More Lies

Megan McArdle has made a stunning discovery! A reader emailed her with new information regarding her health care statistics, which forces her to question everything she's ever known.

A reader sends in this note:

I am a former tax lawyer who worked for years on pharmaceutical international transfer pricing cases. The basis for such cases revolves around what share of profits is attributable to a given country. Let me tell you, you will never get an accurate figure, because no such figure exists - all the numbers are purely notional.

[snip]

For this reason, any number as to the percentage of pharma profits made in the U.S. should be treated as arbitrary and bogus. It will entirely depend on how the costs were allocated, which will differ from company to company, and may even differ from one company's financial statements to its tax returns.

Like Iraq and the destruction of the economy, it turns out that pharmaceutical profits are too complicated to understand. Why didn't McArdle know this, when she is a self-avowed economics expert? Alas, she was led astray by others, who lied to her!

So it looks like I got taken, at least in the sense that there's probably no way to come up with an estimate that I would find acceptable. I wouldn't have put that number in a blog post, because I would have looked for better corroboration, and I'm sorry that I used it when responding on the fly, which I did several times.

What kind of immoral, self-seeking hack would lie about the health care statistics that formed the basis for McArdle's entire argument against any public option in health care? It's hard to tell because McArdle links to a post that just reiterates her earlier claims that have been documented so extensively--health care innovation will be destroyed because 80% of European profits come from the US's drug prices. It's possible she meant to link to this, however:

I may be in error on that--I've heard 80-90% from people in healthcare consulting, and I've seen that sales and profits in the US are usually larger when they're broken out on financial statements, which they aren't all that often. But they were not speaking on the record, and financial statements are not necessarily a very good guide to allocating the net profitability of a drug, because of various tedious pricing strategies involving market timing that you can read about in an exhaustive volume from the OECD that I have on my desk, if you want to come to my office, or spend $100 to buy it yourself. There are also issues of the way that companies allocate profits across international borders, which vary for all sorts of reasons, including the location of the company.

It was people in "health care consulting" who lied to our poor, gullible lass, who interviewed them with an open, trusting heart and was betrayed, just like she was betrayed by the bankers who assured her that risk was so yesterday and free markets self-regulate.

McArdle must also clear up another matter as well. It seems that anything McArdle says in the body of a blog post is utterly trustworthy but anything she says in the comments is "on the fly" and might or might not be accurate, even if she insists it is, offers proofs, and uses that information as the basis for her entire argument. This might make asking McArdle questions in the comments a futile and frustrating experience, but that's blogging for you. McArdle has now determined that the real number is oh, 60%. Maybe.

80% may not be right, and I can't back it up with any hard numbers, because there are no hard numbers available. But multiple corresponding sources suggest that the number is well over 50%. 60% is probably the floor of likely.

She can't back up her number but unnamed sources tell her, based on unknown numbers, that the floor is probably likely to be 60%, more or less. We can just trust her that her numbers are right (kind of) and her sources are telling her the truth. This time.

I'm now adding this to my long list of "dark numbers", with the best available proxy being the global sales of New Chemical Entities. Two thirds of those, not more than three quarters, occur in the United States, versus about a quarter in Europe. You can argue about what the fixed costs are in various places, but as my correspondent implies, given how much cross border activity there is, the problem seems to be indeterminate, so I'll stick with a number we know. This doesn't really change my assessment of the problem, since 2/3 is still pretty overwhelming, but statistics matter.

Yes, they do.

By the way, speaking of statistics, I bet you thought McArdle admitted she made up the earlier 80% number, didn't you?

Anonymous: You said that medical innovation will be wiped out if we have a type of national health care, because European drug companies get 80% of their revenue from Americans. Where did you get this statistic?

Megan McArdle: It wasn't a statistic--it was a hypothetical.

However, whenever I have been able to find pharma financial statements that break down their profits by region, the lion's share always comes from the US.

You could not be more wrong.

On a side note, the reason I said 80% was a hypothetical in the Washington Post chat is that . . . well, I didn't. I forgot that conversation, and thought the commenter was referring to this post. These are the perils of typing thousands of words a week, and also, of getting old.

In that post (Health Care: A Lesson In Practical Philosophy) McArdle says the same thing she says in all her other posts:

You can assume that slashing pharma profits 80% will have no impact on their behavior, or at least, only change the behavior you want to change.

Or you can bite the bullet and say, we should save lives now at the expense of lives later.

It's the same argument, the same number, the same justifications, the same threats of disaster. There's no mix-up, just more lies. It's insulting and utterly ridiculous.

UPDATE: McArdle responds to a commenter who can't believe a University of Chicago MBA doesn't know about cost allocation. Criticism of McArdle's authority is about the only way to get a response from her:

I'm glad that you have never, ever made a basic cognitive error, NDM, but there you are, I do from time to time. We live in a world of imperfection and travail.

And lies and deceit.