Becker on health reform

Gary Becker looks at whether the Swiss system would be good for the US. He worries that a system that only spends 11% of GDP on health care compared with the US’s 16% can’t deliver the same outcomes. He doesn’t evaluate this but worries that the Swiss are being given a free gift by the US:

For one thing, the Swiss impose sharp price controls on drugs, lab tests, and other medical procedures. To take drugs as one important example, Swiss price controls reduce prices of top selling US patented prescription drugs to about 40-50% below their American prices. In particular, the cost of lipitor in Switzerland is about 1/3 of its American price. In reality, what the Swiss (and other countries) do is free ride off of the incentive provided by American drug prices for pharmaceutical companies to invest the huge amounts of resources required to produce blockbuster drugs like lipitor.

Very small countries like Switzerland can get away with this free riding since their demand for drugs is so much smaller than that of the US. However, were the US to emulate the Swiss system, and there is a call from some Congressmen for greater control over drug prices, the incentives biotech and pharmaceutical companies have to innovate would be greatly reduced. It is precisely the greater price freedom in the US that induced many drugs companies to relocate their research labs out of Europe and into the United States.

Well, isn’t that interesting. Let’s start with the obvious first point: 2 out of the top 5 pharmaceutical companies responsible for all this innovation are Swiss. Near as I can tell, they do much of their R&D outside of the US. And surely being so close to the political system, if the prices were bad for them (e.g., if the Swiss govt squeezes them it demonstrates other govts can too), you can’t say there is insufficient pressure to do something about it. Of course, Lipitor is made by Pfizer (a US company).

Now let’s see if the economics makes sense. In every other market, if you regulate prices below market clearing you get rationing. Is there any evidence of rationing of drugs in the Swiss system? Becker doesn’t seem to think so. He seems to think that the Swiss can just tell pharmaceutical companies what to sell their products for and that is that. But, in reality, placing just a little weight on the future, why don’t pharmaceutical companies just refuse supply?

It seems more likely that the pharmaceutical companies are exploiting the US’s inflated willingness to pay given the non-transparent nature of their health care system; you know, with a tendency to over-prescribe that has been discussed. To be sure, that can motivate R&D; especially if the rationale is that you come up with something new and the health care system’s decision-makers will decide that they must have it. But it is far from clear that it is generating the right mix of R&D.

[Update: I have it on good authority that the US spends about $75 billion per annum on health related R&D including pharma, biotech, devices and NIH. That means that if you cut $700 billion in expenditure per annum and then fully subsidised the current US R&D spend, you would produce the same level of innovation. In other words, at best the US is paying $10 in additional costs for every $1 allocated to R&D. That is a darn pretty inefficient system.]

9 thoughts on “Becker on health reform”

  1. It’s OK for you to be so snippy and smart-alecky, Josh, but it’s not a good idea to offend benefactors. I take it you do not own shares in CSL.


    My perspective on US willingness to pay for drugs is the general Americans insistence on “world’s best” regardless of cost (see defense spending as well).  If a drug is 1% more effective but costs 10 times as much then most Americans would insist they have it and that their insurance company should pay (and would sue the company if it tried to force them onto the cheaper drug).
    So the US system encourages companies not to innovate into a new unfulfilled area (which is very hard), but to iterate a slightly better version of the existing drugs (which is easier and less risky).


  3. I believe that the pharma majors spend rather less on R&D than they do on US marketing. A centralised approval and pricing arrangement as occurs in Australia could save them billions and still allow profitability at lower prices.


  4. Unlike Barack Obama, Becker has clearly not read Atul Gawande’s analysis of why health care costs twice as much per capita in McAllen, Texas, as it does in the nearby city of El Paso, despite the fact that demographics of the two are essentially the same.
    Gawande quotes a per capita annual cost of $15,000 in the former (even though the per capita income is only $12,000), compared with $7,500 in the latter.
    The Mayo Clinic in Rochester, Minnesota, delivers some of the highest quality health care in the nation; annual per capita cost: $6,700  (all costs were 2006 figures.)
    Gawande, a career surgeon (and occasional feature writer for The New Yorker) is well qualified to investigate such matters.
    It really doesn’t matter what the cost is of an unnecessary diagnostic test or an unnecessarily prescribed drug. Whatever it is, it is still a waste of money.


  5. Wow, Joshua, you’ve suddenly discovered a gold mine.
    He has discovered that if government introduces price controls market behavior won’t change and that people will just go ahead an innovate the way they always used to. Price and demand curves? What are they?
    Suddenly soviet 5 year plans weren’t failures at all, they were just failures to communicate. LOL.
    Joshua, you have absolutely no damn idea about the US health system and how it works and why people are against against it. You’re only objection to the objections are that the proposals would satisfy your own warped bias toward government involvement.
    Have you even read any part of the proposals? Have you, other than what some far left wing sites are telling you? Ummm.
    Do you even know that the Obama plan doesn’t change the nexus between employer funding to single payer like we do here?
    You really have no idea what you are talking and unless you can say that you have read the 5 or so plans currently undergoing congressional scrutiny your comparison is about useful as your “study” that determined the ABC is right wing biased.
    Case in point:
    <i>Near as I can tell, they do much of their R&D outside of the US. And surely being so close to the political system, if the prices were bad for them (e.g., if the Swiss govt squeezes them it demonstrates other govts can too), you can’t say there is insufficient pressure to do something about it.</i>
    Are you really this shallow a thinker to believe that even if non-US based big pharma did a great deal of research in places outside the US the US market wasn’t central to their decision-making process in terms of likely profitability outcomes.
    Do the god damned math yourself for a change and see what would happened to big pharma profitability if say 40 of their revenues were cut by 50% like in the Swiss experience.
    Do you even know that pharma costs in the US are almost all covered by insurance seeing that the US has one of the lowest co-payment systems in the world?
    You really have no idea.


  6. We pay for R&D through higher prices. Another way is to reduce the cost of R&D through low interest contingent loans.


  7. Tye,
    That’s one hell of a rant. I’d be interested in learning how the US health system works instead of rebuttals.
    From latest studies referred to in The Economist magazine (not your usual left-wing,  anti-captialist pinko publication) the US health system fails – so to speak -because the outcomes achieved do not match the level of expenditure in comparison to other health systems. This lends some weight to to evidence of dimishing returns or outright waste of resources.

    As for the particular examples of pharma spend, it would be interesting to examine their income statements for facts on marketing and sales expenditure versus R&D expenditure (and complementary R&D acquisitons).  One of the biggest advantages – other than pricing power – I see for schemes such as the PBS is that drugs must meet transparent requirements on effectiveness prior to purchase. Why shouldn’t the medical recipient and the tax-paying public get value for money on the basis of the Government acting in the role of expert and price negotiator?


  8. If the free-riding idea holds water, then in theory small countries could apply it to any other product with very high R&D costs and practically zero marginal production cost.  The one that comes immediately to mind is computer CPUs…


  9. DP:
    The US system is extremely complex, principally brought about by a huge amount of government meddling at state and Federal level.
    There’s no real national plan to speak of as essentially health is mostly, though not all, state “managed” and mandated. Plans for the the most don’t carry over state lines and they differ from state to state.
    The huge problem with the US health system is that it is employer provided for the most which creates huge problems with job security being one issue.
    The insured don’t really know the cost of their insurance and don’t care. Insurance companies are basically spread takers. They make estimates on potential outgoings and then sell plans carrying a margin for themselves as they should. Doctors aren’t cost conscious and in some ways are forced to over test for fear of legal retribution.
    States mandate all sorts of things the plans have to carry as bear minimum and  differ from state to state. The paper work is unimaginably cumbersome too.
    However to get things into perspective …. There is no health care crisis in the US. There is an insurance problem where an estimated 30 million people are without health care. It’s not the poor by the way who don’t have health care as they are provided through medicaid. Rather it’s not the poor who a legitimately supposed to be there as there are 11 million illegals who don’t have insurance for the most part.

    The way to solve the problem is to use the money currently paid by the employer, give the money to the employee and then have them buy their own insurance.
    As far as big pharma spending on marketing costs. This is nonsense that carries from one left wing site to another and no one seems to question it.
    Pharma have very large marketing costs as they have to go some ways in explaining the uses of new drugs at doctor level and be able to answer questions.
    I’ve looked at the marketing expense ratio for Pfizer and it really isn’t that extraordinary. There are also pharma companies involved in the consumer side or over the counter drugs such as Johnson and Johnson that carries a high marketing expense line simply because of the consumer products they carry.
    High marketing costs is bullshit. They spend as much as rationally needs to to be spent and the idea that they’re wasteful is laughable in this day and age when investor and peer pressure to perform is more than abundant.


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