Filed under: Health
I asked Megan McArdle two questions: if her problem with universal private health insurance is that it will someday entail drug price controls and thus hurt pharmaceuticals research, why don’t we just do universal private health insurance and not do drug price controls? And, if the House health insurance reform plan is bad for drug innovation, why are pharmaceuticals companies backing it? Her reply (Is What’s Good for Pharma Good for America?) is that pharmaceuticals companies are not necessarily interested in inventing useful new drugs:
Price controls are a feature of national health insurance schemes, just as log-rolling is a feature of democracy. We might hold out for a while. But eventually, we’d have a combination of populists in office and a budget problem, and the pharma profits would go.
I’ve condensed and bolded here to point out the logical problem. The gist is that in a few sentences, Megan goes from arguing that price controls will savage pharmaceuticals companies’ profits, to arguing that pharmaceuticals companies will be able to profit just fine under price controls by cutting out research. Which is it? Under her framework, the former makes sense, the latter doesn’t. If the government institutes drug price controls in order to save money, then it is cutting revenues to pharmaceuticals companies. What Megan wants to argue is that somehow drug price controls will cut out the good kind of profit, the kind that incentivizes research, but not the bad kind, the kind that just makes pharma companies rich without further social benefit. That doesn’t make sense. If anything, European-style price controls will hurt profits on established drugs more than on innovative ones, because they all have cut-outs that allow higher prices for newly patented drugs. Megan just doesn’t have a satisfactory explanation of why it is that pharmaceuticals companies are supporting health insurance reform, if health insurance reform inevitably leads to drug price controls which inevitably lead to reduced profits for pharma which inevitably lead to reduced innovation.
Effectively, Megan is arguing both that she knows pharmaceuticals companies’ interests better than they do, and that even if they do know their interests, those interests don’t necessarily match up with inventing new drugs that help people. So why are we relying on these companies that allegedly don’t understand their own business and whose interests do not line up with the public benefit to provide us with the drugs we need? Well, fortunately, goes the argument, Megan McArdle does know how to align pharmaceuticals companies’ interests with inventing new drugs that help people, and it just so happens that the answer is to maintain the status quo.
I may be missing something here. But I find this argument as twisted-up as a molecule of RNA. Megan started out arguing against government health care, because government health care will kill medical innovation. It was pointed out that even if that were true, the proposed reforms are insurance reforms, not health care reforms, and “innovation” in private insurance is generally useless or harmful; we want innovation in care. Okay, she said, but government health insurance will kill innovation in care because it will have to cut expenditures. It was pointed out that even if that were true, the proposed reform is not government health insurance; it is guaranteed and regulated private insurance. Okay, she said, but that private insurance system is just the “camel’s nose” for a system that will inevitably move to government control. It was pointed out that this is not so; private universal health insurance systems everywhere else in the world remain private. Okay, she said, but underneath those ostensibly private systems, you will inevitably have government regulations like price controls on drugs, which will kill pharma profits which will kill innovation. It was pointed out to her that even if it were true that price controls on drugs kill innovation, the pharma companies seem to disagree with her that there will be price controls, or else that they will kill profits, since they are backing the reform bill. To sustain her argument, Megan now has to posit that the pharma companies are wrong about the inevitability of drug price controls, or else that they are happily conspiring with government to create a world where there is no more drug innovation but drug companies can still reap profits through…??? The more I think about this latter idea, the less plausible it is. If drug companies stop research, their drugs go generic. If the US government needs to solve its budget deficit by buying generic drugs, it can do so at prices so low, they will put American pharma as we know it out of business. I guarantee you that Schering-Plough of New Jersey does not want to compete on price against Cipla of India.
I believe the more parsimonious explanation of why big pharma does not oppose the private-oriented Obama health insurance reform plan is that pharma executives think it will not, in fact, cause the harms Megan predicts.
In this discussion, in order to get a sense of what it is that Megan thinks, I have tried to stick to her terms, rather than constantly going head to head on the other side of all those “even if that were true”s: the fact that private pharma actually does almost no basic research, or even secondary research on drugs for rare conditions; the logical dilemma that private health insurance must either have stronger incentives to drive down prices on new drugs than public health insurance does, or private insurance is worthless; the fact that new drugs and other medical innovations are wildly overprescribed in order to generate ROI, costing us all money and making nobody healthier; and so on. And yet it feels to me like Megan keeps arguing on both sides of a series of issues in ways that don’t cohere with each other. Reform will fail because governments cannot reduce costs, but government will institute controls on drug prices in order to reduce costs. Private pharma and the profit motive are the only way to generate valuable medical innovation, but you can’t count on private pharma to create valuable medical innovation because the profit motive often doesn’t reward it. And so forth. The only constant thread I can detect here is that a proposal to have the government do or regulate something is always bad.
Megan finally tries to characterize our differences as a cultural chasm in ways of thinking that prevents us from understanding each other. She says that liberals don’t “grok” libertarianism. I think this is evasive. I understand Megan’s arguments perfectly fine. More generally, I grok libertarianism. I grok a lot of philosophies I disagree with. The problem, I think, is that Megan is trying to use free-market arguments to oppose a program of reforms that has been designed to specifically take free-market criticisms into account, one that, in fact, was thought up by people who really believe in the free market. In order to do that, she has to cook up increasingly far-fetched harms, way out in future: this will lead inevitable to that which will lead inevitably to serfdom. But nobody who’s not a hard-line libertarian, not even corporate executives in the relevant industries, seem to think that Megan’s litany of woe is likely. If Megan thinks drug price controls are a bad idea, fine, we can have a discussion about that. But they’re not part of the health care reform that’s being proposed, and to argue “ah, but if we pass this, drug price controls must inevitably follow, and they are terrible!” is a style of argument that makes it impossible to have a conversation.
I actually don’t want to get into a discussion of how I grok libertarianism, because I think there are some things about the liberal grokking of libertarianism that Megan may not grok, and I’m not sure it would be possible to get through a conversation about the nature of that grokking without offending one another. But maybe if we all sat down on Mars around a nice dish of fried Milton Friedman’s brains, we could talk it out sometime.
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