Innovation

Like many other pundits with good employer-provided health insurance, Megan McArdle has decided the rest of the country cannot have any type of national health care or insurance. She has given many reasons: rationing will kill your granny, drug companies need to charge the US more to subsidize drugs for the rest of the world, the government will wrap its claws around you and take away your dessert, the government is incapable of implementing any programs successfully, and it will destroy Medicare and Medicaid and raise taxes for everyone. She wavers on which aspect is most important--she said it was public choice theory, then she said it was giving the government a greater role in health care markets, and now she says it is drug company innovation. It's obvious that she is just throwing everything out and seeing what sticks and she can't give a logical, fact-based argument because she doesn't have one. McArdle can gin up fear and throw out bad information however, and for weeks she has been doing just that. Let's take a look at her latest effort, about innovation.

McArdle finally narrows down her argument against government-run health care to one and only one issue: it will destroy innovation, because high US drug prices pay for drug companies' research and development of new drugs and medical procedures.

I'm fundamentally worried about a utilitarian calculus. As long as I think that single-payer will fundamentally depress innovation, I'll remain opposed.

Profits are the pull on the overwhelming majority of the innovation that actually results in a new drug or piece of equipment--not a good target, not an intriguing idea, but something you can actually use on a patient....

Critics of our system say that it is horribly wasteful and inefficient. I quite agree. But innovation is horribly wasteful and inefficient. It's quite common for drug researchers at mean-old profit-oriented pharma to go their entire lives without working on a drug that actually makes it past Phase III trials and into patients. Those kinds of crazy bets are exactly the kind of thing that the centralized, rational, efficient systems that progressives like to build (or at least, dream of building) have the hardest time allowing. And when such systems do make start spending big, they don't tend to get made where the biggest market is--i.e. the most patients with the strongest demand. Instead the decisions are political: which disease has the best organized interest group to lobby the government?

Those are just inherent qualities of a government system. They're the qualities of the systems that progressives lionize in government--the reason that othercountriesspendless. I acknowledge that it can work very well as long as there are some irrational, decentralized, uncontrolled countries in the mix figuring out how to deliver the technology you'll eventually use, for the same reason that a really surprisingly large number of children can forego vaccination without risking disease. But at this point, the US is the only country left providing a hefty incentive for inventing new treatments. If we stop, the whole world suffers, and we along with it. So for all the many bad points about our system, for now, I'd like to stick with it.

It has been pointed out to McArdle that six of the top ten drug companies are European, the US market is only part of the world market for drugs, the US should not have to subsidize any other country's innovation needs, European companies also innovate, US drug innovation and spending on R&D are decreasing, the government funds a tremendous amount of research that is the basis for much of the drug companies' "innovation," and drug companies are mainly innovating by re-working old drugs, but these facts do not change her views. McArdle states 80-90% of European drug companies' profits come from the US and the US provides almost all medical innovation, and therefore we can't have health insurance reform or national health care.

Dr. Marcia Angell, former editor of the New England Journal of Medicine, has debunked these excuses, as have others.

In the past two years, we have started to see, for the first time, the beginnings of public resistance to rapacious pricing and other dubious practices of the pharmaceutical industry. It is mainly because of this resistance that drug companies are now blanketing us with public relations messages. And the magic words, repeated over and over like an incantation, are research, innovation, and American. Research. Innovation. American. It makes a great story.

But while the rhetoric is stirring, it has very little to do with reality. First, research and development (R&D) is a relatively small part of the budgets of the big drug companies—dwarfed by their vast expenditures on marketing and administration, and smaller even than profits. In fact, year after year, for over two decades, this industry has been far and away the most profitable in the United States. (In 2003, for the first time, the industry lost its first-place position, coming in third, behind "mining, crude oil production," and "commercial banks.") The prices drug companies charge have little relationship to the costs of making the drugs and could be cut dramatically without coming anywhere close to threatening R&D.

Second, the pharmaceutical industry is not especially innovative. As hard as it is to believe, only a handful of truly important drugs have been brought to market in recent years, and they were mostly based on taxpayer-funded research at academic institutions, small biotechnology companies, or the National Institutes of Health (NIH). The great majority of "new" drugs are not new at all but merely variations of older drugs already on the market....

Third, the industry is hardly a model of American free enterprise. To be sure, it is free to decide which drugs to develop (me-too drugs instead of innovative ones, for instance), and it is free to price them as high as the traffic will bear, but it is utterly dependent on government-granted monopolies—in the form of patents and Food and Drug Administration (FDA)–approved exclusive marketing rights. If it is not particularly innovative in discovering new drugs, it is highly innovative—and aggressive—in dreaming up ways to extend its monopoly rights.

And there is nothing peculiarly American about this industry. It is the very essence of a global enterprise. Roughly half of the largest drug companies are based in Europe. (The exact count shifts because of mergers.) In 2002, the top ten were the American companies Pfizer, Merck, Johnson & Johnson, Bristol-Myers Squibb, and Wyeth (formerly American Home Products); the British companies GlaxoSmithKline and AstraZeneca; the Swiss companies Novartis and Roche; and the French company Aventis (which in 2004 merged with another French company, Sanafi Synthelabo, putting it in third place).[5] All are much alike in their operations. All price their drugs much higher here than in other markets.

Since the United States is the major profit center, it is simply good public relations for drug companies to pass themselves off as American, whether they are or not. It is true, however, that some of the European companies are now locating their R&D operations in the United States. They claim the reason for this is that we don't regulate prices, as does much of the rest of the world. But more likely it is that they want to feed on the unparalleled research output of American universities and the NIH. In other words, it's not private enterprise that draws them here but the very opposite—our publicly sponsored research enterprise....

People need to know that there are some checks and balances on this industry, so that its quest for profits doesn't push every other consideration aside. But there aren't such checks and balances.

A study done by Ralph Nader's Public Citizen's Congress Watch in 2003 had similar findings:

One of the biggest controversies swirling around the drug industry goes beyond its high prices and huge revenues to the question of what pharmaceuticals do with all their money. Financial reports show that the companies plow far more money into profits than into research and development. Consider:

--As a whole, Fortune 500 drug companies channeled 17% of income into profits last year. Yet they spent just 14.1 % of revenue on R&D.

--Specifically, seven 0f the nine profitable Fortune 500 drug companies devoted more of their revenue to profits than to R&D.

The drug industry contends that it needs extraordinary profits, built on high prices, to fund expensive and risky R&D. Ironically, when some analysts contemplate the future of the industry, their greatest concern is large pharmaceutical companies' over-reliance on advertising and marketing of existing drugs-especially their "blockbusters"-and their failure to keep enough innovative drugs in the research pipeline.

In Pharmacetical Innovation, edited by Frank A. Sloan and Chee-Ruey Hsieh, the editors repeat the same information; drug innovation has greatly slowed, the "free" market is heavily weighed towards drug companies, and drug companies are increasing profits tremendously through advertising and other tactics such as outsourcing drug manufacture to China and other places, not just through innovation.

McArdle expects her audience to accept her statements as fact and does not support them with evidence. All drug companies depend on the US's high prices to create most new medical innovation and we can just take her word for it. But McArdle is not alone in clinging to her Pharma-friendly beliefs. She can rest easy knowing that Rick Santorum also believes the exact same thing and will back up everything she says with the power of his personal beliefs as well.

"You look at any other place around the world that has gone to a more socialized version of healthcare [and you find that] the government doesn't pay for innovation and quality," the former senator says. "It pays for quantity. It pays for trying to cover as many people with the cheapest available technology. This will dramatically stifle innovation in our country."

America, says Santorum, is where most innovative medicine is conducted because the market rewards excellence and innovation.

And who can argue with the Free Market Fairy?