Increasing health spending also increases profits
Megan McArdle and I have gone back and forth on pharmaceutical innovation more than enough times to know each other's positions by heart, so I'm not really trying to stir up old arguments here. But I am confused by her latest post on the subject (as opposed to her latest column, which is a good overview of the difficulty of discovering new drugs, and with which I agree almost completely). On the one hand, McArdle says that she believes she "may have seriously underestimated the risk that this thing will turn into a massive fiscal disaster that could precipitate a serious budget crisis." On the other hand, she's worried that health care reform's role in "reducing profits in pharma" will harm drug innovation.
As far as I can tell, these two positions are in direct contradiction. If health-care reform increases total health-care spending -- which is McArdle's first contention -- then it should also increase profits for pharmaceutical companies, thus juicing innovation. This is what research by MIT's Amy Finkelstein suggested happened after Medicare was formed. In that world, McArdle's concerns that lost profits will lead to less innovation are moot. Profits are going to go up because spending is going to go up. The mechanism here -- increased coverage leads to increased usage of health care by people who otherwise would be priced out of the system -- assures it.
It's also fair to ask where I come down on this given that I do believe that the Affordable Care Act will save some money and put us on the path to saving more. Put simply, I don't think the current system is very effective at encouraging drug development, and so I think more direct efforts to fund innovation (prize money, research grants) might be more effective than blocking cost-saving reforms to preserve whatever small percentage of current spending ends up in pharmaceutical R&D. If we want to maximize innovation, we should try to do that directly rather than allowing health-care spending to bankrupt us because we're concerned that changes will adversely harm pharmaceutical innovation.
Posted by: srw3 | June 8, 2010 3:58 PM | Report abuse
Posted by: visionbrkr | June 8, 2010 4:00 PM | Report abuse
Posted by: visionbrkr | June 8, 2010 4:06 PM | Report abuse
Posted by: rmgregory | June 8, 2010 4:19 PM | Report abuse
Posted by: matthewarnold | June 8, 2010 4:31 PM | Report abuse
Posted by: justin84 | June 8, 2010 5:56 PM | Report abuse
Posted by: lister1 | June 9, 2010 12:07 AM | Report abuse
Posted by: zosima | June 9, 2010 2:42 AM | Report abuse
Posted by: visionbrkr | June 9, 2010 8:24 AM | Report abuse
Posted by: justin84 | June 9, 2010 9:34 AM | Report abuse
Posted by: chrynoble | June 9, 2010 2:46 PM | Report abuse
Posted by: justin84 | June 9, 2010 4:25 PM | Report abuse
The comments to this entry are closed.