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State Science Institute

August 4, 2009, 6:43 pm

A number of folks, including myself but more prominently Megan McArdle, have argued that a big problem with nationalized health care schemes is that these plans threaten drug innovation in the US  (which is really the last remaining source of drug innovation in the whole world).

The argument is that nationalization schemes will likely hammer drug prices through price controls down to marginal cost, eliminating any profit motive for expensive drug development.  Further, new drugs will be hampered by having to convince government health care czars that the drug should be allowed under proposed proscriptive, top-down systems of allowed medical procedures.  Risk-adverse beauracrats faced with inevitable budget overruns are unlikely to take the chances with new procedures that the private world takes every day.  (And if you don't believe that budgets will be immediately overrun, look at cash-for clunkers, where 5 months of funds were used up in 5 days -- people may not like the government, but they will take free money and services in near infinite amounts).

Well, I had thought that the response to this argument from health care "reform" supporters would have been something like "private incentives to develop drugs will still exist because of X or Y."   But apparently, they have given up on that argument and jumped all the way to the argument that even without any private drug companies, Dr. Robert Stadler and the State Science Institute will do all the drug development we need.

Megan McArdle responds in depth here.  I think there is a simpler argument.  Look at something like computers or machine tools.  Innovation in these free markets occurs all over the world, and new inventions and products are as likely to come from Korea or Japan or Germany than from the US.  But in the world of pharmaceuticals and new medical devices, a wildly disproportionate share come in the US, the last semi-free health care market in the world.  And even those new products developped in other countries are funded and capitalized based on their profit potential in the US.

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Category: Health Care
  • Mesa Econoguy

    Exactly: healthcare nationalization will decimate drug companies, which will then require government assistance, they will get it, and become de facto arms of the National Health Dept. or some other monstrosity.

    See Chrysler, GM template. Maybe the unions will get a piece here, too, since their retirement/benefits plans are a complete disaster.

    I would be very curious to see the numbers on US drug innovation. Don’t have time to look now.

    PS, Who is Ezra Klein, and why is he writing about economics?

  • Paul

    If the drug companies do become part of the government, some bureaucrat will be deciding which drugs to fund R&D. Not only will cost be a factor, politically popular illnesses will be given more funding at the expense of not-so-popular-but-yet-necessary medicines. Currently, any drug that might be beneficial is researched. Even if only a small population would benefit, the final drug price is higher to offset costs.

  • morganovich

    Dr avorn appears to be living proof of that old (but true) axiom of retail brokerage:

    doctors are the worst investors in the world.

  • James

    Unfortunately, this argument will only bolster their pride in such a program. Not only will "everyone get healthcare", but we also will be rid of the pharmas! It's immoral to be making money off of medicine you know. It's about time that industry was government run too.

  • http://hertzlinger.blogspot.com Joseph Hertzlinger

    The simplest argument: President Robert Kennedy Jr.

  • http://herdgadfly.blogspot.com/ gadfly

    Dwight Eisenhower said in his Military - Industrial in 1961:

    Today, the solitary inventor, tinkering in his shop, has been overshadowed by task forces of scientists in laboratories and testing fields. In the same fashion, the free university, historically the fountainhead of free ideas and scientific discovery, has experienced a revolution in the conduct of research. Partly because of the huge costs involved, a government contract becomes virtually a substitute for intellectual curiosity. For every old blackboard there are now hundreds of new electronic computers.

    The prospect of domination of the nation's scholars by Federal employment, project allocations, and the power of money is ever present

    * and is gravely to be regarded.

    Yet, in holding scientific research and discovery in respect, as we should, we must also be alert to the equal and opposite danger that public policy could itself become the captive of a scientific-technological elite.

    Government bribery, bullying and interference with the scientific community has resulted in expensive untenable environmental and climate-related policies, with no end in sight. Health care will shortly topple to the Feds . . . so bend over, put your head between your legs and say "I like Ike."

  • John

    "... the US (which is really the last remaining source of drug innovation in the whole world)."

    The UK which does not have the best social healthcare models but has had it in place since 1948, has been a prime site for drug innovation often having innovative drugs long before the USA. Many of your "US" drug companies are in fact British acquisitions or mergers.

  • Brian

    I saw this argument of stifling innovation addressed in another manner that I think is a little more straight forward.

    What are proponents of nationalized health care claiming will be the benefits of socialized medicine? Reduced costs, better management, and a single payer system. I've not heard anyone claim equal or higher levels of innovation. If proponents are using questionable math to claim the benefits they are claiming, you can bet they wouldn't hesitate to offer equal or increased innovation as a benefit if they had numbers that would get them anywhere close to making that claim. Since they're not, they seem to have accepted that there will be little or no innovation under a nationalized health care system, and if they're still proponents after realizing that, one can only assume they're just fine with that.

  • mahtso

    John, I have heard this claim. Would you please provide some examples? Thanks!

  • mahtso

    OOPS! As soon as I clicked "Submit Comment" I saw my error: Of course my comment should read: "John, I have never heard this claim. Would you please provide some examples. Thanks!"

  • Scott

    I think this is a particularly weak argument against the proposed health care reform. Almost, 10 to 1 Medical R&D is funded by taxpayer dollars in this Country. We spend more, public and private funds, on research in this country then every other nation regardless of the metric you look at.

  • Alexej Buergin

    There is a country where everybody is insured, where the people voted (70% to 30%) to keep the many private health insurers and not nationalize them, and where there is a vigorous R&D. Of course the health system is the second most expensive in the world (the lawyers play almost no role), and the country is very small.
    So: Why imitate a failed system like the UK? Why not imitate success?