August 09, 2004
A "Wealth Good" For All?
The following is my second posting from a health care debate on KQED's "California Connected" website. Jack Calfee of the American Enterprise Institute had just claimed health care was a "free market" good.
The question posed for today's discussion appears to agree with Jack Calfee's twin claims that all new drugs provide incremental health benefits and there is a free market in health care. Neither assumption is true.
Let me begin by saying that there's a half-truth in each of Jack Calfee's assumptions. Some new medicines do provide extraordinary gains, both in extending life and providing economic returns to society. But the reality is that the health care gains from drug therapy (and from the U.S.'s outsized devotion of GDP to health care, five or more percentage points greater than other advanced industrial nations) are exaggerated by industry spokespersons and economists.
I don't 'demand' certain care. I seek care when it is needed. I don't respond to price signals when I need that care. I pay whatever it costs to get it. By every standard measure of health outcomes -- life expectancy, infant mortality, access to health care -- the U.S. lags behind its economic equals. Yes, life expectancy is creeping up, but in the past decade it increased at half the rate of the previous 30 years. And according to demographers who have looked at the numbers, public health measures are more responsible for recent gains than medical technology. From the outcomes vantage point, the war on smoking has provided far more health benefits than the drug-oriented war on cancer.
I agree that some people treat health care and drugs like a free market "wealth good." How else can we explain Botox and Viagra? But the reality is that the market-oriented health care economy in the U.S. is missing a vital component of any market if it is going to operate efficiently: Price signals.
As a 54-year-old male, I don't "buy" my health care. My employer (or, in my case, my wife's employer) buys most of my health care. I don't "demand" certain care. I seek care when it is needed. I don't respond to price signals when I need that care. I pay whatever it costs to get it; and if I were uninsured, I'd throw myself on the mercy of the local emergency room, which is where about 43 million uninsured Americans get their care.
This paradigm works in the drug marketplace, too. I don't "demand" drugs and respond to their price signals. My doctor prescribes drugs when I need them. And unless one is conversant with the latest guidelines issued by the National Institutes of Health, reads the New England Journal of Medicine or surfs good medical reference sources on the Internet (has WebMD reached a 1 percent penetration rate yet?), we pay for and take what we're prescribed.
As Sen. Estes Kefauver complained over 40 years ago when he conducted antitrust investigations into the "antibiotic cartel," the problem is that "he who prescribes does not buy, and he who buys does not prescribe." As he recognized then and is still true now, this is a prescription for price gouging.
Why? At least half of all new medications coming on the market add nothing to physicians' armamentarium for fighting disease. They were conceived, developed and marketed as minor variations of drugs that are coming off patent. Or, they were developed to give a drug company an entry in a market for which there are already numerous alternatives with the same mechanism of action.
So why do they get prescribed in such huge numbers? Perhaps it has something to do with the 30 percent or more of all drug industry expenditures that are devoted to marketing. Legitimate medical innovation doesn't require marketing. Doctors will beat a path to your door if you truly have a miracle cure for their desperately ill patients. But me-too drugs need marketing -- lots of it -- because the last thing companies want consumers and physicians to know is that a cheap generic might work just as well.
Drug industry spokespersons justify this wasteful expenditure of health care dollars by claiming these me-too drugs offer alternatives to people who may not respond to the other medications in that class. Yet, as Marcia Angell, the former editor of The New England Journal of Medicine points out in her forthcoming book, "The Truth About the Drug Companies," (Random House, August 2004), this claim is always based on anecdotes offered by the drug companies or physicians who are on their payrolls. It has never been scientifically tested in clinical trials. If they want to keep making this claim, they ought to at least test the proposition.
Let me conclude by saying that regulation will not choke off innovation in this dysfunctional marketplace. Jack's references to Eastern Europe and the U.S.S.R. are a red herring. If the government negotiates on behalf of seniors (not the price caps suggested in Jose's query), it will simply be joining the rest of the advanced industrial world as well as the Veterans Administration and most of the insurance companies who provide a drug benefit.
The facts are that the two great regulatory reforms that affected the drug industry in the 20th century forced -- yes, forced -- the industry to adopt scientific practices. In 1937, in response to a tragedy that killed two dozen children in Tennessee, the industry for the first time was required to test its drugs for safety. In 1962, again forced by a near-tragedy, this time involving thalidomide, the government imposed an efficacy requirement on industry, which led to the modern system of systematic clinical trials for scientifically testing the worth of new medicine.
Today, the out-of-control marketing practices of the modern drug industry require a new set of rules to once again save the industry from its current self-destructive path. By setting up a government-funded agency to contract with independent researchers to conduct comparative clinical trials, physicians could get objective information about the best and most cost-effective medications. This single reform would send vital information to the marketplace (three economists recently won the Nobel Prize for showing how imperfect information distorts markets) and would create incentives for the industry to channel its extraordinary skills into the search for significant new breakthroughs.
Don't forget the inverse of what I said at the top -- if half of industry efforts are wasted, then the other half are not just legitimate, but vital to the drug development process. By strategically shrinking this industry through prudent regulation that would wean out wasteful marketing and drug development expenses, we would not only get a more affordable health care system, but a more innovative one.