ACCUMULATING PERIPHERALS


I grok libertarianism by mattsteinglass
August 18, 2009, 4:22 am
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.

 

As for the second question…I don’t care about the pharmaceutical companies qua pharmaceutical companies.  The pharmaceutical companies are interested in what is good for pharmaceutical companies.  I am interest in what is good for society…Right now, pharmaceutical companies spend a great deal of effort on innovation because they have to in order to survive.  But if survival means ditching the R&D labs and churning out low-cost copies of things they’ve already invented, then I’m pretty sure that’s what they’ll do.

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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14 Comments so far
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I do agree with Megan on one point; the only legislation that really has a chance to pass is not healthcare reform or Social Security reform or Medicare reform- the only items that pass anymore are give away programs to seniors or War.

Comment by fleetlee

Matt, with respect, the start of your post indicates that you really don’t understand what I’m saying.

Under the current system, pharmaceutical companies have an incentive to innovate, because an innovative drug is very profitable. Under the European system, it is mildly profitable–but not profitable enough to pay for the losers, or so my friends in health care consulting tell me.

Under the system you are proposing, it will not make sense for pharmaceutical companies to innovate, because the larger profits come from sucking up to the government.

You’re saying “They have profits now, they’ll have profits then–what’s the difference?”

But the point is where the profits come from is very different. I expect pharmaceutical companies to rationally respond.

Moreover, I quite agree that pharmas are acting in their own interest when they do this. But I think that they are acting in their own interest in the same way that it is in your interest to cooperate with a mugger. When the government is announcing that they’re going to make a plan, and anyone who doesn’t offer big givebacks is gonna get steamrolled, you figure out how to make peace with the government.

The way that incumbents in these situations usually make peace with the government is to take lower profits in exchange for protection from competition. The way they fund those lower profits is by innovating less. That’s what utilities look like.

I am not interested in preserving any pharma, or even pharma profits per se. I am interested in preserving a market structure that offers profits in exchange for innovation–for satisfying consumer demand. Respectfully, you don’t grok what I’m saying. I’m making a pretty standard argument about market seeking and incentive patterns. You’re just picking weird small parts of the argument to rant about. I’m thinking systemically.

The core difference, I suspect, is that you view us both as at least nominally engaged in a similar project to maximize “helpful” drugs which can be known now by both of us. I think the market discovers what drugs can be made that people want, and that this usually, at least in comparison to every command system we know about, maximizes the improvement in human circumstances. I don’t think that a government committee deciding which drugs are “helpful” and subsidizing their production would produce nearly as much increase in healthfulness and happiness. I suspect you do.

I quite agree that we are unlikely to get much further. I have reasons, derived from my observations of every single other national health system, plus a healthy dose of the public choice literature, to think that once the government is paying for more than half the health care in the country, we’ll hit a tipping point that leads to price controls. You have reasons for thinking that this is not so. I believe that this is wishful thinking. You believe I’m a crazy ideologue. And there you are. We could take it to Longbets, but that’s about as far as the discussion is going to go.

Comment by mmcardle

“Under the current system, pharmaceutical companies have an incentive to innovate…”

Innovate in what? Marketing?

As Johann Hari recently pointed out, “the way we regulate the production of medicines across the world is still designed to serve the interests of the shareholders of the drug companies – not the health of humanity”:

a detailed study by Dr Marcia Angell, the former editor of the prestigious New England Journal of Medicine, says that only 14 per cent of their budgets go on developing drugs – usually at the uncreative final part of the drug-trail. The rest goes on marketing and profits. And even with that puny 14 per cent, drug companies squander a fortune developing “me-too” drugs – medicines that do exactly the same job as a drug that already exists, but has one molecule different, so they can take out a new patent, and receive another avalanche of profits.
As a result, the US Government Accountability Office says that far from being a font of innovation, the drug market has become “stagnant”. They spend virtually nothing on the diseases that kill the most human beings, like malaria, because the victims are poor, so there’s hardly any profit to be sucked out.

But this idea of focusing on diseases that actually kill people is foreign to market populists for whom “people” are nothing more than consumers in a marketplace, “one dollar, one vote.”

The reprehensible philosophy called “libertarianism” relies on preaching anti-government cynicism, a self-fulfilling prophecy made possible by the fact that these same preachers have spent the better part of the last three decades working within government to cripple and shrink government so that it can be “drowned in a bathtub.” Quite a trick.

As Thomas Frank has written, “the right’s fortunes depend on robust public cynicism toward government” – a cynicism more pernicious than a healthy skepticism due to its fatalism. Conservatives and libertarians are market populists who confuse mediums of exchange (markets) for mediums of consent (government), not recognizing that “having created the conditions that make markets possible, democracy must do all the things that markets undo or cannot do” (Benjamin Barber). Laissez-faire libertarians pretend to be for “freedom” without realizing how freedom has material prerequisites, so if 275 Americans die every day from our inferior health care system — well, this is price of their perverse notion of “freedom.”

Comment by jasong

jasong,

You’re condemning markets for failing to provide needed drugs, but the passage you quote seems like more of a condemnation of the patent system to me–based on laws written and enforced by the government.

Libertarianism is responisble for crippling and shrinking government? Really? The size of the federal government’s been growing steadily regardless of which party is in charge. Last I checked the Pentagon–not exactly a favorite of libertarians–wasn’t suffering from lack of funds.

Markets are mediums of (voluntary) exchange; governments are mediums of force. I don’t recall consenting to having a portion of my income taken in order to fund the ongoing stupidity in Afghanistan and Iraq, or to bail out Wall St., etc.

Comment by Joe Ermigiotti

Megan, I am not proposing a system of drug price controls. The health insurance reform bills in Congress don’t either. The drug price controls thing is something you brought up. You’re saying that a system of drug price controls follows inevitably whenever the government’s share of expenditures in the system tops some ratio, it might be 50%. We already have a system in which the government guarantees everyone emergency treatment, and the government’s health care expenditures are already slated to become intolerable over the next decade or two. If government budget concerns lead inevitably to drug price controls, it seems to me we’re getting drug price controls.

If I had to pick the single core difference here, it is that I don’t think that the speculative harm of the possibility that reform will make drug price controls more likely, and that if this occurs it may reduce innovation in the pharmaceuticals industry, could come close to outweighing the daily actual harm done by our current health insurance system. In which the weak have to pay more than the strong, some of the sickest people can’t get health insurance at all, people routinely choose to go without preventive care or basic, necessary care for serious problems, people stay in jobs they hate or aren’t good at (often in government!) because of the health coverage, and everyone is burdened by uncertainty and risk. The reform bill in congress pretty much solves these problems. Down the road somewhere, there may be a risk of slowing innovation in drugs; that risk seems to be there anyway, as both private insurers and public ones say they can’t handle the costs; that’s a separate issue and should be dealt with separately.

The other core issue is that it seems to me that you and other free market critics of reform, as the proposed reform hews more and more tightly to free market ideas despite the many sound reasons not to do so, keep pushing the reasons for opposing reform out further and further into the speculative future of things that aren’t actually part of the reform. This disincentivizes future efforts by liberals to accommodate such free-market concerns and empowers those who think we should have just proposed single-payer, since you can never cooperate with the laissez-faire crowd anyway. Though as it happens I don’t even want single-payer; I want France.

As a side issue, you’re right that cutting ROI on successful new drugs could lead to a shift away from R&D; the separate European mechanisms for pricing new drugs are supposed to address this, but maybe they don’t; I still don’t understand how, in such an environment, any Euro or American company could hope to compete against Indian or Thai companies, so I don’t understand how they could be sanguine if they really thought this was in the offing.

Comment by Matt Steinglass

“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.”

If this were true, their program of reform would involve attempting to roll back government interference in the market, rather than adding more. The problem with the pro-reformers is that they seem either unwilling or unable to acknowledge the government’s role in causing many of the problems that they’re now proposing more regulation to fix. The idea that you can give several million more people unlimited access to healthcare without some kinds of adverse effects is just a bogus sales pitch.

Comment by Joe Ermigiotti

Joe, what is your explanation for the fact that every other OECD country achieves universal health insurance coverage, all for 60% or less of per capita costs in the US, while the US insures just 85% of the people who live here? Once you explain that, we can talk.

Comment by Matt Steinglass

Matt,

My explanation is that they must be imposing cost controls of some kinds on these systems, most likely in the form of rationing. I just read a piece today at spiked-online about the NHS that said healthcare in the UK is rationed in part by waiting lists. The piece also mentioned that the NHS is staffed largely by low-paid women and immigrants. Not to mention the trend toward rationing according to “lifestyle”–i.e., smokers and the “obese” being a lower priority. I realize we’re not talking about an NHS-style system here, but it seems like a safe bet that increased govt involvement is going to lead to more govt-imposed cost controls, which will no doubt have some negative consequences (mainly for those who can’t afford to opt out of the system). I mean, one of the main rationales for the current reform is cost control.

Regarding your figure for the percentage of people insured in the US, does that account for people who choose not to buy insurance? I’ve seen figures that indicate that once you account for these people, the number of people uninsured because they simply can’t afford it is pretty low. And they’re eligible for Medicaid anyway.

Lastly, regarding costs per capita, why should it matter to you what I spend on healthcare (or anything else for that matter), or vice versa?

Comment by Joe Ermigiotti

Joe, European health care systems are just cheaper and better. It is in fact possible for some services to be cheaper and better than other services. If national health care systems were competitive with each other, if everyone could compare and choose across countries, the European systems would have simply driven the US system out of business. Unfortunately things don’t work like that, and the people who profit from the inefficiency of the US system can manipulate the political system and people’s inability to see European health care for themselves in order to maintain a system that benefits them (private insurers, pharmaceuticals companies, for-profit hospital chains, overpaid specialists, etc.).

Millions of people in the US “choose” not have health insurance. Most of them “choose” that because they don’t earn much money, and health insurance in the US is cripplingly expensive. It is expensive in part because health insurance companies must spend large amounts on advertising and administration to try to avoid paying for sick people, but mostly because doctors and health service providers in the US are incentivized to make profits by prescribing expensive care to people who don’t need it and for whom it doesn’t do any good. In the UK, doctors have the same incentives which individuals would have in a non-insured system: if you get sick and they have to order care for you, they lose money. Hence incentives are lined up in the right fashion. And that’s why the NHS costs 40% of what US health care costs per capita, and provides almost the same standard of care.

Why should you worry about people who choose not have health insurance? Well, why should I worry about people who choose not to accept emergency care because they worry it will be too expensive? Why should I worry about poor people who choose not to take their kids to the dentist because it’s too expensive? I should worry about them because no one should have to make that choice.

Comment by Matt Steinglass

Matt,

I agree with you. Nobody should have to make the choice between starving or going homeless and paying for necessary medical care. I just disagree that our options are limited to universal, government-provided insurance on the one hand, and, on the other, the public/private hybrid we have now.

I’m not sure if the European systems are cheaper and better. Plenty of people say the American system is better, if not cheaper. I’m inclined to believe that neither type of system is better in all ways. Personally, I would like the option of choosing neither. I agree that prices are too high, but why? One of the main reasons is because third parties pay for everything, including routine doctor visits, and therefore there’s no incentive for the “consumer” to worry about price. This ties in with your observation about doctors prescribing unnecessary treatments. You wouldn’t agree to have an unneeded procedure or test performed if you were paying the bill yourself. Making the government the new third-party payer doesn’t seem like it would solve this problem. Your example of the NHS’s cost controlling incentive is exactly the kind of thing that leads, rightly or wrongly, to “death panel” hysteria. There’s a big difference between the patient deciding not to pay for a treatment and a doctor making that decision for him or her, based on bureaucratic pressure to keep costs down. When an insurance company does this kind of thing, it’s “profits over people”; but when a national health system does it, it’s what, “keeping costs down over people”? From an individual perspective, what’s the difference?

For what it’s worth, I think we should be moving in the direction of more personal control over these decisions, not less. There doesn’t seem to be any good reason that in a free, or freer, market most people couldn’t afford to pay for routine check-ups and procedures, and basic prescription drugs, out of pocket, and have an actual insurance policy for catastrophic illnesses and accidents. But seeing as how this isn’t even part of the “debate,” I’m not holding my breath.

Comment by Joe Ermigiotti

Let us not forget:

From birth, Megan McArdle has been the beneficiary of public funds: taxes paid for her upbringing, paid her father to venture into a corruption-ridden business world based on using public money for private gain, and paid her wages in her first breakthrough job. Her response is to revile government intervention as an employee of the most notoriously corrupt magazine on the market.

Rank hypocrisy and Marie Antoinette privilege is the basis of the Megan McArdle ideology, in which we’re supposed to swallow free market solutions, while she basks in the comfort of taxpayer-subsidized privilege.
So when it comes to health care, Megan McArdle has the worst solution of all, a solution designed to protect her privilege: inaccessible free market innovations for us, and corruption on the taxpayer dime for Megan and her brood. Remember this the next time Megan McArdle defends the corrupt and broken system that’s worked so well for her, and so disastrously for the rest of us.

Comment by jasong

Yeah, I don’t agree with any of that, actually. I’ve benefited from the free market my entire life in many ways, and I suppose someone could construct some tendentious argument claiming that my desire to regulate the insurance market is somehow hypocritical, but it’s a pretty silly and ad hominem thing to do.

Comment by Matt Steinglass

Without government regulation and our socialized court system, the “free market” would not exist.

Comment by jasong

I’m curious what Megan thinks of drug patents. Clearly, this is government interference in the free market, which is why many libertarians oppose it. Yet, also clearly, a 15 year drug patent allows drug companies to innovate more, since they have a stronger (government granted) guarantee of profits.

The free markets are great, but they are not perfect. That’s why we need government to “meddle” in a few areas – such as the patent system, or regulation of monopolies.

Libertarians tend to have this idealized view that the *perfect* amount of innovation is derived from the exact amount that people are willing and able to spend on the fruits of that innovation. A guy who is sick and can’t afford a drug may die; or he may work harder to save up money when he is well “just in case;” or borrow the money for the drug on his good credit; or some other individual action that the person decides for himself. And all those individual acts will produce the exact amount of money for the exact amount of innovation that is the ideal – no more and no less.

But often times, the government – the collective decisions of a group of people – can do more with less. Building roads in ways that benefit everyone, for example. Or paying for that drug that saves the guy’s life, allowing him to become productive, which helps everyone. Or guaranteeing a larger market for cheap, effective drugs that wouldn’t otherwise be worth developing.

And sometimes the government can say “innovation = good,” and fund more of it, for future returns. That’s how we get the NSF or the NIH funded research. But libertarians think this is *too much* innovation. Or they simply believe it is immoral to take a little money from everyone in order to fund such things, no matter how much good it will do.

The libertarian point of view also states that things like roads, or printing money, or zoning regulations are best done by the market; that these sorts of things – and any rules or protections needed to regulate them – would emerge over time anyway, if the government would just enforce contract law and then get out of the way. A pure libertarian government has never been tried, however, so these folks will keep arguing for the impossible.

Meanwhile, Megan is either for government intervention, in the form of patent “rights” decreed by the state, or against it, which would destroy much of her prized drug innovation. I imagine she likes patent rights, but that begs the question: why is every other form of government intervention – no matter how big or small – bad?

Comment by tedsaid




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