Wednesday, September 23, 2009

Neglecting the "pharmaceutical umbrella" that the U.S. provides

Benjamin Plotinsky has a good article in the City Journal explaining how comparisons of health expenses in the U.S. and other countries neglects the differential provided by American spending on medical research. First he provides this telling comparison.
To understand one of the most persistent myths in our health-care debate, forget for a moment about public options, health co-ops, and loopholes for illegal immigrants. Instead, imagine that it’s 1962, the hottest point of the Cold War, and that you’re reading a report comparing two countries’ strategies for resisting the Soviet menace. The United States, the report points out, spends billions of dollars a year on troops, tanks, warships, and missiles, while France spends a tiny fraction of that. Nevertheless, France and America are both unscathed by Soviet bombs. Therefore, the report concludes, France’s Cold War strategy is far more efficient than America’s. And you snicker at the obvious flaw in the reasoning, since you know that what has kept the Soviets away from France is precisely America’s enormous military budget. If not for the nuclear umbrella that the United States has unfurled over the Continent, Volgas might be cruising down the Champs Elysées.
There are those who argue today that Europeans achieve the same or better health care results with their nationalized medical plans than we do with our medical care. They use their comparisons of money spent and health outcomes to argue that we are spending our medical dollars less effectively. What is left out of such analyses is the money that is spent on pharmaceutical research and drug development. And the comparison is remarkable.
And as a 2006 article by Henry G. Grabowski and Y. Richard Wang in the peer-reviewed journal Health Affairs makes plain, the lion’s share of new chemical entities (NCEs)—that is, genuinely new drugs—are invented in the United States. Between 1993 and 2003, the authors found, 437 NCEs were introduced around the world. America was responsible for 152 of them—far more than any other country—with Japan coming in second with 88 and Germany a distant third with 42. The United States also led the world in the introduction of “global NCEs,” drugs “introduced in a majority of the world’s leading drug markets.”
New research shows that the U.S. has overtaken Europe as a whole in drug development.
Why is this important? One reason for America’s drug dominance (though far from the only one) is America’s unsocialized medicine. Here, with the exception of a few programs like Medicaid and the VA system, the government doesn’t regulate the price of drugs, so when a company invents something big—the latest miracle cancer drug, say—it strikes it rich, making its executives hunger for more. Take away the profit motive, as government-run medicine often does by forcing drug companies to sell at discounted prices, and innovation will dry up. “EU policy has kept pharmaceutical price inflation equal to average consumer price inflation over the last 19 years,” write Joseph Golec and John Vernon in a 2006 paper for the National Bureau of Economic Research—“with real costs of about $5 billion in foregone R&D spending, 1,680 fewer research jobs and 46 foregone new medicines.” True, America’s unregulated environment benefits any drug company that sells here, regardless of its nationality—but American companies profit most, since even in today’s global economy, a higher proportion of their sales than of European companies’ sales takes place in America.

So socialist Europe, by using American drugs (especially the “global NCEs” that Grabowski and Wang identify), is profiting from good old-fashioned American free enterprise. Europe doesn’t pay its way, either. As Guy Sorman wrote recently in City Journal, France’s socialized health-care system bullies American pharmaceutical companies into accepting bargain-basement prices for their wares. The companies make up for the loss by charging Americans more.

But the lesson here isn’t that America should be stingy about subsidizing French health care. If American consumers and drug companies play a disproportionate role in protecting the world from dangerous microbes—just as America did in protecting it from Soviet missiles—we should be proud. (It would be too much to hope that this good deed will go unpunished among European elites.) No, the lesson is to be skeptical of reports speaking glowingly of socialized health-care systems, because those systems wouldn’t work nearly as well as they do without unsocialized American medicine.(Links in original)

But these statistics are crucial for another reason. If the profit motive is removed from the American market through government regulation of health care programs trying to lower costs by negotiating lower drug prices, the drug companies will respond by doing less of that expensive research and development. And the result will be the loss to all of mankind of future new medicines. We won't know about what we have lost. No one knows of the discoveries unmade. And that is one of the main reasons why I am so strongly against the sort of governmental tinkering with our medical industry that the Democrats are espousing. For we know that if the government becomes the major supplier of health care, there will, surely as night follows day, be governmental edicts coming out about the prices that they're willing to reimburse drug companies for expensive drugs. And gradually, the companies will stop their research into new medicines. Think of the advances that have been made medically in just the last 10 years. Then imagine your future health care without those new medicines. And think of the hope that so many of us have that, by the time we reach old age, that new medical discoveries will be there to help us through such diseases such as Alzheimer's. But those medical discoveries, and one of the most vibrant parts of our economy, will be drying up.

All the world will be the loser for those holes poked in the pharmaceutical umbrella.