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June 21, 2005

Who is subsidizing whom?

My father and I have had ongoing discussions about the sad state of affairs in the health care business. On the one hand, America is producing a disproportionate number of global medical innovation. We have short waiting lines for medicine, and our invasive care is much more likely to save the patient. Our generic medicine is the cheapest in the world. Nevertheless, millions are without private care (though many voluntarily) and must depend on emergency care, which puts pressure (by raising prices) on those who can just barely afford medical care. It also consumes about 1/6th of all us economic activity.

One of the reasons why branded American medicines are more expensive than than that of other wealthy nations is that the nationalized socialist medical models that they employ allows centralized negotiations on the price of medicine. The national monopsony (only one buyer) gives tremendous negotiating power on price.If the drug companies balk at the extortionist price, the government can threaten to void the patent as a public good. The French government essentially did this with RU 486 and the drug maker Roussel Uclaf. But that isn't how it usually goes. Normally, they make a modest profit on each pill, with a far larger share of the profit from medicine sold in the United States. A natural question is why should American consumers support cheap medicine for foreigners? But that's actually the wrong way to think about it. It is true that we help other rich nations get access to medicine that the profit they provide would not create. Even so they hold down our medicine prices buy buying up that artificially cheap medicine.

The foremost decision in how much money to spend in pursuit of a treatment or cure is the profit that it is expected to fetch. That means that if the drug makers only sold medicine in the US that they wouldn't be able to make as much money as if they sold it worldwide. Making less money means fewer dollars spent on new cures for American ailments. My theory is that the US drives the research agenda by supplying the lions share of the profit, then other countries subsidize those goals by chipping in profit. They further hold down costs by allowing greater economies of scale for production. To prove this we just need to see if the diseases on which the international pharmaceutical business focuses are American more than European. We know that the rich world overall is getting the medicine it demands. For example, there were 1,223 drugs were licensed worldwide between 1975 and 1997, but only 4 dealt with primarily tropical diseases . Yet tropical diseases cause far more than .33% of the years of healthy life lost to disease. But can we parse out the differences between European and American diseases?

I have a few ideas how we could do that. Obesity might seem like a natural candidate, as Americans are considered to be the fattest people on earth. We could check to see if their are more obesity drugs in the pipeline than something like prostate cancer, which we might presume to not vary between the US and Europe. However, Europeans may be quickly fattening up to the weight of Americans, so obesity and appetite drugs may be the wrong place to look for differences. Instead, I'd check a remark that a doctor mentioned to me a few years ago, that when confronted with the same symptoms, doctors in different countries predict different diseases. That is, two middle aged men come in to the doctor with trouble sleeping. The American doctor tells him he needs to cut the salt out of his diet because he is at risk of a heart attach, and the French doctor might say that he has liver trouble and needs to reduce the wine in his diet. If we could figure out common symptoms groups that were treated as different diseases in the US and Europe, we could check their relative drug developments.

Posted by OneEyedMan at June 21, 2005 9:00 AM

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