Why Big Pharma wants health insurance reform by mattsteinglass

To recap: Initially, Megan McArdle wrote that she doesn’t want health insurance reform because it will entail the elimination of a robust private health care/insurance sector, and that will curtail innovation in pharmaceuticals and technology. I responded that the reforms proposed in Congress don’t eliminate private health insurance or care; they rely on it, like most of the world’s universal health care systems in Europe and elsewhere. Megan then responded that the current reforms in Congress are just the “camel’s nose”, and they will ultimately lead to the crushing of private health insurance and/or care. I responded that they won’t, because evidence shows that all those European health insurance systems that have for 60+ years relied on a robust, regulated private insurance sector (France, Germany, the Netherlands, etc.) still have robust, regulated private insurance sectors. In the Netherlands, I noted, they recently eliminated the public plan and moved to an all-private system. To this, Megan responds that underneath that surface of private health insurance in Europe, the government is actually controlling things, and she takes the example of pharmaceutical prices. In the Netherlands, as in most European countries, drug prices are tightly regulated by the government. This, Megan says, has crippled Europe’s ability to stimulate drug innovation and research, and if we adopt European-style health insurance systems, we will cripple the US’s ability to stimulate drug innovation, and since the US is the last free market for drugs left in the world, that will cripple drug innovation throughout the world.

I feel that we are really getting somewhere in this discussion. I have two basic questions here. The first is this: if Megan thinks the Dutch system is fine apart from the price controls on drugs, why don’t we adopt the Dutch system but not the price controls on drugs? If Megan’s problem with the House insurance reform bill is not the actual House insurance reform bill, but the prospect that it will ultimately lead to price controls on drugs, why doesn’t she back the House insurance reform bill and insist that it not adopt price controls on drugs?

The second question I have is this: if the House health insurance reform bill is so bad for drug innovation and research by pharmaceuticals companies, why are the pharmaceuticals companies buying $12 million in ads promoting the House health insurance reform bill?

I think I have a pretty good idea why they are, actually. Take a look at the current “CEO Voices” essay on the website of PhRMA, the pharmaceuticals industry business coalition, by Astrazeneca President Rich Fante.

As the debate on the future of health care reform unfolds, our leaders must strike a delicate balance between changing the system to address its weaknesses and protecting America’s lead in the search for new medical cures and treatments.

One of the first changes Congress should make is to increase resources for the Food and Drug Administration, so it can remain the world’s gold standard for consumer protection. A strong FDA will help bring safe and effective medicines from the laboratory to patients in a consistent, systematic way.

Second, reform efforts should expand coverage for the uninsured, so every American has affordable health and prescription insurance. Lack of insurance compromises people’s health because they receive less preventive care, are diagnosed at more advanced disease stages. Once diagnosed, they tend to have higher mortality rates.

To provide coverage for those without health insurance, we encourage efforts to increase access to market-based, private coverage and availability of public-sector programs.

So the president of Astrazeneca thinks the top two priorities are increasing the resources of the FDA (so it can approve more new drugs), and increasing the number of Americans who have health insurance, both public and private. The reason for that is obvious: if you don’t have health insurance, you can’t afford to buy drugs.

But there’s something else going on here as well. American health insurers are becoming increasingly reluctant to reimburse treatment with expensive new drugs that can’t be shown to work better than older, cheaper drugs. (This, by the way, is exactly the same process that goes on in all those European health care systems when they review how much to pay for new drugs.) This industry research report (which you and I can only read the abstract of, because the full report costs $11,000) argues that as insurers are getting more aggressive, drug companies must take into account the likelihood of insurers’ paying for new drugs, and drop research on drugs that are unlikely to be reimbursable.

For example, take this presentation a few months ago by John Watkins, who sets reimbursement policies for Blue Cross Premera in Washington State. Watkins explains that without evidence from direct head-to-head trials of new drugs against old ones, he is not likely to approve reimbursement. And in this article from 2006, Watkins explains that he was able to approve reimbursement for a new type of diabetes medication (developed from Gila monster saliva! Wow!) after very complex comparisons showed that for certain patients, it could save 11% in costs over a 10-year period, despite costing far more per dose. But Watkins explains that Blue Cross could do this because it has less client turnover than other insurers. For insurers who expect to lose a lot of their clients within a few years due to America’s balkanized market, such long-term cost savings don’t work. So they won’t approve reimbursement for new, more expensive drugs for chronic conditions like diabetes that only save money in the long term.

Diabetes drugs are a big area of investment for pharma. PhRMA boasts that the industry has 183 new diabetes medications under development. But it makes no sense to invest in these and other drugs if you don’t know whether insurers will reimburse for them. And that’s probably why pharmaceuticals companies have finally decided to get on board with health insurance reform: they need some predictability. The current American health insurance system is simply too big of a mess. They can’t invest in new drugs with any confidence that private insurers will pay for them.

But the main point here is simple: Megan is arguing that the House health care reform plan will in the long run devastate private pharmaceutical innovation in the US, but the US pharmaceuticals industry disagrees with her. They are backing this bill. They are advertising for it. They are calling for the government to get more people insured. Maybe Megan knows their business better than they do. But that just doesn’t seem likely to me.


7 Comments so far
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You said it yourself: The pharmaceutical companies are lobbying for this bill because they want more people to buy their drugs. They want “predictability”—i.e., guaranteed profits. This is how regulation always works. The major players in an industry push for legislation that allows them to corner the market. These guys do know their business.

No doubt Megan’s right. Increased demand for drugs will inevitably lead to higher prices, which will lead to demands for price controls. Government intervention always leads to more government intervention.

But this is a side argument as far as I’m concerned. The main problem is a lack of individual control, in both the current system and in whatever’s being kicked around congress right now. We should be moving toward less government involvement in the healthcare market, not more.

Comment by Joe Ermigiotti

Three cheers! One of the most frustrating things for me in the debate about healthcare, aside for the crazy stuff out there, is that the opponents won’t seem to specify exactly what they are opposed to; they just keep saying they are opposed. Thanks for working to pin this down. I try to do the same for those in my circle who are opposed, but they just keep ignoring me…

Comment by christine

looks like check mate to me. will be interesting to see if Megan can find her way out of this one.

Comment by mkburr

Hi, Matt.

I’ve been reading your ongoing discussion with Megan, and I agree with you. Megan is a smart and talented writer, but she tends to paint everything with the free market/libertarian brush. I agree with her that that is the rule – free markets are usually best. Where I disagree is when, as in health care, there needs to be an exception to the rule.

I’ve been thinking about the practice of hospitals vastly overcharging those without medical insurance, and having different rates for different insurance companies. I’ve read a lot of anecdotal evidence of these practices, as well as the issues with trying to find out the cost of a procedure *before* it’s done. (If true, this is one of those gapping holes that free market practices doesn’t address.)

I’ve been trying to figure out what the unintended consequences would be for 1) making it a rule that care givers charge all their patients the same across treatments, and 2) forcing them to disclose costs – when appropriate, or when asked – before the procedure is agreed to.

My sense is that (1) could be quite effective, and that (2) has some potential, but could be a paperwork nightmare to regulate. But they are both pretty big changes, and there may be things that haven’t occurred to me.

Care to comment? I be interested to read arguments either for or against.



Comment by tedsaid

Sorry … worded that wrong. I shouldn’t have said “charge the same across procedures.” That would be asinine. I meant, for each procedure, the care givers would have to charge the same, regardless of the patient’s insurance status or affiliation.

Comment by tedsaid

Not only is that not a possible rule, but the opposite is the case. To put it somewhat crudely, Medicare rules require that it get a better price than anyone else. Insurers base their reimbursement negotiations on the Medicare price. That’s why it’s getting harder to find a PCP who takes Medicare.

Comment by mmcardle

McArdle claims that phara companies won’t invest in research and development if they can’t make huge profits in the US. But she is careful to not give us a number for this spending.

From what I recall, pharma companies spend about $30 billion a year on research and development. That out of a total health bill in the US of 2 trillion. Surely the government could figure out a way to disperse that much money to develop new drugs, and it would own the patents on them.

Comment by eduardomontez

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