And The Day After That, and The Day After That, and…

One morning last week on the way to work, there was a small cluster of people at a busy intersection holding signs that said things like “No One in America Should Go Without Health Care,” “Health Care Reform Now,” “It’s Time To Remake America,” and something about profits. None of these are exact quotes, but you get the idea. The one about profits was too far away and too small a print; I couldn’t make out the rest of the words while I was driving.

There are a few things that tear me up about these kinds of demonstrations.

First, everyone in America who wants it has access to health care today. They may not have access to a good old family doctor, but practically no one has that. There’s a reason why she calls herself a dinosaur. They may not even have access to a primary care physician, and that sucks. None of that means, though, that they don’t have access to health care. Even if it’s a last resort because they fear the costs, anyone can go to an ER and expect to be treated regardless of their ability to pay.

Second, everyone in America has access to health care that is almost certainly better than the health care that, say, George Washington had during his life^[a] . Aspirin wasn’t even developed until 1853, after all. I am positive that even the poorest man in America has access to better health care at the time of his death, since he died because of his treatment, which included bloodletting. And he got some of the best medical treatment available at the time!

Two hundred and ten years from now, I am almost certain that the poorest person then will have better health care than Bill Gates could possibly buy today. The people of that time period will look back at us and say, “How on earth could they ever have thought that [Insert Medical Procedure Here] was actually helpful?”

Almost certain, that is, unless the government gets too mixed up in the market of health care now.

Why? Well, first, take a look at this post by Megan McArdle, which discusses the benefits of “me-too” drugs (which are, in theory, the easiest new drugs to develop) and the costs associated with developing them. Totally new drugs that have no close relationship with an existing treatment are much more difficult (and, in turn, much more expensive) to develop.

Now, let’s discuss the economics of health care innovation.

Let’s say a new drug costs $10,000,000 to develop. This drug can be sold in 10 different markets (each its own nation), and each market represents 10 people who need the drug. A full cycle of the drug is a pill a day for ten days. So, each market buys 100 pills, which means 1,000 pills sold altogether, so the company must charge $10,000 per pill just to break even on R&D. For the purposes of this illustration, we’ll assume that there are no marginal costs involved (or that the actual development was $9,999,950, and the 1,000 pills cost $50 to make).

Okay, well, the government in market ten decides that $10,000 per pill is too expensive, and the greedy pharmceutical company should just eat the costs, so they mandate that the pill will cost $100 for each of their subjects. So, they buy 100 pills at $100 each, for a total of $10,000, the cost of one elsewhere. That leaves a total cost for the company of $9,990,000, which is now distributed among 9 markets buying 100 pills each. $9,970,000/900 = $11,078 (approximately).

This isn’t a huge change, proportionately speaking. A little more than a 10% increase in the price of the drug for most of its users, and probably, if you were shelling out $100,000 to cover this treatment (10 pills at $10,000), an increase to $110,780 probably won’t break the bank.

But, then, market nine decides to do the same thing… so does market eight… and market seven… and…

Until, finally, every major market has implemented price controls to one extent or another, except market one, which now pays many times more than it would’ve done otherwise. Some of the citizens of market one, seeing how the government “cares for” its subjects, demand that they be “cared for”, too. The governments of these other nations begin criticizing the other nation, citing the fact that their citizens pay much less for their health care, but that their outcomes are not much different from the nation that pays a lot of money. The bad publicity wears on the politicians of Nation One, who must, after all, get reelected, and the government of market one takes over health care.

It “negotiates” with the pharmaceutical company^[b], and finally, there’s no market that can possibly make up the R&D costs. What does our company do?

Effectively, it goes into indentured servitude. It works to keep making its pills (marginal cost is minimal, after all, and the company can make some money, even if it can’t ever cover the original debt. Given the situation, investors avoid the industry like the plague – why put up a collective $10,000,000 to develop a drug if the outlay can never be recovered?

This process would be repeated in pretty much every area where medical innovation was taking place. Why invest the money to improve your products if the only money you can ever make is a minimal profit on the marginal costs of production? If the fixed (and huge) costs of R&D are never going to be recovered, then no one will spend that money.

Ah, you say, the government will spend that money for the public good. Where does it get that money? Our government is already bankrupt. It can borrow, effectively meaning more debt for our children, or it can raise taxes, stealing money from us. But the whole argument against the current system is that it costs the people too much! How is it better for the government to steal the money than it is for the pharmaceutical companies to make it honestly (well, more honestly, at any rate)?

Universities will do the research? I’m afraid not. Universities are great for getting some basic medical/scientific research done, but the actual outlay to take their discoveries and get them into the market? That’s almost exclusively done by the very companies being vilified here.

Here’s the thing. In ten or twenty (or more) years, the price of the currently super-expensive super-drugs will come down, and there will be new, better super-expensive super-drugs on the market. Yeah, the rich are going to continue to get better treatment than the working class or the poor, but that’s always going to be true. The real measure of progress is whether people are getting better treatment than they (or people who were in a similar financial position) got a decade or two ago.

Yes, it’s probably possible to take the level of health care given to Teddy Kennedy or Robert Byrd and give it to the rest of America, but, in doing so, you’re giving that level of health care to the rest of America for the rest of America’s lifetime. It is, almost literally, taking candy medicine from a baby.

1. Heck, this is even true on a much shorter time scale. How many new drugs and procedures do we have today that we didn’t have in the 1960s, or even the 1990s? [↩]
2. Price controls would go into effect, as Megan McArdle (again) explains here, no matter what some people try to say. The politics of the thing makes it certain. It may not happen immediately (though I bet it would), but it will happen eventually. [↩]