefit seriously does this?

Yes, it really is a zero-sum game!

[Quartz]

sd

I have to agree with others that your own statements undercut your argument that our health care system has *nothing* to do with lower life expectancy and higher infant mortality. The very people you argue are bringing the U.S. averages down are those with the least access to health care. Providing them better access is almost certainly going to increase their life expectancy and infant motality can be dramatically improved with better pre-natal care.

[Dale]

All decent people understand the moral case for universal health care. Now with Krugman and others making the case that we could actually rationalize our economy by doing so- and add Dean Baker's ideas of nationalizing Rx research, thus putting Rx patents in the public realm- then the moral case and the economic rationalization case are finally converging.

Perhaps the only thing keeping us from being both good and smart is ideology, disguised by pride and prejudice.

[sd]

Quartz,

I've never said that our healthcare system has nothing to do with our healthcare outcomes. I'm simply suggesting that our healthcare outcomes are also influenced by other factors that are completely independent of our healthcare system and that would continue to influence our outcomes even if we made a wholesale change to the system. And thus, its foolish at best and dishonest at worst to simply compare outcomes from country to country and say that any observed differences are driven entirely by the differences in the healthcare systems between those countries.

Yes, black people are more likely to be poor and thus more likely to lack access to healthcare. But middle and upper class blacks are still at an elevated risk of a variety of common and costly dieases compared to whites and Asians with the same socio-economic profiles due to genetic factors. Replace 10% of the population of France with people of sub-Saharan African heritage and life expectancy will be lower there than it is today. Period.

Americans have a different genetic mix than the Canadians, the Germans, the Japanese, the British, etc. And that matters in determining healthcare outcomes.

More importantly though, Americans have very different lifestyles from citizens of other industrialized nations. We eat more saturated fat and sugar, exercise less, have more babies, drive more often, drive drunk a lot more often, and shoot each other with greater glee than people in most other nations. All of these things bring down life expectancy. And none of them will change if we went to a single-payor healthcare system.

I am no fan of our current system, and would be quite open to moving to a nationalized system (as I said repeatedly in my posts above). But given all the things that Americans do to put their life and limb at risk, its amazing that the gap in life expectancy between Americans and Europeans isn't greater still. Perhaps our current system, while unjust to the uninsured, isn't doing a bad job at all at providing for the health of the insured.

[Isabel]

Am I the only one that reads sd's arguments as mistaking causes for effects, or vice-versa? You can't possible imagine that other countries don't have their own genetic, life-style, etc issues. The whole point is that they try to tackle them, instead of considering them a curse of God. Talking about Finns, you should read about how they reversed their horrendous cardio-vascular mortality rate in a couple of years (or maybe decades). I could try to dig in the archives of the Guardian or the Observer to show you that very interesting tale. Of course, a reversal like that requires that a society puts a very high price in saving the lives of as many of its citizens as it can, instead of leaving them to their genetic fate or bad habits.

[liberal]

Socialized medicine---the *provision* of medicine, not just medical insurance (so-called "national health insurance")---is inevitable for reasons of economic efficiency. This follows from the unique nature of the health care market, as made clear from this excerpt from Phillip Longman, "The best care anywhere," _Washington Monthly_, Jan/Feb 2005, pp. 39--48,
URL: http://www.washingtonmonthly.com/features/2005/0501.longman.html [note: VHA = Veterans Health Administration]

--------------------------------------begin excerpt-----------------------------------------------------

Why care about quality?

Here's one big reason. As Lawrence P. Casalino, a professor of public health at the University of Chicago, puts it, “The U.S. medical market as presently constituted simply does not provide a strong business case for quality.”

Casalino writes from his own experience as a solo practitioner, and on the basis of over 800 interviews he has since conducted with health-care leaders and corporate health care purchasers. While practicing medicine on his own in Half Moon Bay, Calif, Casalino had an idealistic commitment to following emerging best practices in medicine. That meant spending lots of time teaching patients about their diseases, arranging for careful monitoring and follow-up care, and trying to keep track of what prescriptions and procedures various specialists might be ordering.

Yet Casalino quickly found out that he couldn't sustain this commitment to quality, given the rules under which he was operating. Nobody paid him for the extra time he spent with his patients. He might have eased his burden by hiring a nurse to help with all the routine patient education and follow-up care that was keeping him at the office too late. Or he might have teamed up with other providers in the area to invest in computer technology that would allow them to offer the same coordinated care available in veterans hospitals and clinics today. Either step would have improved patient safety and added to the quality of care he was providing. But even had he managed to pull them off, he stood virtually no chance of seeing any financial return on his investment. As a private practice physician, he got paid for treating patients, not for keeping them well or helping them recover faster.

The same problem exists across all health-care markets, and its one main reason in explaining why the VHA has a quality performance record that exceeds that of private-sector providers. Suppose a private managed-care plan follows the VHA example and invests in a computer program to identify diabetics and keep track of whether they are getting appropriate follow-up care. The costs are all upfront, but the benefits may take 20 years to materialize. And by then, unlike in the VHA system, the patient will likely have moved on to some new health-care plan. As the chief financial officer of one health plan told Casalino: “Why should I spend our money to save money for our competitors?”

Or suppose an HMO decides to invest in improving the quality of its diabetic care anyway. Then not only will it risk seeing the return on that investment go to a competitor, but it will also face another danger as well. What happens if word gets out that this HMO is the best place to go if you have diabetes? Then more and more costly diabetic patients will enroll there, requiring more premium increases, while its competitors enjoy a comparatively large supply of low-cost, healthier patients. That's why, Casalino says, you never see a billboard with an HMO advertising how good it is at treating one disease or another. Instead, HMO advertisements generally show only healthy families.

In many realms of health care, no investment in quality goes unpunished. A telling example comes from semi-rural Whatcom County, Wash. There, idealistic health-care providers banded together and worked to bring down rates of heart disease and diabetes in the country. Following best practices from around the country, they organized multi-disciplinary care teams to provide patients with counseling, education, and navigation through the health-care system. The providers developed disease protocols derived from evidence-based medicine. They used information technology to allow specialists to share medical records and to support disease management.

But a problem has emerged. Who will pay for the initiative? It is already greatly improving public health and promises to bring much more business to local pharmacies, as more people are prescribed medications to manage their chronic conditions and will also save Medicare lots of money. But projections show that, between 2001 and 2008, the initiative will cost the local hospital $7.7 million in lost revenue, and reduce the income of the county's medical specialists by $1.6 million. An idealistic commitment to best practices in medicine doesn't pay the bills. Today, the initiative survives only by attracting philanthropic support, and, more recently, a $500,000 grant from Congress.

For health-care providers outside the VHA system, improving quality rarely makes financial sense. Yes, a hospital may have a business case for purchasing the latest, most expensive imaging devices. The machines will help attract lots of highly-credentialed doctors to the hospital who will bring lots of patients with them. The machines will also induce lots of new demand for hospital services by picking up all sorts of so-called “pseudo-diseases.” These are obscure, symptomless conditions, like tiny, slow-growing cancers, that patients would never have otherwise become aware of because they would have long since died of something else. If you're a fee-for-service health-care provider, investing in technology that leads to more treatment of pseudo-disease is a financial no-brainer.

But investing in any technology that ultimately serves to reduce hospital admissions, like an electronic medical record system that enables more effective disease management and reduces medical errors, is likely to take money straight from the bottom line. “The business case for safety…remains inadequate…[for] the task,” concludes Robert Wachter, M.D., in a recent study for Health Affairs in which he surveyed quality control efforts across the U.S. health-care system.

If health care was like a more pure market, in which customers know the value of what they are buying, a business case for quality might exist more often. But purchasers of health care usually don't know, and often don't care about its quality, and so private health-care providers can't increase their incomes by offering it. To begin with, most people don't buy their own health care; their employers do. Consortiums of large employers may have the staff and the market power necessary to evaluate the quality of health-care plans and to bargain for greater commitments to patient safety and evidence-based medicine. And a few actually do so. But most employers are not equipped for this. Moreover, in these days of rapid turnover and vanishing post-retirement health-care benefits, few employers have any significant financial interest in their workers' long-term health.

That's why you don't see many employers buying insurance that covers smoking cessation programs or the various expensive drugs that can help people to quit the habit. If they did, they'd be being buying more years of healthy life per dollar than just about any other way they could use their money. But most of the savings resulting from reduced lung cancer, stroke, and heart attacks would go to future employers of their workers, and so such a move makes little financial sense.

Meanwhile, what employees value most in health care is maximum choice at minimal cost. They don't want the boss man telling them they must use this hospital or that one because it has the best demonstrated quality of care. They'll be their own judge of quality, thank-you, and they'll usually base their choice on criteria like: “My best friend recommended this hospital,” or “This doctor agrees with my diagnosis and refills the prescriptions I want,” or “I like this doctor's bedside manner.” If more people knew how dangerous it can be to work with even a good doctor in a poorly run hospital or uncoordinated provider network, the premium on doctor choice would be much less decisive, but for now it still is.

And so we get results like what happened in Cleveland during the 1990s. There, a well-publicized initiative sponsored by local businesses, hospitals and physicians identified several hospitals as having significantly higher than expected mortality rates, longer than expected hospital stays, and worse patient satisfaction. Yet, not one of these hospitals ever lost a contract because of their poor performance. To the employers buying health care in the community, and presumably their employees as well, cost and choice counted for more than quality. Developing more and better quality measures in health care is a noble cause, but it's not clear that putting more information into health-care markets will change these hard truths.

[lise]

A racial-genetic argument is needless, and supporting data is in any case not persented, so I suggest thinking through any such argument again then returning to and citing relevant data in another argument entirely.

[lise]

Isabel:

"Am I the only one that reads sd's arguments as mistaking causes for effects, or vice-versa? You can't possible imagine that other countries don't have their own genetic, life-style, etc issues. The whole point is that they try to tackle them, instead of considering them a curse of God. Talking about Finns, you should read about how they reversed their horrendous cardio-vascular mortality rate in a couple of years (or maybe decades)."

Thank you for this comment, I was trying to think of a way to respond in a temperate manner to the needless racial-genetic generalization.

[Wow]

A high quality discussion here. Thanks to all.

[No Preference]

"I was trying to think of a way to respond in a temperate manner to the needless racial-genetic generalization."

Not to mention the fact that Cuba, with 2/3 of the population of African descent, matches us in life expectancy and infant mortality.

Opponents of national health insurance have a bad explanation for everything. What they can't explain away is the fact that in countries with national health insurance people are happy with it. Whereas here . . .

[anne]

No Preference:

"Not to mention the fact that Cuba, with 2/3 of the population of African descent, matches us in life expectancy and infant mortality."

Matches us, although income levels are far far below ours. Again, a fine rebuttal to a deceptive argument. We generally pay more than necessary, for a poorer general health outcome than necessary.

[Roger Albin]

For a skeptical and cogent view of the claim that high US drug prices are needed for proper R&D, see http://bmj.bmjjournals.com/cgi/content/full/bmj;331/7522/958 (you probably need a subscription but most University Libraries will have access).
For the claim that African-Americans are intrinsically prone to chronic diseases, I'd like to see real peer-reviewed data, as opposed to simple prevalence statistics which don't really address this claim.
Finally, the statement that the last 25 years has been a golden age for drug discovery is simply wrong. Investigational New Drug (IND) applications to the FDA have been falling for a number of years. While some important new classes of agents have been introduced, notably statins, others, like antibiotic development, have languished. Overall, Big Pharma has not done an outstanding job of producing significant new products, there has been a lot of me too drug development, and the pipeline doesn't look great.

[Randy]

Medical care in the US is expensive because of the licensing requirements for health care providers and the approval process for drugs. In short, prices are high because competition is severely limited. The costs associated with the medical insurance system are very small in comparison to the cost of restricted competition. So the consumers are doing the only thing they can do. They are treating themselves. If you all really want to lower the costs of medical care, then let people practice medicine without a license. Yes, there will be some costs - but nothing compared to the costs of restricting competition.

[Cranky Observer]

> If we implemented the liberals' fantasy
> policy and bought all drugs through the
> government at reduced prices, the R&D
> pipeline would dry up, to one degree or
> another.

Absolutely. Just as it would be impossible for the US Federal Government to create and maintain a National Weather Service, employing many high-quality PhDs and all-around dedicated weather geeks who are self-motivated to do high-quality research and provide exceptional, cost-effective services to all citizens for solid-but-not-extreme salaries. Couldn't happen - without the hope of $5 million bonuses those rocket scientists would never work hard. In fact, if any such Service exists we had better privitize it off right quick before it does actual negative work!

Cranky

[Cranky Observer]

Less snarkily, who is going to continue to pay those high US prices for new drugs? Historically new drugs were permitted by the top-tier health plans at places like GM, General Electric, IBM, etc. But those top-tier plans are evaporating along with unions and defined-benefit pension plans. A few Silicon Valley firms still offer them, but for the most part all the big plans are in massive cost-cutting mode (see Express Scripts and the statin war, for example). I see the pipeline for 100% reimbursement drying up a lot faster than the pipeline for NIH-funded drug research.

Cranky

[anne]

Roger Albin rightly questions the extent to which the last 25 years have included signal progress in drug development. However there has been a marked change in drug company profitability in the last 25 years. In 1980, drug companies gained the right to patent drugs that were developed with public funds or in public facilities. This led to soaring returns on equity and profits for drug companies, as prices for drugs increased far faster than general prices. Interestingly, however, along with price increases there has been no corresponding increase in "new" drug development. Rather large numbers of drugs developed are slight modifications of existing drugs that can be newly patented.

[Isabel]

A while ago Angry Bear ran a serious of posts and a very heated discussion on this subject. If pride doesn't prevent you from doing some international comparisons (like, spending per capita, in what, with which demographical results, etc), you'll find a lot of instructive graphics and links at http://www.angrybear.blogspot.com/ (check on the left column, The US Healthcare System). They might, or might not, quash your prejudices.

[anne]

http://www.nytimes.com/2004/09/14/health/policy/14conv.html?ex=1252900800&en=fe413194a662c12b&ei=5090&partner=rssuserland

September 14, 2004

A Doctor Puts the Drug Industry Under a Microscope
By CLAUDIA DREIFUS

Q. The pharmaceutical companies say their prices are steep because they spend somewhere in the neighborhood of a billion dollars per drug bringing them to market. Did your research support this assertion?

A. A group of economists - mainly funded by the drug companies - came up with the widely quoted figure on this. They said that it cost $802 million to bring a drug out. They, however, were looking at the most expensive drugs to develop: new chemical compounds developed entirely in house. Most new drugs aren't that at all. Most are what people call "me too" drugs, which are slight variations of older drugs already being sold.

According to these economists, the real cost of bringing out those rare original drugs is actually around $403 million. But they doubled it by factoring in how much money the companies might have earned if they'd invested that $403 million. Moreover, the economists did not figure into their total the many generous tax breaks these companies receive for doing research and development. This is a highly inflated figure.

The fact is that for the last two decades the drug companies have been hugely profitable. Last year there was a little wiggle downward, but in 2002, the 10 biggest American drug companies had a median profit of 17 percent of sales compared to a median of 3 percent for the other Fortune 500 companies. In the 1990's, profits ran between 19 and 25 percent. Prices are high to keep profits high....

[anne]

http://www.nytimes.com/2004/09/14/health/policy/14conv.html?ex=1252900800&en=fe413194a662c12b&ei=5090&partner=rssuserland

[Marcia Angell interviewed.]

Q. Exactly what are these "me too" drugs you argue against?

A. They are minor variations of old drugs already on the market. Sometimes a company creates a "me too" drug as a way of extending a patent on an older one. For example, AstraZeneca created Nexium to replace the virtually identical Prilosec when its patent was about to expire. By putting out these me-too's, the companies can get new exclusive marketing rights on what are essentially the same old drugs.

Other companies come in with their own me-too's because markets are expandable. It's been shown that when you advertise one me-too drug, you increase the sales of all of them.

Q. Why do you have a problem with this?

A. The prevalence of the me-too's really says an awful lot about the lack of innovation within the pharmaceutical industry. If you look at the new drugs marketed over the last six years, 78 percent weren't even new chemical compounds. They were just new combinations or different formulations of old drugs. And 68 percent were classified by the F.D.A. as unlikely to be improvements over drugs already on pharmacy shelves.

At the same time, there are shortages of some important drugs that the pharmaceutical companies aren't much interested in making because they are not as profitable as the me-too's. But the companies don't have to turn out needed drugs, if they are not lucrative. And they don't....

[anne]

http://www.nytimes.com/2004/09/14/health/policy/14conv.html?ex=1252900800&en=fe413194a662c12b&ei=5090&partner=rssuserland

Q. How much of the high cost of drugs is the result of marketing and sales expenditures?

A. The companies spend over 30 percent of their revenues on marketing and administration. Their marketing budgets are so enormous because they have to persuade doctors and patients to prescribe one me-too drug over another. If you had a truly innovative drug - a cure for cancer, for instance - you wouldn't have to market it much. The world would beat a path to your door....

[anne]

http://www.nytimes.com/2004/09/06/books/06masl.html?ex=1252209600&en=1accf3fe4a08f287&ei=5090&partner=rssuserland

September 6, 2004

Indicting the Drug Industry's Practices
By JANET MASLIN

But over all, Dr. Angell's case is tough, persuasive and troubling. Arguing that in 1980 drug manufacturing changed from a good business into "a stupendous one," thanks to changes in government regulations. She adds, "Of the many events that contributed to their sudden great and good fortune, none had to do with the quality of the drugs the companies were selling."

In the past, drug discoveries made through government research remained in the public domain. Beginning in 1980 those breakthroughs could be patented, even if their research was sponsored by the National Institutes of Health. As a consequence, Dr. Angell says, patent shenanigans have reshaped the drug business, as have the recent government regulations that expedite direct-to-consumer drug advertising. "Once upon a time, drug companies promoted drugs to treat diseases," Dr. Angell writes. "Now it is often the opposite. They promote diseases to fit their drugs." ...

[pfc]

I'm struck by the apparent disregard that opponents of reducing America's cost for drugs have for the fact that we are subsidizing the rest of the world. Especially given that there seems to be a correlation between those who argue against reducing America's cost for drugs and those who are strongly anti-internationalism.

Given the current system, where American's are prevented from using the power of the government to bring down drug prices, but the rest of the world is, we are paying for research that the rest of the world benefits from. (Now I don't have much of a problem with this, I think we have an obligation to do so, though I'd rather do it through universities than funding corporate profits, but...)

But, SD, for instance, why are you so comfortable with subsidizing the health care of the rest of the world?

[anne]

October, 2005

The Myth of Foreign free riders and the high price of US medicines
British Medical Journal*

The United States government is engaged in a campaign to characterise other industrialised countries as free riding on high US pharmaceutical prices and innovation in new drugs....

The campaign, strongly backed by the pharmaceutical industry, seems to have started in the late 1990s as a response to a grass roots movement started by senior citizens against the high prices of essential prescription drugs. This issue was the most prominent one for both parties in the 2000 elections and has since been fuelled by a series of independent reports documenting that US drug prices are much higher than those in other affluent countries....

We can find no convincing evidence to support the view that the lower prices in affluent countries outside the United States do not pay for research and development costs. The latest report from the UK Pharmaceutical Price Regulation Scheme documents that drug companies in the United Kingdom invest proportionately more of their revenues from domestic sales in research and development than do companies in the US. Prices in the UK are much lower than those in the
US yet profits remain robust.

Companies in other countries also fully recover their research and development costs, maintain high profits, and sell drugs at substantially lower prices than in the US....

[I have no convenient HTML address.]

[anne]

http://bmj.bmjjournals.com/cgi/content/extract/331/7522/958

The United States government is engaged in a campaign to characterise other industrialised countries as free riding on high US pharmaceutical prices and innovation in new drugs.1 This campaign is based on the argument that lower prices imposed by price controls in other affluent countries do not pay for research and development costs, so that Americans have to pay the research costs through higher prices in order to keep supplying the world with new drugs.1 2 Supporters of the campaign have characterised the situation as a foreign rip-off.3 We can find no evidence to support these and related claims, and we present evidence to the contrary. Furthermore, we explain why the claims themselves contradict the economic nature of the pharmaceutical industry.

[anne]

Drug companies operate at significant profit through Europe, Canada, Australia, Japan.... There is no reason to believe that we are subsidizing the health care of Sweden or Denmark or Australia.

[Cranky Observer]

> I'm struck by the apparent disregard that
> opponents of reducing America's cost for
> drugs have for the fact that we are
> subsidizing the rest of the world.
> Especially given that there seems to be a
> correlation between those who argue against
> reducing America's cost for drugs and those
> who are strongly anti-internationalism.

Becuase price differentiation by market, and rent-capturing in general, are normal and expected features of competitive microeconomic markets?

Cranky

[anne]

http://www.sims.berkeley.edu/~hal/people/hal/NYTimes/2000-09-21.html

September 21, 2000

Examining 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....

[sd]

All of the arguments I've seen (and I've seen quite a few) suggesting that pharma companies earn outsized profits are based on fundamental misunderstandings of accounting and economics.

A company can finance its operations in one of two ways: through equity or through debt. There is a very real and very significant economic cost with either type of financing, something that the willfully ignorant Marcia Angell repeatedly fails to understand.

The cost of debt financing shows up as an explicit line item on a company's publically reported income statement in the form of interest expense (actually not a 100% accurate reflection of the cost of debt, but a pretty good proxy). The cost of equity financing does not show up on the income statement, as accounting conventions have traditionally been reluctant to put an exact number on the cost, which fluctuats over time.

A company that finances itself 100% with debt will report relatively low profits, as the full costs of its capital are loaded into its publicly reported P&L. However a company that finances itself 100% with equity will report relatively high profits, as the full costs of its capital are not loaded into its publicly reported P&L. But that doesn't mean the all-equity company is more profitable on a true (economic) basis. Its just that our 19th century accounting conventions make it appear so.

Companies that use massive stocks of collateralized fixed assets to produce products in stable, low growth industries will tend to finance themselves predominantly with debt. Think steel mills. Companies that use intangible assets, like the smarts of its employees, to produce products in volatile, high growth industries will tend to finance themselves predominatly with equity. Think software companies. In each case, the type of financing chosen is economically appropriate for the business given its asset needs, risk exposure, and the timing of its cash flows.

So now which camp do you think pharma companies fall into? Its not that hard. Too hard apparently for the Marcia Angells of the world to be bothered with apparently though.

[sm]

Some of the discussion is high quality. Some of it is uninformed, prejudiced baloney. Those of us who have lived the alternative know it's baloney. You Americans who haven't been taken in by the ideological nonsense have simply got to stop wasting your time arguing with the clowns and do something.

Figuring out what might work better (devil in the details) and how to build a coalition around it -- that's what needs to be done.

[anne]

Weather the prime drug companies earn profits that are too high is not a point I care to make. Dear Marcia Angell does not care about this point. That prime drug company profits and returns to equity have been exceptional however since 1980 is simply the case. Drug company profits have led all other industry group profits these 25 years. An index of large drug company stocks shows a return of about 20% a year through this period, and obviously there is a reason for such a return.

Marcia Angell is quite an exceptional person, quite an exceptional authority, and bears attending to closely.

[Tom Cecere]

Very interesting thread, but none of the 52 comments address the real issue of government insurance for Americans. We simply will not allow a bureaucrat to make life and death decisions for us. Period. Remember, folks, these are the same people who staff your local motor vehicle office.

Whatever system we come up with has to have, at its core, an insuring institution and a separate government cross-check and appeal. Can anyone say, "Regulated Monopoly"?

[sm]

Bureaucrats in the US already make those life and death decisions.

[Mandos]

"Very interesting thread, but none of the 52 comments address the real issue of government insurance for Americans. We simply will not allow a bureaucrat to make life and death decisions for us. Period. Remember, folks, these are the same people who staff your local motor vehicle office."

But you do! What do you think the whole HMO system is? A massive collection of second-guessers. When you go to an HMO primary care doctor, he/she has to forward referrals to some kind of second-guessing bureaucrat to determine whether the service was necessary. I know people who have had nightmares fighting the HMO for tests for, say, cancer.

I have the privilege of living both systems (Canada and US) simultaneously, which is why I only go for the cheapest US insurance I can, since my biggest fear is being hit by a car. In Canada, no one second-guesses my care. My family doctor writes the referrals he darn well wants, to whatever specialist he thinks is competent. There are no second-guessers.

And my doctor simply forwards, once a month or something, a computer file to the government insurance agency, who pays straight up. By contrast, my US employer, the HMO, hospitals and so on have a massive bureaucracy to handle the arcane complexities of US insurance claims. Utterly byzantine and strange.

What you say is simply a result of swallowing insurance industry propaganda.

[No Preference]

"We simply will not allow a bureaucrat to make life and death decisions for us. Period."

Oh yes we will. We do now. Bureaucrats in insurance companies currently make life & death decisions for many of us. Those of us who are uninsured, on the other hand, would be happy to have a bureaucrat available to make a choice, since now our only choice is "death".

"Remember, folks, these are the same people who staff your local motor vehicle office."

Oh, please. I get good service at my local motor vehicle office. On the other hand, dealing with the health bureaucracy at my local private hospital is a royal pain. Could we have some intelligent arguments rather than silly appeals to prejudice.

[sd]

anne:

Have drug company profits lead all other industries on an economic basis or an accounting basis? What claim exactly are you making?

Because I'm pretty sure I know what claim Marcia Angell is making - that when you look at publicly reported profit margins and returns pharma companies appear to outperform other industries. But as I pointed out above, the publicly reported numbers contain significant distortions that anyone with even a basic understanding of accounting conventions and financial economics can spot easily.

Dr. Angell would presumably find it objectionable if I published a book suggestion courses of treatment for her patients. Because I wouldn't know what the hell I was talking about. Similarly, Dr. Angell doesn't know what the hell she is talking about. She betrays a deep and broad ignorance of how to properly analyze the perormance of a business. The underlying concepts are not hard - any reasonably intelligent person can educate themselves on the underlying economics quite easily. But Dr. Angell has reveled in her own ignorance, despite the fact that this very issue has been the most prominant criticism of her recent book on the pharma industry.

[Cranky Observer]

> She betrays a deep and broad ignorance of
> how to properly analyze the perormance of a
> business.

SD,
Please give us a short summary of the performance of (1) US pharma (2) EC pharma over the last 20 years, ranked against (same country) (a) steel (b) oil (c) auto mfgers (d) telecomms (e) dry retail (f) grocery. Don't forget to include stock price appreciation, and touch on whether or not you think efficient market factors out GAAP presentation. Thanks.

Cranky

[lise]

Mandos, thank you for the comments on the ease of Canadian health care administration.

Anne, thank you for the posts and comments. There is no responding to a boor, I know, so do not fret. The thread is otherwise of fine quality.

Medicare's structure by the way is nicely responsive to a physician's judgement and I would have no qualms about being covered by a Medicare like insurance program.

[sd]

cranky,

Um, no. I'm not going to do tricks for you on command.

But an interesting cherry-picked list you provide. I'm sure US pharms does look good compared to:

a) One of the most mis-managed industries in the US economy which has largely migrated overseas in the past 25 years
b) An commodity industry largely at the mercy of the cartel pricing of foreign governments
c) An industry that has been out-competed by its Japanese counterparts for three decades
d) Not sure what you mean by "telecoms"
e and f) Industries with famously low profit margins under constant assult from the most formidable cost-based competitor in US business history

However compared to say, computer software, specialty retail, financial services, hospitality, media or a host of other industries, I'm not so sure pharma looks that great.

And to your point of analyzing stock price performance, make sure you're thinking of survivorship bias. Lots of biotech firms have gone out of business in the last 30 years. They're part of the same industry value chain, even if it isn't so easy to determine what the returns on an investment made in them 20 years ago would be.

[lise]

Cranky, you are always clever. Looking to the Vanguard health care fund, for the last 20 years, we find a return of 19.44%. The fund is essentially an index of the large international drug companies. I would call this exceptional.

[healthcarethinktank]

If, God forbid, Krugman had an ACL tear (knee injury), I would like to see his reaction when told he would have to wait 12 weeks for an MRI and possibly 6 months for surgery. He would be incensed that a member of the elite would have to wait with the common rabble.

(for the record, physicians are always the worst patients, but professors are not far behind)

EVeryone agrees on the need for reform, but let's not throw the baby out with the bath water.

About every single-payer country already has a two tier system, those with money and influence go elsewhere.

Pharm would be a good place to start, with catatrophic care second.

Unfortunately, the people who really know what they are talking about don't have columns in the NYT.

[SqueakyRat]

sd is engaged in an exercise in theology, not health-care economics.

[sd]

SqueakyRat:

I'm not sure I understand your meaning.

[Jussi]

Isabel

"Talking about Finns, you should read about how they reversed their horrendous cardio-vascular mortality rate in a couple of years (or maybe decades)"

It was more like decades, but still very successful.

If you're interested, it's called the "North Karelia Project" in English, and here's a link to a summary of what it was about:

http://www.kantele.com/nwfwebsite/puska_heart.html

[anne]

Thanks, Jussi. The study of the reversal of heart disease among Finns is of considerable interest and relevance. There has been significant advance in preventing heart disease here as well over the last several decades, even with the general weight gain. Cutting consumption of saturated fats would seem to be key.

[Roger Albin]

"If, God forbid, Krugman had an ACL tear (knee injury), I would like to see his reaction when told he would have to wait 12 weeks for an MRI and possibly 6 months for surgery. He would be incensed that a member of the elite would have to wait with the common rabble."

This is a common argument against some type of Canadian or British health care system. This argument is a good example of Mark Twain's half brick ("a half truth is like a half brick - they both can be thrown a long way). There is no question that there are obstacles to some forms of non-emergent care in Canada and the UK, though some knowledgeable people argue that these are exagerrated. But even if this claim is entirely valid, it is still based on a fallacy. The comparison implicit in arguments of this type of argument is between a person in Britain who has access to the National Health Service (NHS)and an individual in the USA who has access to some form of employer based insurance. But this is a false comparison. The NHS covers everyone and employer based insurance covers the employed. The proper comparison is between everyone in Britain and everyone in the USA. When you do this appropriate comparison, you have to include all those people in the USA who have very restricted access to health care. What would be the waiting time for someone dependent on charity care for their MRI and knee surgery? It might be infinite. With the tens of millions of people in the USA with poor access to health care, adding in the waiting times and access problems faced by the uninsured and poorly insured renders this argument completely null.

PS: Based on my 25 years of practice experience in a university town, I have to say that professors are excellent patients.

[JRossi]

A few comments from a front-line family doctor: A single payer system would markedly decrease costs, at least initially, and would significantly improve care for the poor. Over time, health care costs would increase again, due to advancing technology and an ageing population, but a one-off decrease in costs would certainly be helpful. Health insurance companies are pure evil--they cost a lot and add essentially no value. They should be eradicated. Drug companies are greedy and deceitful but are not pure evil because they do invent drugs that help people. They should be heavily regulated. Some physicians, especially in my specialty, are not overpaid, but most specialists are overpaid. They will fight a single payer tooth and nail and spew out all sorts of BS about quality declining. The quality of MDs will not decline in the near term, as already-trained doctors have no choice but to practice medicine or retire. Over the longer term, maintaining an adequate supply of well-trained MDs might be difficult if their effort-adjusted salaries fall relative to those of other high-paying careers. Nevertheless, specialties would still attract good people even if salaries were lower. Family practice, pediatrics, internal medicine and psychiatry are having a hard time getting enough med students interested. A single payer (?the government) would do well to note this fact.
If outreach programs targeting young mothers were included in health care reform, infant mortality would decrease. sd is right, however, that our infant mortality rates would probably not get down to the rates of the Nordics and Japan because of the higher prevalence of adverse
health behaviors and social pathology.
Ensuring access to affordable health care for poor and middle income people would improve the health status of the population overall and would certainly decrease the stress (and sometimes the agony) of being unable to obtain appropriate health care. High-income people would pay higher taxes. The country as a whole would benefit.

[sd]

Roger,

You make an excellent point, but it seems to me that we should be concerned about both sets of people - the insured and the uninsured. If nationalizing healthcare would result in better access to care for the uninsured, its probably worth it even if it would result in lower quality care for those presently insured. But let's not pretend that the tradeoff doesn't exist. Currently insured Americans could very well be worse off under nationalized healthcare. To ignore the possibility of this is dishonest.

[Jussi]

Anne

"There has been significant advance in preventing heart disease here as well over the last several decades, even with the general weight gain"

That's good news! I hadn't heard that, so obviously I'm not reading enough

[anne]

Isabel and Jussi:

http://www.nytimes.com/2004/07/13/health/13heart.html?ex=1247371200&en=8576b89d85d37e43&ei=5090&partner=rssuserland

July 13, 2004

Experts Set a Lower Low for Cholesterol Levels
By GINA KOLATA

Federal health officials yesterday sharply reduced the desired levels of harmful cholesterol for Americans who are at moderate to high risk for heart disease.

The new recommendations call for treatment with cholesterol-lowering drugs for millions of Americans who had thought their cholesterol levels were fine. Already more than 10 million people take the drugs. But now, more should start, the recommendations say. For people at the highest risk, they suggest that the target level of L.D.L., the type of cholesterol that increases the likelihood of heart disease, should be less than 100. That is 30 points lower than previously recommended.

For people at moderately high risk, lowering L.D.L. to below 100 with medication should be seriously considered, the report said. The advice for people at low risk remains unchanged.

The recommendations were published today in the journal Circulation and endorsed by the National Heart, Lung and Blood Institute, the American Heart Association, and the American College of Cardiology. The authors said the change was prompted by data from five recent clinical trials indicating that the current cholesterol goals were not aggressive enough and that more intense drug treatment led to better results....

[sd]

Of potential interest to people watching this thread is a 2004 article by Michael Porter et. al. of Harvard Business School:

http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml?id=R0406D

Abstract:
The U.S. health care system is in bad shape. Medical services are restricted or rationed, many patients receive poor care, and high rates of preventable medical error persist. There are wide and inexplicable differences in costs and quality among providers and across geographic areas. In well-functioning, competitive markets, such outcomes would be inconceivable. In health care, these results are intolerable. Competition in health care needs to change, say the authors. It currently operates at the wrong level. Payers, health plans, providers, physicians, and others in the system wrangle over the wrong things, in the wrong locations, and at the wrong times. System participants divide value instead of creating it. (And in some instances, they destroy it.) They shift costs onto one another, restrict access to care, stifle innovation, and hoard information--all without truly benefiting patients. This form of zero-sum competition must be replaced by competition at the level of preventing, diagnosing, and treating individual conditions and diseases. Among the authors' well-researched recommendations for reform: Standardized information about individual diseases and treatments should be collected and disseminated widely so patients can make informed choices about their care. Payers, providers, and health plans should establish transparent billing and pricing mechanisms to reduce cost shifting, confusion, pricing discrimination, and other inefficiencies in the system. And health care providers should be experts in certain conditions and treatments rather than try to be all things to all people. U.S. employers can also play a big role in reform by changing how they manage their health benefits.

[Cranky Observer]

> If, God forbid, Krugman had an ACL tear
> (knee injury), I would like to see his
> reaction when told he would have to wait 12
> weeks for an MRI and possibly 6 months for
> surgery. He would be incensed that a member
> of the elite would have to wait with the
> common rabble.

The straw man of "single payer" vs. "single provider". At one time in the UK, citzens covered by National Health were forbidden by law to go outside the system and purchase additional care. That is no longer the case, and people with personal resources can purchase additonal care.

I do not believe that there was ever a time when a person with Krugman's money (I have seen references to his NYT renumeration being $400,000 + syndication fees) was prohibited from purchasing additional medical services in Canada, France, or Germany. Nor to travel to the US, or anywhere else, to get additional care. Which is no different than it is in the US today - if Krugman is dissatisfied with his MIT medical plan he is free to fly to New York or LA and have his knee worked on at his own cost.

Cranky

SD - in other words, you have no such analysis.

[Roger Albin]

sd-

I don't disagree with your point. No industrialized nation (or non-industrialized nation for that matter) has come up with a wholly satisfactory solution for health care provision. It is probably impossible. I agree that tradeoffs are inevitable and as in the UK, some services would become less available. Where you find the balance point is going to depend somewhat on the political process involved and how much social value is placed on considerations of equality. This is ultimately a question about values, not economics.
I am confident about one thing. Somehow, of all the possible options, we seem to have ended up with a health care system which is highly inequitable and miserably inefficient in terms of economic performance. Whatever merits the individual components of our system possess, and they are manifold, the system as a whole cannot be defended on the basis of providing good care for our population as an aggregate or on the basis of economic performance. Major reforms are needed and they shouldn't be impeded by phony arguments about the defects of alternative systems (I'm not suggesting you made that particular phony argument).

[Jacob Roberts]

Fred Hapgood:

With regard to doubling the size of the federal government: my family is a median-income two adult/two children household. We're pretty close to average. Next year, my employer will pay over $11k in healthcare premiums on behalf of my family, and we will pay a little over $11k in federal taxes (payroll and income, plus some excise taxes). We'll likely incurr about $2k in healthcare expenses if we spend about the same on health care next year as we did last year. I am not a huge fan of single-payer health care itself (as I understand it), but the idea of a national health insurance policy has a great deal of appeal to me.

-JLR

[sm]

"The proper comparison is between everyone in Britain and everyone in the USA."

Or all Canada vs all USA.

The real class system in the USA is defined by access to health care. Those with "good" insurance or very big bank accounts do all the talking in the media and in the policy fora when health care is discussed.

What we see in these debates is a defense of privilege, how valuable it is, how it can be defended, how it is incumbent on the rest of society to fund that privilege.

The arguments read like the dossiers sent by members of the nobility to the Estates General of 1789. Full of highly moral and "public spirited" proposals that ignore the real problems of the majority.

And lurking behind it all the nagging realization that despite all its potential a once great country has become second class and corrupt. (See Simon Schama's *Citizens*.)

[Ari]

"First, yes infant mortality is higher and life expectancy lower in the US than in most comparable countries. But this is largely due to a host of social and behavioral problems that have nothing - nothing whatsoever - with how we finance and run our healthcare system. Americans are more violent, more sedentary, and less likely to eat well than citizens of other industrial nations. We have a large African population at increased genetic pre-disposition for a host of life-shortening chronic ailments. We have a much higher birthrate among low income people who are less likely to be healthy and to seek out medical care."

I wish to bring us round to this set of generalizations, and firmly assert that I know of no truth in such stereotypes. Are we more sedentary than the British? Do we eat more poorly than Australians? Are we significantly more violent than the French in a way that effects longetivity? Do we have a large "African" population that is prone to life-shortening chronic ailments?

To make such statements as though they were in any way clear and established has to be entirely false. What is established is that we spend more per capita on health care and general outcomes are poorer. Now proceed from there. Paul Krugman is absolutely convincing.

[Robert]

SD,
Just as you are not conceptually opposed to single-payor universal coverage, so I am not wedded to the idea that the single-payor must be a federal entity. There is no conceptual reason why the single-payor can't be run by our friends in Bentonville, Arkansas, where they can bring their private sector prowess to bear upon inefficiency, waste, and layers of duplication mutlipied across competing firms. I do however, have issue with my tax dollars being inefficiently spent through competing insurer solutions when the very so-called "insurers" are mere TPA's (third party administrators) neither providing genuine risk-capital, industry capital investment, or anything other than insured pool fragmentation and market disintermediation. Last time I checked the "spread" for low-risk underwriting vs. the spread for high-risk underwriting was markedly different, and I fail to see the risks being borne by the private sector in the US healthcare insurance industry that is in any way commensurate with their share of "premiums".

[Ari]

Also, I have no possible idea what an "African" population would amount to in America or Europe or even in Africa. We are so genetically mixed in so many ways over the centuries that race can be in no way other than a great range of genetic attributes. Africa's hundreds of millions are of mixed ancestry from Tunisia or Morocco to Nigeria to South Africa. I am partly British and Russian and Latino, that I know of and who can tell what else my genetic heritage might show. A friend is African-American, but Indian as well and we have no idea what else.

[anne]

http://www.nytimes.com/2005/10/18/nyregion/nyregionspecial4/18jennifer.html?ex=1287288000&en=61b85c9ed6181577&ei=5090&partner=rssuserland&emc=rss

October 18, 2005

Trying to Get, and Keep, Care Under Medicaid
By RICHARD PÉREZ-PEÑA

Jennifer Garden has a tumor inside her head - this much she understands. It will not kill her, she knows, but it has the power to make her miserable and steal her sight.

Ms. Garden, 24, also has Medicaid - sometimes, anyway. And there is much about it that she has just never understood - the paperwork she gets in the mail, or why the system sometimes insures her and sometimes rejects her, or why she can see some doctors and not others.

In many ways, the tale of Ms. Garden's struggle to keep her tumor in check tells an intimate, often maddening story of New York's vast, generous, but disturbingly imperfect Medicaid program. It shows how people's grip on this lifeline is weakened by private turmoil and personal failings, and by the idiosyncrasies of a system that seems to offer great largess with one hand, and chip away at it with the other.

Over more than a year spent watching Ms. Garden tackle Medicaid's rules, documents, acronyms and programs within programs, it becomes clear how answers to even the most basic questions - such as when is she insured, and when not - elude her.

"I'm learning how it works, but each time I figure something out, it's after something goes really wrong," she says.

And so sometimes across her complicated life she has received great medical care, and sometimes none at all.

Sometimes she is to blame, sometimes others. It is an endless battle - with the program, her troubled home life, and her own inclination, when circumstances get tough, to let things slide.

Nineteen can be an age of imagined invulnerability, when illness and health seem distant abstractions. Not for Ms. Garden.

At 19, she lived with constant worry, a fearful whisper in her mind that she needed to protect her health - if only she knew how.

Four years earlier, her doctor had diagnosed a benign tumor in her pituitary gland, at the base of her brain. Untreated, the tumor would grow and wreak havoc with her hormones. Eventually, it would press on her optic nerve and blind her.

Medication can usually keep such tumors in check, and it worked for Ms. Garden. But the day she turned 19, her mother's health insurance no longer covered her, and there her health troubles really began.

She visited a New York City welfare office to apply for Medicaid. But what she thought was a straightforward process turned into something out of an absurdist play.

She explained that she had no income, but the clerk insisted she needed proof. She could have satisfied the requirement with a written statement that she had no income, a fact she says that no one explained.

For most of the next four years, Ms. Garden went without insurance, doctors or medication, and the tumor grew unabated. Exhaustion and severe headaches became regular ordeals, and it grew hard to hold a job, or even search for one.

In that time, she says, she tried repeatedly to sign up for Medicaid. Once, for example, she was told that she was not poor enough to qualify because she lived with her boyfriend.

She may have been eligible on all of her first three attempts - it is impossible to say with certainty - but each time she was turned away without even filling out an application.

While working part-time at a Barnes & Noble bookstore, she recalls, she tried once more to apply, but her wages -less than $10,000 a year - were too high for her to qualify.

Ms. Garden's inability to get health care just pushed her farther from the usual path to middle-class security - a track her life had never followed closely....

[Randy]

Anne,

Great story. But not a new one. Medicare and Medicaid were built on the feeling generated by many such stories. But the problem before us is not Jennifer Garden's illness, but rather, why didn't the government programs help her? A lot of people gave up a lot of money to help the Jennifer Garden's of this world, and yet Jennifer isn't helped. Your mission, should you choose to accept it, is to convince those of us who doubt the efficiency of government (as shown clearly by your story) to give even more.

sd: First of all, being "already insured" in the US, and, in fact, knowing many people with various kinds of insurance, I can tell you that the decline in quality for the already insured between the US and Canada is for MOST patients, negligeable. Yes, there are problems of occasional undersupply in Canadian markets, which is unfortunate, but the problem is miniscule in comparison to access problems in the US, and the decline in quality for the already insured does n