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Ignoring Innovation

Jim Henley has a question for some of his friends on the libertarian right:

So tell me: The argument is that if we further nationalize health-care financing it will mean reducing expenditures which will mean squeezing the profits of Pharma which will reduce innovation and more people will die and that’s bad. How is this not also an argument against any course of action that reduces health-care spending? For instance, favored right-wing programs are tort reform and increasing the share of health-care costs borne directly by the consumer. The argument is always that these changes reduce “unnecessary procedures” and – ta-da – control costs. But this would also, then, reduce the incentive for innovation in the health-care sector. Lower profits; less capital attracted.

I think y’all are proving too much.

For a long time, I took questions about stifling innovation very seriously. So did a lot of liberals. But then I realized that the people making those arguments wanted to do things like means-test Medicare, or increase cost-sharing across the system, and generally reduce costs in this or that way, which would cut innovation in exactly the same way that single-payer would hypothetically cut innovation: by reducing profits.

I also found that I couldn't get an answer to a very simple question: What level of spending on health care was optimal for innovation? Should we double spending? Triple it? Cut it by 10 percent? Simply give a larger portion of it to drug and device manufacturers? I'd be interested in a proposal meant to maximize medical innovation. I've not yet seen one.

It turned out that concerns about innovation weren't really about innovation at all. They were just about attacking universal health care ideas of a certain sort. Which is why I stopped taking them seriously. As it is, I'm less worried about squeezing out medical innovation than I am about rising medical costs squeezing out innovation in every other sector of society. Maybe some day the situation will change, and so too will those concerns. But we're not there yet.

By Ezra Klein  |  September 17, 2009; 12:07 PM ET
Categories:  Health Economics  
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To *increase* innovation, including innovation to be more medically effective and productive needs only

a better payment incentive system:

Posted by: HalHorvath | September 17, 2009 12:14 PM | Report abuse

I'm pretty consistently libertarian and the only area I have a problem with stifling innovation is with price controls on drugs. I think that the US gets it exactly right where if you invent a new drug then for a period of time you can charge whatever you want to for it because it would not have existed without you putting that research in. You are not depriving anyone of anything because it would not exist otherwise. THen eventually after the patent expires anyone who wishes to can create a generic or competing version of it to drive the price down.

For this reason I am STRONGLY in favor of allowing drug reimportation. Not because it will lower the cost of drugs here so much as it will stop other countries from free riding on our reasearch. Whatever a company is willing to sell the drug for in another country we also get it for here.

Posted by: spotatl | September 17, 2009 12:14 PM | Report abuse

Asking these questions of libertarians is like asking a cargocultist why he does what he does. The answer is that there is a prescribed set of motions and mantras you need to enact, and then good things will happen. The precise policy issues and situations involve don't matter. But if you stick to the "libertarian" solutions, then you will be rewarded with salvation.

Posted by: constans | September 17, 2009 12:22 PM | Report abuse

spotatl: Do you not realize that the reason drugs are cheaper in other countries is that OTHER GOVERNMENTS IMPOSE PRICE CONTROLS ON DRUGS????????? Sorry for the caps, but whenever I see a right winger argue for drug importation, it makes me crazy. However, I would be strong in favor of legislation which limited drug manufacturer's prices in the U.S. to the highest price charge in any other country. Then Pharma could sort out by itself what the total return it needed on a drug would be, and set prices accordingly. If another country wanted to deny it's citizen's access to a drug by refusing to pay a price that Pharma was willing to sell it for, that would be their political problem, not ours.

Posted by: exgovgirl | September 17, 2009 12:46 PM | Report abuse

The "it would stifle innovation" argument rests on a fallacy: that the US alone is responsible for any and all medical advances. If that's so, then why is that so many of the Nobel prizes in medicine and life sciences are awarded to non-US researchers?

And how many people who talk about other countries "freeloading" on US research are aware that five of the top six drug companies are headquartered in countries with universal healthcare? Or that drug companies in the US spend more on advertising and promotion than they do on research? The current system rewards those companies by ensuring fatter profits here than they reap in their own countries.

Posted by: Athena_news | September 17, 2009 12:46 PM | Report abuse

>I'm less worried about squeezing out medical innovation than I am about rising medical costs squeezing out innovation in every other sector of society.

Well said.

Posted by: rayrick1 | September 17, 2009 12:47 PM | Report abuse

Ezra, many Libertarians do not support intellectual monopoly (i.e. patents) because we believe it actually discourages innovation. Please see the book "Against Intellectual Monopoly" which, in keeping with the book's premise, is available for free all over the Internet.

"What level of spending on health care was optimal for innovation?"

The optimal amount of spending that occurs when willing buyers and willing sellers voluntarily engage in a business transaction. This question is impossible to answer in our current system because legislators and rent seekers have so badly distorted market signals.

Posted by: kingstu01 | September 17, 2009 12:48 PM | Report abuse

"But then I realized that the people making those arguments ...."

So I stopped caring about innovation because the people you supposedly were having these conversations with were, in your opinion, being inconsistent? And because you couldn't get a straight answer out of some supposed group of probably hypothetical people you viewed as your opposition? You know that doesn't logically follow, right?

Posted by: jhglassman | September 17, 2009 12:59 PM | Report abuse

Turning to the argument of increasing the share of costs borne by the consumer and thus reducing unnecessary expenses: the reality is this does indeed work, on the margins. I can decided to take a generic, go to urgent care vs the ER, and tough out my cold rather than go to my primary care doctor. All of this saves money. This is where high deductible plans make sense.

But 80% of healthcare spend is on things other than this. Once you get swept into the 'system' you are at the mercy of the doctors treating you. In the hospital having an appendectomy you do what you are told. You become diabetic, have a heart attack, get diagnosed bipolar, same thing. The doctors are in control. The amount of cost sharing you have does not matter. This is where high deductible plans just become another form of cost shifting, regardless of their hype.

Posted by: scott1959 | September 17, 2009 1:00 PM | Report abuse

exgovgirl- I completely understand that other governments put in price controls. Which is exactly why I want to see drug reimportation allowed. If the pharma company wants to sell to that country for lower than market rates then they have to be willing to give the US the same price. IF the country wanting the drug is not willing to offer enough money for the drug then that country will just have to go without the drug. Those countries are currently getting a free ride off of us funding their drug research- by allowing drug reimportant it would make those other countries pay for their share.

Posted by: spotatl | September 17, 2009 1:01 PM | Report abuse

Basically I think back if the US had imposed strict drug controls on all pharma 50 years ago- we are far better off today because there are many drugs that are now generic and widely available that would not ahve ever been invented under that other system. I think that giving people a narrow window to make as much money they can off of a new invention is a great balance of individual vs public good.

Posted by: spotatl | September 17, 2009 1:03 PM | Report abuse

Tort reform? The purpose of tort reform is to reduce transfers from doctors, hospitals, and drug companies to lawyers. In other words, it's completely consistent with the goal of encouraging innovation in the medical and pharmaceutical industry. Henley is wrong, in a way that shows that he was just stringing buzzwords together rather than actually thinking about the issues.

This is not just a disagreement but rather a straight-out factual error, Ezra. There's just no set of facts in which tort reform reduces innovation. You ought to append a correction to this post.

Posted by: tomtildrum | September 17, 2009 1:03 PM | Report abuse


From your post, it looks like you think that a country's level of medical innovation is directly proportionate to its aggregate profit levels regardless the source of the profit. You can't possibly think that, so I'm worried I'm confused. The libertarian point is going to be that cutting profits is good so long as it is reduced in ways that market mechanisms demand, mechanisms that themselves generate innovation, like competition and the profit-motive.

Further, this reminds me of something I meant to say a few months back when I first noticed you started addressing this argument in some detail. You seem to have a pretty narrow view of medical innovation. You primarily focus on innovations in pure science or in pure drug development. But libertarians emphasize not only these innovations but the innovations 'downstream' in the productive process, in those 'down and dirty', day-to-day tasks that Adam Smith thought the division of labor and competition improved in practically whatever sector of the economy they were allowed to work within. Libertarians defend markets as innovative not only on the grounds that they produce advances in pure science and drug development, etc. but because of the daily experimentation that occurs in the market process due to competition and feedback from the market - feedback that policies you support - in our view - would distort and, at worst, destroy.

Posted by: Selfreferencing | September 17, 2009 1:06 PM | Report abuse are correct in that we have no idea what the optimal spending level is because we have know idea what a willing buyer and willing seller would pay.

You go to a car lot and you decide if the care is worth $25,000, negotiate, buy it or not.

With healthcare we not only have a largely non-discretionary and non-budgetable expense, we have a third party paying the bulk of the cost (if someone was doing that for you with the car you would not drive a Civic). This is not an argument for the removal of insurance, which can't be done given its exceptionally high costs. I think it is an argument to spread the cost over all society (my preference would be single payer but there are lots of ways to do this). Then maybe we can get a sense as to what the appropriate level of spend is, once all the fracturing of the risk pool is removed.

Posted by: scott1959 | September 17, 2009 1:08 PM | Report abuse

Health care is more like NASA than a used car lot. Nobody has any idea of the best way to spend the money. All you can do is give them an overall budget you're comfortable with and let the experts argue it out. That's what we should be doing with health care reform but unfortunately central planning is a dirty word in America.

Posted by: bmull | September 17, 2009 1:41 PM | Report abuse

Ezra, you are wrong.

Innovation is the only way to improve the value of of a dollar spent on healthcare.

In addition, it is obvious that reducing the ability of pharmaceutical companies to innovate will drive up non-drug healthcare costs, which constitute the bulk of healthcare costs. For example, it would be great to see better diabetes drugs out there which will reduce the intensity of medical care from the complications of diabetes.

Finally, the notion that the federal government can successfully allocate dollars into those industries that will maximize the greatest return on investment (e.g. new technologies) for society reminds me very much of arguments made by social planners who ran command-control economies.

Guys, don't take Ezra seriously because he doesn't really take healthcare entrepeneurs seriously.

Posted by: RandomWalk1 | September 17, 2009 1:43 PM | Report abuse

When it comes to childbirth, single-payer Universal Care seems to have encourage much more innovation than free market competion in the US. Midwifery is more developed, and in-home, post-natal care much more comprehensive. Childbirth is not only less expensive, but those countries have lower infant mortality rates.

I suspect there are similar circumstances in other other medical specialities. Whatever the theory, the practical experience seems to be there are things to be learned from other models.

Posted by: Athena_news | September 17, 2009 1:56 PM | Report abuse

But it has been in Ezra's own column that we've learned out that most basic research is done with federal money: pharma simply takes the promising results and institutes Phase I-IV testing for marketability.

Pharma doesn't innovate, it handles the production end that research facilities don't want.

We had cites for all this, as well as confirmations from industry veterans. It was a good learning discussion. Sorry you missed it, maybe someone will repost.

Posted by: rosshunter | September 17, 2009 2:03 PM | Report abuse

Ezra - Henley doesn't get it. And your question about innovation is unanswerable. It's about incentives not costs/spending. There is no "right" level of spending for innovation. There are many possible optimal levels of spending depending on individual consumer choices.

We don't currently have a system that allows for this. And we're not likelyt to get one. But tort reform could help a little - by improving doctors' incentives to treat appropriately rather than defensively. And increasing cost sharing is not about reducing overall costs, it is about improving incentives by letting consumers spend THEIR OWN money instead having employers do it for them. In fact, you support ending the tax deductibility of health care costs (as do I) -- which would increase cost sharing AND which would improve incentives.

Posted by: mbp3 | September 17, 2009 2:18 PM | Report abuse

"The "it would stifle innovation" argument rests on a fallacy: that the US alone is responsible for any and all medical advances. If that's so, then why is that so many of the Nobel prizes in medicine and life sciences are awarded to non-US researchers?"

You really might want to think about what you wrote here. If I told you "obviously the majority of the world's cars are sold in Japan because that's where the most profitable car companies are" you'd immediately realize that I was crazy. You've said something just that bad here.

Or, to save you 5 seconds of thought, you can invent drugs in Europe and sell them in America

Posted by: Careless | September 17, 2009 3:13 PM | Report abuse

Just because some straw man doesn't think as you do, you can't dismiss everything anyone who calls themselves libertarian might think.

I am for most things that would give control back to the people and take it away from our government. What it seems to me is that the discussions we have around health care seemingly give all our control up - to the government. One that typically doesn't work so efficiently. If you run your own company, you typically do it more efficiently.

It doesn't seem the government wants to give us better health care, or they'd give us a better bill. It seems to me that they just want control of our health care. Which so many people seem to want. I don't understand it at all. It makes absolutely no sense. But there it is.

Posted by: atlmom1234 | September 17, 2009 4:02 PM | Report abuse

I'm reminded of the old economist's joke: two economists meet on the street. "How's the family?" says the first? The second replies, "compared to what?"

The funny thing is that the libertarian view is economically bankrupt. More profits = more innovation might be true, but there is a declining marginal utility to it - and if we're really concerned with innovation and health care then we should be very interested in how much that increase in utility is going to cost us. What do we give up by siphoning so much wealth towards a single sector of the economy? Libertarians appear to have no interest in this foundational question.

On a side note, wouldn't the fact that firms that successfully engage in rent-seeking are rewarded by financial markets be an indication that financial markets cannot optimally distribute capital on their own?

Posted by: patrickarmshaw | September 17, 2009 4:36 PM | Report abuse

jhglassman said
"So I stopped caring about innovation because the people you supposedly were having these conversations witch were, in your opinion, being inconsistent?"

Exactly. You can dismiss it, but you're still ignoring a large issue in health care reform. The problem of innovation doesn't go away because some people made bad faith arguments.

Posted by: Nimed | September 17, 2009 4:56 PM | Report abuse


We don't spend nearly enough on medical innovation and advancement, and this is primarily due to positional/context/prestige externalities, with medical research being an inconspicuous consumption good (as well as having other gigantic free rider problems). For details, see this outstanding brief Washington Post column by Cornell economist Robert Frank at: (Frank is also a regular writer for the New York Times' Economic Scene). Positional/context/prestige externalities are colossal in economics; another serious problem with the field is that they get so little attention, and are so rarely included in the models.

A key question, then, is what is the most efficient way to increase medical innovation and advancement. And you answered that question beautifully in a recent post (at: ):

I posed a similar question to [MIT health economist] Finkelstein. If she had billions of dollars and wanted to supercharge innovation, how would she do it? Would she simply increase reimbursement rates for drugs? Would she give it to pharmaceutical companies? What's the most efficient engine for medical innovation?

In reply, she pointed me to the work of Harvard's Michael Kremer (another expert, sadly). "The two main things that people talk about," she said, "are funding a lot of basic research -- push strategies -- and then pull strategies, where governments get together and define a prize for innovation on a particular disease." In other words, funding innovation and scientific discovery in a direct and targeted fashion.

End Quote

The Jonathan Cohn article you link to get's at this, but not completely. Plus, the link hasn't been working. But here's an alternate one that is: .

Posted by: RichardHSerlin | September 17, 2009 7:56 PM | Report abuse

The best argument for tort reform is that it would reduce costs by cutting back on the need for certain "defensive" tests or procedures. It is unclear how this relates to caps on damages for pain and suffering or other consequential damages.

I would be interested in "experiments" by the states to see if incenting physicians to use surgical checklists and to adopt other best practices would work (perhaps by subsidizing the malpractice costs of doctors who do so). For example, if certain practices were followed, there would be a rebuttable presumption that there was no malpractice. Also, it would be interesting to see the impact on jury verdicts if individuals who are the victims of malpractice were provided care through a subsidized program.

Posted by: ellenfredel | September 18, 2009 10:35 AM | Report abuse

"What level of spending on health care was optimal for innovation?"

How about the level that free individuals choose to spend on it, given the context of *every other* competing value in the lives of individuals.

You might see great value in medical innovation--by all means spend more supporting that. Or, instead, you might want new brakes for your car more--then spend the $$ on that. You might prefer the new Beatles Boxed Set--fine, buy that. You might want to waste it all on loose women and nose candy--not my choice, but have at 'er.

You see, a question like that has a *context*--and medical innovation isn't a primary over *all other values* just because you might see it that way.

Or, in other words: what I choose to spend or allocate for medical stuff is not properly your business in the first place.

This, from you ("I'm less worried about squeezing out medical innovation than I am about rising medical costs squeezing out innovation in every other sector of society") is errant bull: it matters not that medical costs are rising or falling--the money you take by fiat, whether it's more or less, already squeezes out unknowable degrees of innovation--in fact, of any activity at all--in every other sector of society.

You're quibbling about the "right amount to steal" and my message is: "don't be a thief in the first place".

Posted by: rdg2 | September 18, 2009 4:30 PM | Report abuse

Want to know one big obstacle to innovation?
Go read this article:

Depressing account of the current state of research in biological sciences, with suggestions for improvement.


PS - tell your web folk that A) their registration form is way too curious - I wonder how many people are either turned off by it or blatantly lie? B) An ad screen preceding previewing a comment? That's insane.

Posted by: MaysonLancaster | September 18, 2009 11:08 PM | Report abuse

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