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The Question of Innovation

Like Kevin Drum, there's one objection to a national health-care system that I find kind of interesting. As the argument goes, the United States overspends on health-care insurance. But that overspending has a point. It supercharges innovation. The rest of the world, in fact, free rides off of the high prices we pay for new drugs and ingenious technologies. That's not a great deal for us, but it's better than the grim future that awaits us in a world where the United States is not massively overpaying, and innovation thus grinds to a global halt.

The problem with that objection is that it's all theory. I've never seen empirical evidence quantifying the benefits of domestic overpayment, nor the cost to innovation of, say, a government health-care system that cut spending by 15 percent. Similarly, you'd also want to consider whether further drug innovation was the most productive use of those dollars. Out of every $100 we spend paying more for drugs and devices than other countries, would those last $8 do more good contributing to "innovation" (along with profits, advertising, me-too drugs, etc) or funding early childhood education? Or cutting taxes?

Nor do proponents of this theory seem to take it particularly seriously. They'll use it as a cudgel against single-payer, but never as an argument to increase domestic spending. But why not? If the benefits to innovation are really so grand, why shouldn't we double our spending? Or increase it by 20 percent? It seems unlikely that fortune has delivered us to the optimal point on the curve. If the need to better fund global medical innovation were truly so persuasive, you'd imagine that it would cease being a convenient objection to universal health care and be built into an affirmative policy proposal in its own right.

It's potentially telling that the most serious discussion I've seen of the innovation question didn't come from an advocate of the argument at all. It came from Jon Cohn, who explored the issue in a two-year-old article for The New Republic. So far as I know, there has been no serious follow-up or rejoinder.

By Ezra Klein  |  July 15, 2009; 7:14 AM ET
Categories:  Health Economics  
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That a well-child visit must "cost" more than $500 (as mine do) thanks to innovation is stretch.

Our higher cost of medicine is due primarily to the gross inefficiencies of our system - the multiple administration costs needed to acquire and pay for medical services - the multiple codes a physician's billing office can enter for a particular service or treatment - and the American business philosophy embraced by most in health care that maximizing profits is the ultimate focus of any venture.

Innovation? If you look around, biotech labs in other areas of the world are doing fascinating research into drug development too....

Though innovation is important, we should absolutely not be looking for a "reform" that sets out to increase our costs, Ezra. That makes me shudder.

Posted by: anne3 | July 15, 2009 8:18 AM | Report abuse

I think one of the interesting topics is price controls on drugs. We could immediately save a TON of money by just limiting the price that drug companies could charge for things they have already invented and tomorrow that would be a big boost for virtually every person on earth- they would have access to more drugs at a lower cost. Its a win!

But go back 40 years and make that change- where there was a limit to what people could charge for drugs that people need. Do you really think that there would be just as many drugs available now? I think we have a pretty good balance where for a certain number of years drug companies can charge whatever they want to and can absolutely strike it rich if they invent a drug that people want. But after that anyone is free to make a generic version of that drug and the price should plummet. (not that it necessarily will- people have little reason to pick a drug that cost half as much but works 5% worse)

Posted by: spotatl | July 15, 2009 8:31 AM | Report abuse

"I've never seen empirical evidence quantifying the benefits of domestic overpayment, nor the cost to innovation of, say, a government health-care system that cut spending by 15 percent."

Here's an example of both.

For overpayment: The best evidence available that I've seen would be a comparison of different countries. Bain and Co had a great piece looking at country expenditures and R&D activity a few years ago, and the conclusion was overpayment in the US has led to a shift of more R&D in this country over the last two decades. Don't have link handy, but should be easy to find.

On underpayment: This is very timely. The UK NHS/NICE just this week launched an "Innovation Pass"-- that basically lets drugs get a "pass" from the normal NICE-type controls-- and the kicker is that it was launched explicitly as part of a broader initiative to spur greater innovation in the UK. So NHS has clear concerns, including NICE, that a nationalized system has put a crimp on innovation.

Posted by: wisewon | July 15, 2009 8:41 AM | Report abuse


The 1998 paper by Danzon, The Economics of Parallel Trade (Pharmacoeconomics 13:293 –
304) is relevant to the issues raised. It is available online for free at

Posted by: TheIncidentalEconomist | July 15, 2009 9:04 AM | Report abuse

Because my two major health issues are migraines and allergies, I benefit a lot from profit-motivated innovation. Those are profitable ailments to innovate at, because they never go away. But profit-seeking innovation will not, as others have pointed out, go after new anti-biotics. That's the sort of innovation that's better funded by NIH grants/prizes, for example.

Posted by: MikeT5 | July 15, 2009 9:18 AM | Report abuse

Your write, "Similarly, you'd also want to consider whether further drug innovation was the most productive use of those dollars." I'd like to know who this omniscient "you" is. If investors believe that there is a more productive use for their capital then they would not provide it to drug companies for drug development. Are you or the government smarter than the market?

If drug prices were mandatorily cut by the government the profit motive would be decreased and capital would flow from pharma/bio-tech into other opportunities that would now be more attractive. Similarly, why are green tech companies now attracting so much capital? It's because investors expect the government to subsidize the profit opportunity in this business. Works both ways.

Posted by: mbp3 | July 15, 2009 9:42 AM | Report abuse

Your objection is that it's all theory? Ezra, everything about Obamacare that you're advocating is theory! It doesn't already exist in the United States, and therefore we have to theorize about it using estimates and analogies, all of which rest upon the assumptions that we choose to formulate the theory.

"If the benefits to innovation are really so grand, why shouldn't we double our spending? Or increase it by 20 percent? It seems unlikely that fortune has delivered us to the optimal point on the curve."

Are we at the optimal amount of spending for MRIs? Prenatal care? Hip replacement? Drug rehab? Chemotherapy? Why haven't you laid out precisely how much the spending on each of those treatments will change under your proposed reforms?

Posted by: tomtildrum | July 15, 2009 10:22 AM | Report abuse

I don't know from drugs, but there are plenty of innovative device companies that are both headquartered and do lots of business overseas.

Posted by: someBrad | July 15, 2009 10:48 AM | Report abuse

Before Farrah Fawcett died, she had a prime-time special on ABC about her cancer fight. She was flying to the socialist hellhole of Germany for "innovative" cancer treatment she couldn't get here in the U.S. at any price. What does this mean?

Posted by: flounder2 | July 15, 2009 10:55 AM | Report abuse

A good analogy might be Department of Defense military technology acquisition. Obviously they continue making enormous strides in military-related technology, of which many technologies have made an enormous impact on civilian life (GPS, the Internets). So it is indeed possible for the government to fund innovation.

But as everyone knows, the military-industrial complex is an ugly, dirty business. Think about how much money gets wasted, how dirty the dealings get as politics fuses with corporate capitalism. A whole new army of defense contractors and lobbyists a la Halliburton!

Not only is it possible we might end up spending more on new drugs, we might be buying the less-optimal drug because it's factory is in a certain Congress member's district.

Posted by: jgoldberg3 | July 15, 2009 11:02 AM | Report abuse

I'm not sure that Farrah's innovative treatment bought her very much as she's not here to advocate.

One wonders if German's on the state plan get the treatment, or if it's part of their cash practices.

Posted by: RedBird27 | July 15, 2009 11:13 AM | Report abuse

You sound like a creationist. Do you actually doubt that the profit motive is better at sparking innovation than Government funds? It's just a theory!!!!

Posted by: fallsmeadjc | July 15, 2009 11:15 AM | Report abuse

It's not a matter of where the drugs are made or innovated. It's a matter of where they can be sold for a profit that justifies the investment in their creation. Without the US that place doesn't exist and that profit motive doesn't exist.

Posted by: fallsmeadjc | July 15, 2009 11:20 AM | Report abuse

Farrah's German treatment was new-age witchcraft, not medical care.

Posted by: tomtildrum | July 15, 2009 11:40 AM | Report abuse

I was just throwing it out there to refute the idea that costly U.S. is better than everyone else. Fawcett got 3 years, does anyone know if that beat her prognosis? I could also point out that a bunch of Republicans I know here in Arizona (a number of whom would vote for the right to shoot Mexicans on sight) go to Mexico for their dental work, but that would be piling on.

Posted by: flounder2 | July 15, 2009 11:49 AM | Report abuse

I am currently waiting for the FDA to approve a drug therapy that will potentially save or add years to my life. That drug therapy was developed in Japan. While the FDA has dragged its feet on this for the past three years, another apparently equally effective treatment has been developed - in Germany.
The one and only FDA approved drug treatment for my illness (IPF) is just a left over, expensive variation on organ rejection drugs. All American made tho.

Posted by: fishermansblues | July 15, 2009 12:20 PM | Report abuse

One thing left out of the argument is how much research is done by NIH. Pharma spends four times as much on marketing as research. How much is spent on erection and hair-restoration versus heart disease and cancer?

There is your profit motive.

Posted by: PoliticalPragmatist | July 15, 2009 1:11 PM | Report abuse

PoliticalPragmatist - Actually I think the figure is 3 times as much on marketing as R & D. Google Alan Sager.

He also points out that the drug companies do almost no basic research on drugs, i.e. they don't discover the drugs. When someone else has found a new drug and shows it has a strong probablility of success, then and only then will the druggies pick it up. Most of their R & D is spent on tests for the FDA.

Jonas Salk was at Carnegie - Mellon when he did the vaccine work, not Merck.

Posted by: lensch | July 15, 2009 2:28 PM | Report abuse

Ezra, that means it's not a THEORY! It mean's it just a bunch of hypotheses or stupid guesses!!!

Theories take years of empirical studies to prove. Hypothesis come out of wherever that person's critical thinking skills come from and I'll just leave that to your imagination.

Posted by: Dakinikat | July 15, 2009 2:29 PM | Report abuse

Come on Ezra..There's no way you can measure the cost of forgoing drugs and devices that haven't been invented yet. And NIH conducts research but this is a far cry from actually translating research into developing products. That's a process for entrepeneurs motivated by profit. In know that liberals are suspicious of the profit motive when it comes to medicine--but an honest assessment of medical developments over the last several decades suggests that for-profit medicine can have enormous humanitarian benefits. I'm glad that you're honest enough to at least entertain this objection!

Fact is, medical innovation will slow to a halt if the US adopts single payer--and then tries to ensure equitable distribution of health care at fixed 2009 technology. Then suddenly your beloved European and Canadian models won't look so good anymore without the US system to piggy back off of as they've been doing for years.

Posted by: panza2mil | July 15, 2009 4:36 PM | Report abuse

My favorite source for combating the innovation and free rider myths is Donald Light, Professor of Comparative Health Care.
Check out his U Penn page from the Center for Bioethics. He has lots of stats and charts and graphs too! My favorite nuggets are only 7.1% net sales of pharma goes to research, and only 1.3% goes to basic research for breakthrough drugs. 85% of new drugs provide the same treatment already available (copyright churn). Compares drug innovation rates in Europe and US.
Plus he won the 2004 Ronald Reagan Republican Gold Medal!

Posted by: Hazelite | July 15, 2009 6:21 PM | Report abuse

"Fact is, medical innovation will slow to a halt if the US adopts single payer"

This is just the kind of stupidity Ezra is complaining about. A wild biased statement with no reference or justification.

Posted by: lensch | July 15, 2009 7:35 PM | Report abuse

Great, so now we are going to depend on the innovation fairy to finance new drug development.

I am being kept alive by experimental cancer drugs in the US. The drugs are made by companies from different countries, but they all get most of the funds to finance the development of the drugs from sales in the US. The drugs I am receiving are not available in the UK and other socialized countries. There are newer drugs in the developmental pipeline that could help me even more, but it will be years and hundreds of millions of dollars before governments allow them to be sold. So, Klein wants to cut off the source of the funding to develop those drugs. Where's the money going to come from, big guy?

Thanks for wanting to pull the plug on me, Klein. I hope you and your family all live to an old age in good health. I guess my life has no value in the Brave New Obamabot World.

Posted by: georgebruce1 | July 16, 2009 1:17 PM | Report abuse

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