Monday, January 18, 2016

Paul Krugman, Bernie Sanders, and Medicare for All

The website for Dean Baker's organization, the Center for Economic and Policy Research, is under attack. In light of the urgency of the issue, Dean has asked the management to post this here.

BY DEAN BAKER, CENTER FOR ECONOMIC AND POLICY RESEARCH
Paul Krugman weighs in this morning on the debate between Bernie Sanders and Hillary Clinton as to whether we should be trying to get universal Medicare or whether the best route forward is to try to extend and improve the Affordable Care Act. Krugman comes down clearly on the side of Hillary Clinton, arguing that it is implausible that we could get the sort of political force necessary to implement a universal Medicare system.
Getting universal Medicare would require overcoming opposition not only from insurers and drug companies, but doctors and hospital administrators, both of whom are paid at levels two to three times higher than their counterparts in other wealthy countries. There would also be opposition from a massive web of health-related industries, including everything from manufacturers of medical equipment and diagnostic tools to pharmacy benefit managers who survive by intermediating between insurers and drug companies.  
Krugman is largely right, but I would make two major qualifications to his argument. The first is that it is necessary to keep reminding the public that we are getting ripped off by the health care industry in order to make any progress at all. The lobbyists for the industry are always there. Money is at stake if they can get higher prices for their drugs, larger compensation packages for doctors or hospitals, or weaker regulation on insurers.
The public doesn’t have lobbyists to work the other side. The best we can hope is that groups that have a general interest in lower health care costs, like AARP, labor unions, and various consumer groups can put some pressure on politicians to counter the industry groups. In this context, Bernie Sanders’ push for universal Medicare can play an important role in energizing the public and keeping the pressure on.
Those who think this sounds like stardust and fairy tales should read the column by Krugman’s fellow NYT columnist, health economist Austin Frakt. Frakt reports on a new study that finds evidence that public debate on drug prices and measures to constrain the industry had the effect of slowing the growth of drug prices. In short getting out the pitchforks has a real impact on the industry’s behavior.
The implication is that we need people like Senator Sanders to constantly push the envelope. Even if this may not get us to universal Medicare in one big leap, it will create a political environment in which we can move forward rather than backward.
The other point has to do with an issue that Krugman raises in his blogpost on the topic. He argues that part of the story of lower health care costs in Canada and other countries involves saying “no,” by which he means refusing to pay for various drugs and treatments that are considered too expensive for the benefit they provide.
While there is some truth to this story, it is important to step back for a moment. In the vast majority of cases, the drugs in question are not actually expensive to manufacture. The way the drug industry justifies high prices is that they must recover their research costs. While the industry does in fact spend a considerable amount of money on research (although they likely exaggerate this figure), at the point the drug is being administered this is a sunk cost. In other words, the resources devoted to this research have already been used; the economy doesn’t somehow get back the researchers’ time and the capital expended if fewer people take a drug that is developed from their work.
Ordinarily economists treat it as an absolute article of faith that we want all goods and services to sell at their marginal cost without interference from the government, like a trade tariff or quota. However in the case of prescription drugs, economists seem content to ignore the patent monopolies granted to the industry, which allow it to charge prices that are often ten or even a hundred times the free market price. (The hepatitis C drug Sovaldi has a list price in the United States of $84,000. High quality generic versions are available in India for a few hundred dollars per treatment.) In this case, we are effectively looking at a tariff that is not the 10-20 percent that we might see in trade policy, but rather 1,000 percent or even 10,000 percent.
This sort of gap between price and marginal cost leads to exactly the sort of distortions that economists predict when the government intervenes in a market with trade tariffs, except the distortions are hugely larger with drugs. Companies have incentive to engage in massive marketing efforts, they push their drugs for conditions for which they may not be appropriate, and they conceal evidence suggesting their drugs may be less effective than advertised, or possibly even harmful. They also lobby politicians for ever longer and stronger patent protection, and they use the legal system to harass potential competitors, both generic and brand. Even research is distorted by this incentive structure, with large portions of the industry’s budget being devoted to developing copycat drugs to gain a share of a competitor’s patent rents.
Perhaps the worst part of this story is that the patent monopolies put us in a situation where we might have to say no. The industry’s monopoly allows it to say that it will not turn over a life-saving drug for less than $100,000, $200,000, or whatever price tag it chooses. However, if there was no patent monopoly, we would be looking at buying this drug at its cost of production. That will rarely be more than $1,000 and generally much less. At those prices, it will rarely make sense to say no. (The same issue arises with most medical equipment – once we have the technology, producing an MRI is relatively cheap, as would be the cost of an individual screening.)
We do have to pay for the research, but the way we are now doing it is incredibly backward. It is like paying the firefighters when they show up at the burning house with our family inside. Of course we would pay them millions to save our family (if we had the money), but it is nutty to design a system that puts us in this situation.
We should be looking for a system that pays for the research upfront. There are various mechanisms to accomplish this goal. (Here’s my plan for a system of publicly funded clinical trials.) Obviously overhauling our system for financing drug research is not something that is done overnight, but it is an issue that needs attention. The current system is incredibly wasteful and it needlessly puts in a situation where we have to say no in contexts where the costs to society of administering treatment are actually very low.

This doesn’t mean that we would pay for everything for everybody. There are some procedures that actually are very expensive, for example surgeries requiring many hours of the time of highly skilled surgeons. But we should be trying to design a system that minimizes these sorts of situations, rather than making them an everyday occurrence.

13 comments:

stickler said...

Dean has beaten the "patents" hobbyhorse many times in the past, and refuses to accept the fact that few businesses would "sink" any research costs at all, if they were not confident of recovering them over the life of the product.

These costs are very high in the approval process for pharmaceuticals. In the absence of any patent protection, any competent pharmaceutical manufacturer can copy an approved drug and manufacture and sell it far below the price of the originator who is still trying to recoup his "sunk" costs.

Is there gouging for some drugs? No doubt, but dismantling the patent system is not the way to remedy that situation.

Unknown said...

First, 75% of pharmaceutical innovation comes from government-sponsored research. The bulk of for-profit, private pharmaceutical research is devoted to extending the life of existing patents (think "time released viagra").

And, according to Marcia Angell, former New England Journal of Medicine editor who writes for nybooks.com, big Pharma devotes 55% of its gross profit to marketing, only 15% to R&D.

My sympathy for these people is let's just say limited. As for the patent system: oligarchs like big Pharma game it regularly.

JDM said...

Then do the research via the government (where a lot of it is being done anyway) and get a decent royalty payment from manufacturers instead of giving them sweetheart deals. The same could be said for things as varied as hybrid corn and mining and grazing leases. Charge market rates and get market royalties for government property and research, and have the money flow to the government.

BTW, "dismantling the patent system" is a strawman. Don't do that.

John said...

"However, if there was no patent monopoly, we would be looking at buying this drug at its cost of production. ..."

We wouldn't be buying this or any other future drug at all, as the pharma companies wouldn't conduct the research needed to create them.

Julio Huato said...

@stickler Your critique of Dean is preempted by his public plan to fund new drug research. He linked it here.

Larry Signor said...

The horse we rode in on doesn't have to be the horse we ride out on. Continual change seems to work well for the tech industry, auto industry, food production and many other Industries. What is so special about health care and pharma that exempts them from this paradigm?

Larry Signor said...

The horse we rode in on doesn't have to be the horse we ride out on. Continual change seems to work well for the tech industry, auto industry, food production and many other Industries. What is so special about health care and pharma that exempts them from this paradigm?

Bruce Wilder said...

If Krugman is, as advertised, a "liberal", why do we even bother with conservatives?

The Krugman blogpost from Jan 18, Health Reform is Hard, makes clear, if his column seemed more nuanced, that Krugman is no friend to progressive hope. Of course, he starts out insisting that he, personally, favors single-payer. But, in a Scott Lemieux-like pirouette, he knows it is not politically feasible, so bringing it up is just a distraction.

Then, he labels Bernie Sanders as dishonest, and explains that Sanders' plan would require the dread "rationing" to meet its budget targets. He allows that lower administrative costs might account for some economies. (No word on whether eliminating price-gouging profiteering or parasitic for-profit insurance companies might be helpful.) But, the really important thing, according to Paul, is "saying no" to patients. Open-heart surgery as a desirable consumer good driven by insatiable demand, I guess, is the vision here.

And, although I like Econospeak, it is not reassuring that Dean Baker has to rely on this blogpost in the night to get the word out. Talk about hopeless.

Soccer Dad said...

bake says, quote
Ordinarily economists treat it as an absolute article of faith that we want all goods and services to sell at their marginal cost without interference from the government, like a trade tariff or quota.
unquote
translating from opaque jargon to ordinary english, he wants drug to sell roughly for what it cost to manufacture a bottle and put it on the shelf, which is much much lower then the list price

Doctor Baker: in the real world, who,exactly, is gonna pony up 100s of millions of dollars for 10 or more years for development of new drugs without a patent ?
huh ?
I think you are adding 2+2 and getting -3

Soccer Dad said...

As a liberal, I'm saddened by the knee jerk dismissal of krugmn by sanders fans
maybe krugman is right maybe not, but he surely deserves more then a brush off as a liberal shill.

For instance, Obamacare *barely* passed, even tho there was a dem majority in both houses, *and* the bill was structured so that very very powerful lobbys - the insurance industry - were in favor

and yet all the sanders fans just wave their hands and say, poof, single payer....
I'm sorry, I think you people are substituting handwaving for thought: and the ad hominem nature of most of the anti krugman attacks sort of prooves my point

Roger Gathman said...

Baker's substitute for the present system of patents would not deny companies that "invent" new drugs profit on those drugs. It would instead be a licencing system that would incorporate both competition and the constitutional reason for limited monopoly, which is fairness. A drug company that can't be satisfied with the same margin of profit on a new drug as an auto company has on a new model of automobile deserves to be driven out of business.
Big Pharma propaganda is patently ridiculous.

G-fan said...

AARP lobbying against healthcare and insurance firms? AARP is actually more of a marketing device for insurance and other services; it was founded by an insurance industry manager, and it's "members" don't have actual mechanisms to real power in setting it's agenda.

Thomas Wittmann said...

So many of the comments do not attend to the argument.

The fireman analogy makes his point clear; we don't have individual homeowners pay the fireman or no water comes out of the hose, we socialize the costs and pay them upfront, wages, fire truck, and all.

In case that wasn't clear enough here is Baker's following sentence: "We should be looking for a system that pays for the research upfront."

To which some commenters respond: "refuses to accept the fact that few businesses would "sink" any research costs at all"

"We wouldn't be buying this or any other future drug at all, as the pharma companies wouldn't conduct the research needed to create them."

"Doctor Baker: in the real world, who,exactly, is gonna pony up 100s of millions of dollars for 10 or more years for development of new drugs without a patent ?
huh ?"

(ummm, us, if the costs are socialized as are firehouses) Baker is not arguing we dismantle patents for drugs and make no other change.

"For instance, Obamacare *barely* passed, even tho there was a dem majority in both houses, *and* the bill was structured so that very very powerful lobbys - the insurance industry - were in favor

and yet all the sanders fans just wave their hands and say, poof, single payer...."

Perhaps part of the reason Obamacare was such a push is that the overwhelming financial superiority of single payer was not politically in play as it should have been, because the politicians were to constrained in there vision, and the weren't making the sale. The only reason Sanders can now run on single payer is because after the Obamacare fight many more people know what single payer means!

Could Sanders as President get single payer through his first term? No, he couldn't. But the broad public would learn how much cheaper it is. How it isn't so much patients who pay for drug development but specifically American patients.

You will never get popular demand for anything without pushing it politically.

Can't people remember that for many decades a federal anti-lynching law could not pass? Some called that a regrettable reality and did not fight. Others fought hard, and they built a political climate where lynching could be stopped.