Orszag on Health Costs

Peter Orszag, the director of the White House Office of Management and Budget, pitched the Obama administrations health care reforms as budget makers ("Health Costs Are the Real Deficit Threat," Wall Street Journal, May 15, 2009).  Rather than using the egalitarian and humane argument that health care should be expanded to cover all, including the poor, Orszag argues that health care can be reformed to lower costs without compromising the quality of care.  In fact, he doesn't mention  that the plan expands coverage (see "The Obama Medical Plan").  Expanding coverage will expand the taxpayers bill.

Orszag asserts that cost lowering, quality enhancing reforms can be achieved because,

In health care, unlike in other sectors, higher quality currently seems to be associated with lower cost -- not the opposite.

This assertion if simply not true. Goods and services that have a lasting place in the market provide consumers the most satisfaction per dollar.  The 2010 Toyota Prius, costing approximately $25,000, will not have a successful competitor offering lower quality at $32,500.  Rather than argue for more government intervention in highly regulated health care markets the Obama administration should begin by asking why health care markets fail to achieve the common outcome of less regulated markets.  Could it be that the tax code and insurance market regulation contributes to a decoupling of price and quality?
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We Are Out of Money Now

From the Drudge Report, "We're Out of Money," May 24, 2009.

In a sobering holiday interview with C-SPAN, President Obama boldly told Americans: "We are out of money."

C-SPAN host Steve Scully broke from a meek Washington press corps with probing questions for the new president.

SCULLY: You know the numbers, $1.7 trillion debt, a national deficit of $11 trillion. At what point do we run out of money?

OBAMA: Well, we are out of money now. We are operating in deep deficits, not caused by any decisions we've made on health care so far. This is a consequence of the crisis that we've seen and in fact our failure to make some good decisions on health care over the last several decades.

In one short paragraph, President Obama pronounces that the government is broke, ducks blame and passes the the buck to elected officials over the last several decades.  Does anyone smell a tax increase to fund medical care reform?

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Civan and Maloney on Pharmaceutical R&D

The Berkeley Electronic Press has published an article by Abdulkadir Civan and Michael T. Maloney titled, "The Effect of Price on Pharmaceutical R&D.  They conclude,

The results of our research clearly indicate that society benefits from the money spent by people in the United States on prescription drugs. The retail price of existing drugs induces new drug development. The higher the prices of existing drugs in a therapeutic category, the larger the number of drugs in the development pipeline in that therapeutic category. We find this result by looking crosssectionally at the drug development pipeline sorted by the types of diseases that new drugs target.

The estimated price elasticity of drug development across numerous specifications averages approximately 35 percent, and is 0.51 in our preferred specification.  This implies that if drug prices decline by 50 percent, a number well within the range of possibility if drug re-importation becomes common, the number of drugs in the development pipeline could decline by 25 percent.

Of course, our estimates are based on a cross-sectional analysis of the marginal choice of drug companies to develop drugs in one category versus another.  These estimates may not apply to an across-the-board decline in prices. However, as we have shown before, the fact that the U.S. drives drug development means that these estimates of price elasticity must be considered carefully in the debate over drug re-importation and other price controls. It is possible that lowering price will kill the goose that lays the golden eggs.

The emphasis added by bolding is mine.  Provisions in health care reform that focus on government bargaining power to control cost scare me.  They may result in lower current costs at the expense of future benefits through innovation.  Effective reform will treat the symptom of increasing costs, highly regulated health care system, with an injection of market incentives and not treating the symptom with government provision or financing of health care services. 
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Innovation in Pharmaceuticals

In a recent post, I expressed concern that President Obama's proposed medical care reform would restrain creativity and innovation in the health care sector.  John Lechleiter, the chairman and CEO of Eli Lilly & Co., describes contribution that pharmaceuticals have made to longevity, the creativity of the private pharmaceutical industry, and how proposed reform would slow innovation ("Health-Care Reform and the 'Innovation Test'," Wall Street Journal, May 14, 2009). 

Life expectancy has improved to due pharmaceuticals.

Inventions such as these -- and my list includes only the partial output of the company I work for -- have transformed the most basic expectations of human life in the last century. Today, the average life expectancy at birth in the U.S. is 78; when my mother was born in 1928 it was 57. (She's still in great health, by the way.)

Even in the last two decades of the 20th century, new medicines accounted for 40% of the increase in life expectancy in more than 50 countries, according to a recent study by Columbia University economist Frank Lichtenberg. In other words, for every year that life expectancy has increased, five months can be attributed to the availability of new medicines.

The private sector is the "heart and soul" of the innovation.

Today, a record 861 new medicines and vaccines are in human trials or awaiting regulatory approval in the fight against cancer, along with more than 300 for heart disease and stroke, another 300 for mental illnesses -- including Alzheimer's disease -- and 90 for HIV/AIDS.

U.S.-based private industry is the heart and soul of this innovation drama, investing $58 billion in research and development for new medicines in 2007 alone. Virtually no discovery reaches the point of regulatory approval if it is not shepherded through clinical development by a large biotech or pharmaceutical company. This means companies too often maligned as "Big Pharma" are in fact the only entities with the right combination of expertise, infrastructure and financing to pull this off.

Some widely discussed reform proposals would negatively impact innovation.

Yet in today's policy-reform drama -- if early clues from Washington are a guide -- the requirements of innovation may be written out of the script. Already in defensive mode, several large pharmaceutical companies are restaging the old merger play -- continuing to narrow the ranks of firms with the full-scale capacity to innovate. Meanwhile, skittish investors have retreated, leaving nearly half of all publicly traded biotech companies with less than a year of cash on hand. These trends amount to show-stoppers if they continue...

So it is vital to all of us that we insist that reform proposals pass the "innovation test." Providing insurance to millions of Americans through a government-run plan would fail the test. Similar efforts around the world have led to rationing of health care and created hurdles between patients and the most advanced treatments...

Curtailing health-care costs by allowing the federal government to dictate prices for branded medicines also would fail the test. Price controls and rebate requirements tend to be arbitrary and make it much harder for innovators to attract and recoup investments.

The stakes are high.  Medical care reform should be carefully considered and not rushed through the legislative process as so much recent legislation.
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The Obama Medical Plan

Scott Gottlieb, a former official at the Centers for Medicare and Medicaid Services, a fellow at the American Enterprise Institute and a practicing internist, has written an interesting article in the Wall Street Journal ("How ObamaCare Will Affect Your Doctor," May 12, 2009).

The new plan will be modeled on Medicare, which, according to government projections, will run out of funding in eight short years (Kenneth Bazinet. "Medicare's in critical condition, cries report," Daily News, May 13, 2009).

At the heart of President Barack Obama's health-care plan is an insurance program funded by taxpayers, administered by Washington, and open to everyone. Modeled on Medicare, this "public option" will soon become the single dominant health plan, which is its political purpose. It will restructure the practice of medicine in the process.

The government will use market power, the ability to alter a competitive market price, and political leverage to negotiate lower prices. The government program will crowd out private plans meaning that your employer may push you into the government plan.

Like Medicare, the "public option" will control spending by using its purchasing clout and political leverage to dictate low prices to doctors. (Medicare pays doctors 20% to 30% less than private plans, on average.) While the public option is meant for the uninsured, employers will realize it's easier -- and cheaper -- to move employees into the government plan than continue workplace coverage.

The Lewin Group, a health-care policy research and consulting firm, estimates that enrollment in the public option will reach 131 million people if it's open to everyone and pays Medicare rates, as many expect. Fully two-thirds of the privately insured will move out of or lose coverage. As patients shift to a lower-paying government plan, doctors' incomes will decline by as much as 15% to 20% depending on their specialty.

Ironically, the Obama administration believes that tactics the government will use to reduce costs are illegal when used by private firms. Christine A. Varney, the new head of the Justice Department's antitrust division said (Brent Kendall. "UPDATE: DOJ Antitrust Chief Withdraws Bush Monopoly Law Report," Wall Street Journal, May 11, 2009)

Some dominant firms may need reminding that their right to compete aggressively remains qualified. When their conduct becomes predatory or unjustifiably exclusionary, the division will take action.

Doctors will earn less, an unfair outcome given the time and effort needed to earn a medical degree, and the quality of service will decline.

Physician income declines will be accompanied by regulations that will make practicing medicine more costly, creating a double whammy of lower revenue and higher practice costs, especially for primary-care doctors who generally operate busy practices and work on thinner margins. For example, doctors will face expenses to deploy pricey electronic prescribing tools and computerized health records that are mandated under the Obama plan. For most doctors these capital costs won't be fully covered by the subsidies provided by the plan...

Doctors will consolidate into larger practices to spread overhead costs, and they'll cram more patients into tight schedules to make up in volume what's lost in margin. Visits will be shortened and new appointments harder to secure. It already takes on average 18 days to get an initial appointment with an internist, according to the American Medical Association, and as many as 30 days for specialists like obstetricians and neurologists.

The private sector is creative. The government sector is not. Rather than come up with an innovative product, the Obama administration will structure its new program after Medicare. To illustrate that government is neither innovative nor creative, and in other ways, a bad supplier of goods and services, I ask my students if they would like the government to pick their music. They demur, concluding that they would be listening to classical music or polkas, yet we are about to let the government provide our medicine.
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