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DBL%20Hendrix%20small.png College chemistry, 1983

Derek Lowe The 2002 Model

Dbl%20new%20portrait%20B%26W.png After 10 years of blogging. . .

Derek Lowe, an Arkansan by birth, got his BA from Hendrix College and his PhD in organic chemistry from Duke before spending time in Germany on a Humboldt Fellowship on his post-doc. He's worked for several major pharmaceutical companies since 1989 on drug discovery projects against schizophrenia, Alzheimer's, diabetes, osteoporosis and other diseases. To contact Derek email him directly: derekb.lowe@gmail.com Twitter: Dereklowe

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January 10, 2008

Drugs and Money and How It Feels

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Posted by Derek

Imagine that if you wanted to buy a car, you had to first visit a car consultant. This would be an expert who would place your order with a car dealer, after first looking over your transportation needs, financial status, and other factors. No one would be able to order a car on their own. Advertisements for cars would look similar to the ones we have today, except there would be a phrase at the end to “Ask your car consultant”. Much more advertising and promotion, though, would be directed at the consultants themselves, as you’d figure. A steady stream of representatives from the various automakers would come by, extolling the virtues of the latest models and leaving stacks of glossy literature, DVDs, etc., along with offers of free trips to come by for some test-drives.

Let’s move the analogy over to something a bit more realistic: mortgages. Given the current subprime meltdown, it wouldn’t surprise me much if someone, somewhere, has called for the creation of a class of mortgage advisors. Anyone looking to borrow money for a real-estate transaction would be required to go through at least a cursory visit with one. The advisor would look over your finances, explain the different mortgage options out there, and make sure that you understood what you were getting into if you had a particular offer in mind. In fact, the advisor would do more than that – if you didn’t meet certain criteria, they would not put you in touch with a lender. Some advisors would be more lenient than others, but you’d have to see one, and have them sign off on your mortgage, before you could legally borrow money.

Ads for low interest rates and creative refinances would still be around, but they’d always end with an urgent request to call your mortgage advisor immediately, before the great deal evaporated. And the bulk of the promotion money would, again, surely find it way to trying to influence the mortgage advisors themselves. Lenders would come in with figures showing how few people had defaulted with them, what percentage of the loans in a given market they underwrote, and so on. As gatekeepers in an important industry, they’d be much in demand.

Of course, in the world we live in, we trust adult consumers to be able to make decisions about which car to buy. The car companies lose no opportunity to try to make people think about the advantages of a new car, both emotional and tangible, and to suggest that it would be easy to purchase one. The car dealers themselves stress the same points, and add more details about how easy they are to deal with. People do get into bad leases or buy more car than they can really afford, but that’s considered largely the customer’s problem.

And (for now, anyway) we trust adult consumers to be able to decide for themselves if they’re ready to buy a house, which houses they might be interested in purchasing, and how they might wish to do so. This is a harder decision, since it involves a much greater commitment of time and money than purchasing a car, and there are many more options available. The existence of real estate agents and attorneys show that more people feel the need for and are (more or less) willing to pay for outside assistance in buying or selling the property itself, but there are as yet no licensed mortgage agents of the kind I describe above. That’s typically left up to the customer.

So we finally come to prescription drugs. Medical care is even more complicated than real estate – you can obtain licenses to sell properties or mortgages far more easily and with far less schooling than you need to obtain one to practice medicine, and that’s a good thing. You also cannot obtain new medicines, or any drugs for major diseases, without seeing a doctor first, both to make sure of the disease and to advise on its treatment. Consumers – and by this time, we use the word “patients” – are free to follow or not follow this advice, or to shop around until they find a doctor whose opinions they like better (if any), but they are not free to purchase and dose themselves (or others) with prescription drugs.

The difference is, as anyone will tell you, that health is an intensely personal category unto itself. A person’s health affects every aspect of their life, immediately and continuously, in a way that not even the roof over their heads can. Medical issues are unavoidably saturated with thoughts (and fears) of death or grave disability, and always have been. This has receded in places as medical science has reduced the incidence of some causes of death, but overall, this emotional entanglement is very much with us, and will be for a very long time. Look closely, and you’ll see it: as mentioned above, we have a whole special word for “customer of a physician”, because we don’t usually think of the relationship in business terms. “Patient” connotes someone who is in the care of someone else, whose fate rests partly or wholly in another’s hands.

The unusual quality of a medical transaction is understandable for another reason as well, since traditionally the course of a physical ailment has been uncertain, and the ability of medicine to do anything about it has been likewise in doubt. For most of human history, seeing a doctor has been very much like seeing a priest. It has not been looked at as a business interaction, and in most cases it had no hope of ever being one in the usual sense. (See Lewis Thomas’s The Youngest Science for more on that – he points out that almost everything his physician father prescribed in his day was a placebo of one kind or another).

The personal and emotional importance of disease (and of treatment) leads to behavior that is seen less often in other activities. People will spend terrifying amounts of their own money in the hopes of helping themselves or close family members, even in cases where the probability of success is tiny. Huge sums are spent in this country on people who are clearly near death. A person who would never dream of taking their savings to the racetrack and betting it all on a 50-to-1 longshot horse will take the same amount and put it down, with hardly a second thought, on a 500-to-1 chance of a successful medical treatment. This changed attitude extends further: medical personnel are often paid well for their efforts, but they can also give a great deal of themselves in the process, since lives are at stake. There’s an urgency, a justifiable sense of importance, which is hard for people in other professions to feel as often or as intensely.

So medicine, will probably always be special – at least, I don’t see that changing in the lifetime of anyone reading this. That complicates things, though, because (like it or not) money is involved. How could it not be? In fact, I’d say that this is one of the most obvious grinding points of friction between the worlds of private emotion and of commerce. Many people find the whole idea of medicine for profit unappealing and somehow unseemly. Since this is an area where altruism is more common (and more easily recognized) than usual, the contrast between selfless sacrifice and self-interested capitalism is especially disconcerting.

But the value people place on effective medical care, and the difficulties of discovering and providing it, ensures that large amounts of money will always be involved. Medical care works better than it used to, and it has reached that state through vast efforts, which deserve to be compensated. It’s true that when money changes hands, it can be an evil sign, as with charlatans cynically exploiting desperate people with snake-oil cancer treatments and the like. But it doesn’t have to be. We all work for a living; money does not have to stain everything it touches. Physicians deserve to be compensated for their work, proportional to its value and difficulty, and to their skills in performing it. And drug companies should be compensated for their efforts in discovering new drugs, also according to their value.

Not even the harshest critic of the industry would balk at that last statement, but that because we haven’t come down to numbers yet. If you believe that virtually all the work of drug discovery is done through federal funding, with the drug industry stepping in at the end to decide on the price and the packaging, then you will feel that this compensation should be rather minimal. (If you think that, you’re mistaken, but that’s another topic).

How, then, to decide how much a given drug therapy is worth? Any economist will tell you that the price of some good is, finally, what people are willing to pay for it. This principle works silently, for the most part, until someone offers to resell tickets for the big game for five times what they paid for them, or when the price of lumber and gasoline goes up after a hurricane comes through. At such points it stops seeming so reasonable to many observers (although nothing has changed, in terms of supply and demand). It also stops looking so reasonable to many people in the case of pharmaceuticals, but under completely normal conditions – no hurricane is necessary.

My industry realizes this (any fool realizes this). But it’s never known quite what to do about it. Pointing out that drug discovery is expensive has been a traditional argument, and it’s one that I’ve made myself. But that doesn’t address the underlying reasons for the uneasiness. Paying money for health care does not descend to the same mental category as paying money for car repairs just because someone has tried to make a case for the accounting involved. People don’t believe the numbers, anyway, but even the most believable numbers in the world would not do the trick.

Pointing out that these are, in some cases, life-saving therapies (important things, worth the price) is another tactic. That has a better chance of working, because it gets closer to the psychological core of the problem, but in the end it’s not effective, either. The more important, the more involved with matters of life and death something appears to be, the more uneasy people feel about paying market prices. The industry, if it stresses the power and efficacy of its drugs, risks looking like someone charging rent for the use of a fire hydrant.

And another tactic is to put a personal face on things – to show testimonials from people whose lives have been saved, or from researchers working hard to come up with new treatments. This also has a better chance of addressing the psychology of the problem, but also risks heightening the conflict between matters of emotion and matters of commerce. These appeals are a bid for sympathy, on at least one level, which means that they really can’t talk about money. That connection has to be made later, and the mixture is as incompatible as ever.

This is where I should come right out and say that I don’t have a solution to this problem. But I think that it’s worthwhile to consider why it exists, and where (to my mind) it’s coming from.

Comments (28) + TrackBacks (0) | Category: Business and Markets | Drug Prices | Why Everyone Loves Us


COMMENTS

1. Hap on January 10, 2008 2:10 PM writes...

I think I have been uncomfortable with necessities being apportioned solely by money - that seems to make "cost of living" a more literal term than I am comfortable with. With food, people make money selling it, but there is some regulation (though not so much to make it available to the poor as to make it safer, and to make it more profitable. With shelter there isn't much regulation (in most places, rent control has gone away, and may not have helped make more shelter available (but instead decreased the costs for residents who had been there when it was passed); there are some who provide shelter to the poor, but not many. Clothing is similar.

Health care is different than some of these - we have some responsibility for our own bad habits, for example. It costs a lot - it took a lot of money and research to get it to the level of power it currently has (there generally aren't a lot of people who want useless things for free), and the costs of mainintaing it are high, though maybe they could be lessened without even getting to rationing (insurance costs, for example), but they still cost a lot. Other places do it more cheaply by paying for it through the government, but it's possible that those places are free-riding on the ability of people in the US to develop products and make money in the US to pay for care sold elsewhere (and if we do gov't health care, then we would have to wonder if lots of things won't be developed because they can't generate profit).

For me, health care is like gas - I know I need it and that it's valuable, and yet I resent the cost (sort of like an addiction - though obviously not as destructive as addictions go). People know they need it, because without their lives, they have nothing else that is valuable to them (or they can't use it if they do). We hate the cost, but can't escape it, and the inescapability makes us unhappier. If the health care system is driven by profit, then there will always be increasing costs because people are willing to pay (if they have the means) whatever it takes to have their lives, and some have very large means. Since the supply is limited (because medicine takes intelligence and skills which aren't common and lots of training, and with some help in rationing doctors by the AMA), the people who do have the means drive the market costs (because they have to either use their means or lose them). Eventually, this seems to imply that poor people will be left to die because they can't afford care (or the middle class - if the gov't apportions care to the poor, the loss in supply will drive the prices up and limit the ability of the next poorest to afford care), and that is unpalatable to lots of people. This outcome seems bad, and yet we aren't certain how to regulate the market to avoid this without destroying its ability to provide care in the first place (by limiting medicine development and the desire of people to work in medicine - making doctors and nurses and drug developers like teachers, police, firepeople, or soldiers, who are expected to sacrifice themselves for the rest of us). We aren't wiling to sacrifice ourselves for them (I expect to be paid for work, for example), but when we need it we expect it to be there. It sounds like Atlas Shrugged, and though I don't like that as an analog of reality, I don't know if I'm right in not liking it.

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2. DLIB on January 10, 2008 2:53 PM writes...

What do you think would be the repercussions if patients had to agree to a waiver before allowing to take any perscription medicine? Whenever you download software you commonly have to "agree to the terms and conditions...". If you ever go to a gym you commonly have to sign a waiver of liability. So long as the gym isn't overtly negligent then you're on your own. Likewise, if a drug makes it through all the clinical trials and the FDA agrees it is safe, shouldn't that indemnify the companies? If patients had to sign a waiver before taking a drug, the economics of healthcare would be put into sharp relief. I think most people would sign just as fast as they click on the "agree to terms" button.

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3. Dana H. on January 10, 2008 3:12 PM writes...

The more important, the more involved with matters of life and death something appears to be, the more uneasy people feel about paying market prices.

Why do people have this attitude, which on the face of it is insane? Reworded, it means that the more valuable something is to you, the less you are willing to pay for it. Or, "If I really need it, I ought to get it for free."

Personally, I don't begrudge a cent of what I pay for medical care. Even at today's inflated costs (due largely to government intervention), medicine in America is a great bargain, considering what you get for your money.

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4. Derek Lowe on January 10, 2008 3:29 PM writes...

Maybe the word "resentful" needed to be in there. People will indeed pay for important health care items, but they sure don't like it. Emotionally, it feels like extortion, like being asked to pony up or else. . .

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5. Hap on January 10, 2008 4:14 PM writes...

Dana - I think that Derek got it dead on - it feels like extortion (your money or your life). Value alone doesn't determine the resentment - most people don't feel like they should be getting Mercedes or gold jewelry for free, for example. If you don't have the money for those things, of course, you don't die, either.

DLIB - Considering how well my computer works (or doesn't), I think an analogy between the computer industry and the pharmaceutical industry is the last one one would want to make. The power of life and death with no responsibility for it is a frightening power to comprehend, and one unlikely to be used well. ("I don't care if they hate, so long as they fear" only works if you have nearly infinite power and not for long). A population with no legal recourse when medicines hurt and no real choice but to accept them (no, "your agreement or your life" is not a choice) is not likely to make for a stable industry for any length of time. The variety of encumbrances in software, and people's frustration with sofware companies, is much of why orgs. such as FSF exist in the first place, though financial barriers to entry would probably keep the pharmaceutical equivalents out.

The FDA is a federal organization, paid for by us through elected officials. If the FDA was making statements of safety and indemnifying drug manufacturers for approved drugs, how safe would drugs have to be to be approved (and how often would it happen)?

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6. Jonadab the Unsightly One on January 10, 2008 4:15 PM writes...

> Consumers [...] are free [...] to shop around until they find a doctor
> whose opinions they like better (if any), but they are not free to
> purchase and dose themselves (or others) with prescription drugs.

The question of what exactly constitutes a prescription-grade drug, and what sets these apart from over-the-counter items, is another interesting point here.

Consumers *are* free to purchase and dose themselves with pretty much anything you can get from a plant, however treated or refined, with a small handful of special exceptions, and with an assortment of synthetic products that have been approved for over-the-counter sale. Treating yourself on a whim, with just any old dose of the first thing you run across (and the second, and the third, and several others, in any old combination), without significant care or research, is highly ill-advised, but with herbal products and OTC drugs it's legal to do (and, I might add, mixing and matching arbitrary herbal meds is a fairly popular activity these days, especially among middle-aged women).

I agree with you in principle that there will for the forseeable future continue to be classes of drugs that are only available with a prescription. But I think it's interesting to consider why the line between prescription and non-prescription is drawn where it is. I am not at all sure everything falls on the ideal side of that line.

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7. SNP on January 10, 2008 4:27 PM writes...

You know, we're very fortunate to have the opportunity to do something that's so important to people that we face this line of criticism!!!

That happy thought has invigorated me to stop wasting time and finish this damn report...

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8. Jonadab the Unsightly One on January 10, 2008 5:09 PM writes...

I feel I should give examples, to back up my assertion.

On the one side (things that are currently OTC but probably should not be) you've got nicotine, a substance with numerous terrifying side-effects, hitting various body systems, including the heart, the circulatory system, and the CNS. As an added bonus for good measure, it's also fantastically addictive. (I'm assuming a pill form factor here, so the severe carcinogenic properties associated with the more common delivery methods can be discounted.) If it were a new product hot out of the lab that (say) Pfizer wanted to introduce next year (for the treatment of ADHD, perhaps), the FTC wouldn't even have to ban it, because the company would know better than to show it to them in the first place. I realize that's not entirely fair, because the stuff's been in such widespread use for so long that we now know most of its problems, which is usually not the case with new drugs. Still, I find the notion that it could make it past the clinic and into general prescription use unlikely. Over the counter? Forget about it. But nicotine is over the counter, at least for adults. Just imagine for a moment if the line for what can be introduced as a new over-the-counter drug were adjusted to "anything with milder side-effects than nicotine, as long as it's also less addictive than nicotine". Morphine would probably get the green light, and I bet you can think of numerous other drugs that would too, which might be better left in the prescription category.

On the other side of the fence, you've got stuff like Darvocet, the greatest danger of which is that (in addition to the main, prescription-only ingredient) the pill as sold has also got some acetaminophen in it, which is toxic in the unnaturally large doses idiots sometimes take trying to get high on a drug that fundamentally doesn't really do that. (The acetaminophen itself is very much over-the-counter and, in anything resembling a normal dose, as safe as any drug can be, really.) People think hey, here's a prescription painkiller, I bet if I take *enough* of these things I could probably get high. Oops, liver dammage. Yeah, well, you can hurt yourself taking almost any over-the-counter drug if you take a sufficiently extreme quantity of it.

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9. milkshake on January 10, 2008 8:14 PM writes...

All these analogies fail because most patients ("consumers") in US did not chose their health provider - their employer does it for them.

And the employers consideration is typically on the cost rather than the quality. (remember that there is always someone at the company headquearters that gets a raise if she can save on the cost of your coverage). You may not realize all the fine print written by the HMO lawyers until your daughter needs a liver transplant and the insurance company says "It falls in the experimental treatment category that is not covered and we don't think it would benefit her".

This reminds me an old East-European joke: A bear escaped from the circus Colosseum and the tzarist police offered 8 rouble award for catching or shooting the beast - upon hearing the news Moshe immeditately starts packing his belongings. "Calm down, Moshe" his neighbours try to talk him out of emmigrating. "They are hunting after a bear, not after Jews." And Moshe says: "Right. First they shoot you - and then you can go and explain that you are not a bear"

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10. SRC on January 10, 2008 9:20 PM writes...

I probably shouldn't weigh in on this, since I don't understand why people so viscerally hate ticket scalpers, but nevertheless, here goes.

It seems to me as a general proposition that any individual is willing to pay for something in proportion to the value he places upon it.

From that perspective, what could be more important than health care? What are you saving the money for, your funeral?

I say this as a self-employed consultant who pays for his own health insurance, and that of his family, out of pocket. Every cent. And doesn't resent it, either, as long as the health insurers live up to their end of the bargain, which they have.

Food, clothing, shelter, health care - these are critical items, and worth everything, for these are necessary to keeping one's family safe and happy, which is worth the world.

Flat screen TVs, new cars, etc....not so much.

They're just things, and of no importance.

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11. Canuck Chemist on January 10, 2008 9:23 PM writes...

As Milkshake suggested, the fact that the bean counters at the insurance companies make these life-and-death choices is what is evil to me about the "health care for profit concept". It's not without it's complications, but I think the way to go is a single-payer system, where a minimum level of health care is guaranteed, and the choices on health care spending can ultimately be made by someone with more than just a profit motive. This can be supplemented by insurance which provides better or faster than the minimum care. Of course suppliers and providers are welcome to compete for those (limited) dollars from a single (government) payer.

What do hundreds of insurance companies do that a single-payer can't? There are too many middlemen in this world (insurance companies, real estate agents, bankers, car dealers) that provide little value for what they take out of our pockets.

And that's my rant for the day!
Disclosure #1: I'm Canadian
Disclosure #2: I'm in the pharma industry
...I think that puts me in a pretty balanced position :)

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12. emjeff on January 11, 2008 8:44 AM writes...

I find this truth to be incredibly ironic. Back inthe 30' through the 60's, medicine was relatively cheap, doctors made house calls (I'm 44, and I vividly remember my pediatrician coming to my house with his black bag). The only teensy little problem was, aprt from infections, medicine could do very little for you. If you had cancer, you might get an extra month or 2 from chem, but that's it.

Flash forward to today - doctors don't make housecalls, medicine is expensive, but effective; cancer rates are dropping through the floor, new cariac procedures add years to life and whole classes of medicines have shown to help people survive terrible ilnesses.

And yet, we "resent" paying for this care. I don't understand this. For hundreds of years we've been paying for cheap medical care that doesn't work - now, we can pay more for care that DOES work, and we whine that we're getting a raw deal. People, this is just not logical thinking.

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13. Jonadab the Unsightly One on January 11, 2008 11:15 AM writes...

Oh, man, health insurance, don't get me started.

I'm convinced health care would be better and cheaper for everyone if health insurance were abolished entirely and everyone paid out of pocket. That would mean people would have to discipline themselves to put money away in savings out of every paycheck against future health care needs, though, which runs against the grain of our debt-oriented culture. (Then again, maybe they'd just charge medical expenses to credit cards like everything else.)

The problems with health insurance are too numerous and complex to fully lay out in a blog post, but here are a couple of the basics...

First, being insured means people don't shop around for better prices, which screws up the market dynamics. (That's how you get hospital bills padded with bizarre itemizations that don't reflect where the money is really going, among other things.)

The deals that the insurance companies cut with health care providers (which *ought* to be illegal) further skew prices. Doctors and hospitals deliberately pad their prices (by necessity, really) so that the percentage the insurance companies will pay covers their costs, which, in addition to seriously inflating prices for the uninsured and self-insured, also encourages an ongoing cycle of inflation.

Additionally, neither the patient nor the health care provider gets to decide which health care goods and services are most important and most worthy of the patient's money. The insurance company decides that when it decides what it's willing to cover. Choice is removed from the consumer and placed NOT in the hands of a health-care expert (which would make at least _some_ sense) but rather in the hands of a corporate accountant or bureaucrat. Oh, goodie.

Who should pay for health insurance? The government? The employer? The individual? My vote would be none of the above. Health insurance should be abolished, and people should pay medical expenses out-of-pocket like they do pretty much every other expense. (Fortunately I'm not running for public office, because that statement would not exactly guarantee success if I were.)

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14. Canuck Chemist on January 11, 2008 12:00 PM writes...

Jonadab:

So I guess you're saving enough to pay for your future heart bypass surgery???

The core insurance concept of everyone paying something (even if we don't all incur big costs) in order to guarantee that everyone is covered for the low-risk, high cost events is perfectly sound (though perhaps the only disadvantage of this is people don't have as much incentive to take care of themselves-- but that's another topic).

What is unfair is the siphoning off of what is paid into the system by the insurance companies, when we could all pay into a government-run, non-profit insurance plan. I am waiting to hear an convincing argument from someone that explains why we need insurance companies, or why for-profit insurance companies are better than non-profit government ones...arguably insurance companies of any kind... One can make a "they promote efficiency in the system" argument, I guess.

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15. Paul Echeverri on January 11, 2008 1:06 PM writes...

Jonadab:

I don't think you're far wrong there -- time was, as I understand it, that health insurance was for catastrophic illness only, things like compound fractures or organ transplants, and basic checkups and flu shots and minor illnesses were all out of pocket. The WSJ had a pretty interesting profile a few years back about a doctor who just stopped taking any insurance at all and charged fees up-front -- he was able to charge much smaller fees, because he wasn't paying a staff to handle insurance paperwork, and didn't have to worry about managing his cashflow due to dilatory payments from insurance companies. I'd be pretty interested to see health care stop being an expected job benefit and become a more individually assumed cost (the current status owes much to 1970s wage controls), with corresponding salary increases of course, and for catastrophic-coverage health insurance to become more competitive the more expensive total coverage HMOs currently provide. Young and healthy people, in particular, don't really need anything other than catastrophic coverage, and arguably paying for a full HMO is not a great use of their funds.

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16. Hap on January 11, 2008 1:14 PM writes...

I can't say what I detailed is completely logical, but it is how I feel - the Ayn Rand comment is apropos because the "need makes right" argument that I have detailed seems to be precisely what she oposes and refutes. It is also reminiscent of Jurassic Park - where the company realizes that effective therapies powerful enough will be demanded at cost, and their best profit strategy is to make nonessential things for which they can charge what people will pay for.

Market-based systems have problems if we choose to cover (either through gov't or charity) poor people - people's lives are worth (effectively) infinite dollars to them, and so those who have the most resources will be able to get the limited supply of care, while most won't. Getting rid of insurance coverage seems to have problems, too. Employers want to stop paying for coverage, but they don't want to pay employees what those benefits cost (actually, more, because the income would then be taxable), and so employees fight it tooth and nail. The education that doctors receive is a large fixed cost that has to be paid for whether insurance does it or individuals do it, and because those costs are high, it would be difficult for individuals to do so. Paying for preventative care and catastrophic coverage might help, but again, the money is effectively coming from a large pay cut (because the difference in insurance costs isn't going to be converted to a difference in wages), which no one really wants.

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17. SRC on January 11, 2008 2:02 PM writes...

I'm convinced health care would be better and cheaper for everyone if health insurance were abolished entirely and everyone paid out of pocket.

I'm close to that position, but not quite there. I think we need health insurance, but to take care of catastrophic illnesses, not every sniffle (which implicitly is what most people expect now).

First, being insured means people don't shop around for better prices, which screws up the market dynamics.

This is getting to the nub. The problem is not health insurance per se, but rather it's coupling to employment. Auto and homeowner's insurance don't come with the job, but health insurance does, and employees typically have little or no say in choosing the provider.

Because of this coupling, few people know what health insurance actually costs; it just comes out of their paychecks, so they don't worry about it, and that's the problem. (Here's a hint: our healthcare costs for a family of four are a substantial fraction of our mortgage payment.)

The coupling between employment and health insurance dates back to WWII, when General Motors (IIRC) instituted it as a way of getting around wage controls to recruit employees. It has remained in place because corporations get a tax break for their contribution. Eliminating that tax break, and decoupling employment from health care, would be a huge step forward. It would also enhance economic efficiency by promoting workforce mobility, as many people now are reluctant to change jobs for fear of falling afoul of the “pre-existing condition” pitfall.

What is unfair is the siphoning off of what is paid into the system by the insurance companies, when we could all pay into a government-run, non-profit insurance plan.

I get it. Why have insurance companies siphoning off money when we could have the government siphon it off perfectly well?

Holding the government up as a efficiently-run enterprise isn't something one sees every day. A little advice: don't circulate a petition for this in the waiting lines at DMV, as you might get lynched.

One aspect may not be apparent: insurance companies don't make all (or even most) of their money from premiums. They make most of their money from investing the premiums; that's the whole idea of insurance (and Amex Traveler's Checks and Christmas Clubs, for that matter), to borrow other people's money (at no interest), invest it, repay the loan later, and pocket the difference.

So insurance companies (like pension funds) are crucial drivers of the economy. Anyone working at a startup is essentially being paid by insurance companies, who comprise most of the limited partners of venture capital partnerships.

In fact, insurance companies may well lose money on their basic operations, and make up the shortfall on their investments.

Now put the government in place. The government cannot (or at least should not) do the same thing for any number of reasons.

First, it is redolent of socialism, which is intrinsically inefficient and if practiced to any serious degree, oppressive. (For example, how long would it take the government to legislate against any activity that might raise health care costs? Trans fats, smoking, alcohol, performance cars, extreme sports would be predictable early casualties. More mundane activities would soon follow.)

Second, as night follows day, government investment invites use of political influence and ultimately corruption to determine where the funds go. (Google Dianne Feinstein, whose husband's company scored a few billion in government funds allocated by a committee chaired by...uh...Dianne! Small world, eh?) The funds would either go to VCs (and who decides which VCs, and how much they get?) or, God help us, the government tries its hand at making the investments itself. (No comment necessary.)

So for these reasons the government would be ill-advised to play insurance company and make investments. Without investments, premiums would essentially be dead money, which would necessitate raising them to cover the full cost of providing care.

Third, with the government running things, we'd have no recourse. Canadians now can (and do) cross the border to the US for medical care that they can't get in Canada. I guess we'd have to cross over into Mexico. Where they'd go is anyone's guess.

Bottom line: healthcare is rationed everywhere, but on different bases. In the US, it's by ability to pay. Elsewhere, it's by age. (For example, the NHS in Britain writes off people over a certain age. An 80 year old with breast cancer (e.g., my wife's aunt) is essentially told that she's had her three score years and ten, and she shouldn't start reading any serialized novels, because they won't operate on an 80 year old.) We just need to accept that 1) getting good healthcare is expensive, and 2) we're not going to live forever.

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18. Jonadab the Unsightly One on January 11, 2008 5:43 PM writes...

> I'm close to that position, but not quite there.
> I think we need health insurance, but to take
> care of catastrophic illnesses, not every sniffle

I could live with that, if "catastrophic" were suitably defined, but how would that be accomplished? A significant percentage of the population seems to think every little medical event in their lives is a catastrophy. What would you do, require insurance companies to set the deductible high enough than some fixed percentage (say, 95%) of people never meet it in any given year? It would have to go up every year...

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19. SRC on January 11, 2008 6:20 PM writes...

Jonadab, good points.

As a free marketeer, I don't think I'd require anyone to do anything. My model would be auto insurance. Low deductible:high premium, and conversely.

The problem now is that the coupling of health insurance with employment undercuts the motivation for lower cost insurance. If I could get health insurance with, say, a $5 K deductible (and correspondingly lower premiums), I'd be thrilled.

I'll take care of minor illnesses, the odd broken bone, etc., all out of pocket, and be happy for it. I just want to know that if I get hit by a bus, I'm not on the hook for the whole tab, because I can't absorb that kind of loss.

It was the original idea behind insurance (from a policyholder's viewpoint): protection against unlikely but disastrous events that couldn't be borne individually by spreading the risk, and thereby converting the small chance of a catastrophic setback of a given individual into the certainty of a minor setback for a whole group of individuals.

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20. Dennis on January 11, 2008 6:52 PM writes...

I'm just a stupid undergraduate chemist so I don't know much about how industry works but I was wondering what everyone thought of something. It seems like a national, federally subsidized drug company would have numerous benefits in the US. By minimizing incentive for profit at the highest levels you'd eliminate a lot of need to push through drug candidates that have no business being put into clinical trials or to have them pass when they're on the borderline of safety. It would also shift the focus from what drugs can make the most money to what problems do we need to solve. Furthermore, marketing costs could be cut (of course, as Derek has posted, most of the costs are directed towards advertising to doctors, but this way, you could simply provide the information on the drug and let the doctors decide, without having to persuade them with more expensive methods). It would also allow scientists to be more productive by allowing them to focus on doing work rather than having to constantly look for new jobs and move to new areas each time someone decides that firing a bunch of scientists will make the stock price go up.

Of course, the lack of competition could present some problems. It seems likely that there would be fewer molecules in a certain class would become drug candidates, and if those molecules happen to fail in testing, there's less of a chance that a similar molecule that would succeed would be in development at that time. One could also argue that the lack of competition would cause individuals to not work as hard for their jobs, but it seems that scientists (and others who have gone through years in academia) are either self-motivated or motivated by things like prestige that are non-monetary.

I assume all of this is retarded, but it'd be nice if everyone could explain why.

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21. SRC on January 11, 2008 7:27 PM writes...

Dennis, it sounds so...sensible, doesn't it?

Some years ago, visiting the late unlamented USSR, I rapidly learned the word "zagrito" ("closed"). Desk attendants at four star hotels in Moscow reading the newspaper when approached would not look up but just point to the next attendant and say, you got it, "zagrito." Which in due time, all of them said, as did everyone in restaurants (we went hungry for two days - literally). No one could be bothered to do their job.

Why? Because there was no incentive for profit at the highest levels (or any level, for that matter). We couldn't even bribe people to do their jobs, because the employee couldn't keep the bribe (which is why we went hungry). So they played cards, read the newspaper, and chatted, because they were paid the same no matter what they did.

Socialism, essentially what you're proposing, has a siren call because it does sound so sensible. Central planning by "experts" carefully directing the economy in the "right directions," no waste, no competition, just happy campers working for the common good, sturdy peasants posing on tractors, that sort of thing.

The problem is that is doesn't work, and hasn't worked anywhere on earth, despite repeated efforts to make it work. People work when there's something in it for them, and not so much otherwise. More broadly, people pursue their self-interest first, and will only pursue the common interest while they're being watched and coerced to do so. That's why a serious effort to implement socialism rapidly features secret police and such, to try to make sure no one looks out for #1 first. Next stop: Berlin Wall.

The left has made "profit" a dirty word, so let's use the less emotive phrase "personal benefit." People won't work if they don't see personal benefit in doing so. It's even true in the undergrad context. If you knew you'd receive the same grade (say "Pass") regardless of what you did (i.e., you had no incentive to garner personal benefit), would you knock yourself out on your studies? Pull an all-nighter before an exam? Hit the library on a sunny day? You might think you would, but you wouldn't. Subconsciously you'd be thinking that your effort and sacrifice would be rewarded, but when it wasn't, you'd take it a lot easier (especially when you saw someone who did a lot less than you got exactly the same outcome).

All utopian socialist notions founder on that point: the whole idea runs counter to human nature.

To apply this to the Federal drug institute, compare the Post Office with FedEx. Which model would you rather adopt for the drug industry?

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22. Canuck Chemist on January 11, 2008 8:17 PM writes...

SRC:

Great idea about the insurance. Low premiums, high deductible-- I like it! Might actually encourage people to take care of themselves...or perhaps to make dumb choices by not getting the care they need. But at least give people the choice.

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23. SRC on January 11, 2008 9:58 PM writes...

Thanks, Canuck.

I keep hoping that someone will offer that kind of insurance. I'd snap it up in an irregular heartbeat. (g)

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24. UK Chemist on January 12, 2008 6:57 AM writes...

I think all the above just show how truly complex the situation realy is and that in the end the best we can probably hope for is the least worse option.I agree with SRC that the track record of socialised drug research and development hasn't worked to date .For me the issue isn't that we make a profit ,it's the fact that with the current mood of financial markets, that profit has to grow year on year by 10%.This may be OK for industries were new product introduction is highly predictable but in industries like ours where pure dumb luck is probably the biggest contributor it doesn't work out.If anyone has read John Kay's essay on the decline of ICI, I'm afraid this shows the most likely fate of much of big Pharma.This will be sad as, if nothing else, big Pharma has assembled a huge intellectual power house to improve the lot of man-kind.It's a shame it's been so poor in deploying it over the last 15 years.

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25. SRC on January 12, 2008 12:31 PM writes...

Excellent point, UK chemist. The problem is that Wall Street analysts like to use a straight-edge to corporate profits, and therefore reward the "predictability" of a GE (never mind the obvious massaging of GE's numbers).

The problem is, as you point out, pharma is a crap shoot (torcetrapib,anyone?). It's more like wildcatting than anything else, and if there's one thing financial-types hate, it's unpredictability. (For one thing, all of the financial models they're trained to use go out the window; they have to handicap stocks using their technical, medical, and patent expertise.)

I think that's why pharma tries to smooth out results: so they don't get penalized by the Street. The safest way to do that is through what are essentially line extensions, where NPV calculations are not entirely risible. (Rather like Hollywood making sequels!)

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26. Ian B Gibson on January 13, 2008 9:19 AM writes...

Holding the government up as a efficiently-run enterprise isn't something one sees every day. A little advice: don't circulate a petition for this in the waiting lines at DMV, as you might get lynched.

So you're in favour of more clerks and therefore more government spending at the DMV? If not, stop complaining about them being understaffed.


To apply this to the Federal drug institute, compare the Post Office with FedEx. Which model would you rather adopt for the drug industry?

Both have their place. I use the USPS about 90% of the time.

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27. jonadab on January 15, 2008 8:39 PM writes...

The USPS is a special case, because it's (wait for it) not subsidized. It doesn't get its revenue from tax money, but from the sale of its services to the public. If anything it undergoes an antisubsidy in the form of not being paid to deliver franked mail (though compared to the size of the whole operation that's negligible).

There's a lot wrong with the health care system in the US, but if you compare it point-for-point to countries with socialized medicine, I think you'll find that the US system, for all its copious flaws, is actually better. Socialization is not the answer.

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28. bob on January 23, 2008 10:31 PM writes...

SRC,

I don't like this knee jerk socialism accusation whenever someone proposes that the government could help with something. Look at the NIH. It's not socialism just because the government pays for it. Maybe a National Institute of Drug Discovery, Development, and Delivery would be more palatable? (granted, I agree that having the state take over all the drug companies would be a bad idea)

Speaking more generally now, the same thing also happens when discussing healthcare providing. The US won't turn into the USSR if it makes a certain level of healthcare a right rather than a privilege. Why can't some Americans look beyond their borders when discussing healthcare? There are already non-communist countries doing this better than us.

One last thing, in response to Dana, who said:
"Reworded, it means that the more valuable something is to you, the less you are willing to pay for it. Or, "If I really need it, I ought to get it for free." Society needs to pay for things overall and I think most people accept that, but locally I think that's basically fair. If someone really needs something _and if they can't afford it_ it should be given to them free. If you went broke and your house was on fire so you "really needed" water, you would be understandably upset if it wasn't given to you.

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