Drug Money

I take Megan McArdle’s  argument that public health insurance will lead to cramdown of pharma profits seriously. I’m also sympathetic to the her views on the ill effects of such a cramdown, in part because pharmaceuticals are the only element of the medical industry that I am particularly sympathetic to.

I tend to think many, if not most, doctors serve primarily has human databases. As such I think they’re roughly as anachronistic as real estate agents. However, it will be some time before most Americans are comfortable getting their medical advice from a internet database operated by a licensed medical diagnostic technician. Until such time we’ll have to put up with spending billions of dollars to crowbar nearly a million, otherwise very productive, human brains into doing what a computer does effortlessly.

I am similarly not ultra-keen on a lot of the latest specialized medical technology because the cost to treat is often so high. Its one thing when you spend a bunch of money on the R&D but then each treatment is close to free. In that case you can hand out the treatment in every instance that you think its likely to do more harm than good. You might even find out its useful for things you didn’t think of before.

However, when every single treatment costs a ton of money to perform it can become a parasitic drain. You thought you were developing the treatment to treat X. And for X its worth money. However, now that its here everyone and their cousin wants to use it for Y and Z and there is no way to justify that expense. Unfortunately, there is also very little room to say no.

Drugs of course are often cheap to produce once you’ve gotten past the R&D. Not in every case of course, but its my understanding that this is the basic model. The plethora of low cost generics certainly seems to imply that this is the case. Thus, I am quite optimistic about the potential for pharmaceuticals to revolutionize our lives and to produce cost effective treatments for what ails us.

The questions is: suppose I can’t have cost controls on the rest of medicine without also imposing cost controls on pharmaceuticals. Drugs are good, but are they good enough to justify the rest of the bloated medical apparatus? Are they good enough to justify the collateral damage to the federal budget – the hundreds of programs that will be downsized as congress tries to limit the inevitable rise in taxes?

Its not at all clear to me that this is the case. Its not clear that arguments that the pharmaceutical industry is clearly marginally socially productive mean that the sum total of an effort to avoid government rationing is socially productive.

I highly doubt that with the pharmaceutical industry suppressed, new drug creation will grind to a halt. Public agencies will continue to work on drugs, although with unknown productiveness. And, if things get really bad I imagine there will be public pressure to allow a “reasonable” margin of profit in the drug industry, and perhaps some accounting changes such that intangible deprecation will reduce their reported profit margins.

I see Megan’s point but I’m just not sure its worth stopping the entire effort over.