Arnold Kling  

Pharma a Public Utility?

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David Warsh has an interesting column on the pharmaceutical industry.


"If only we could find a patient willing to pay $800 million for that first dose," said Judy Lewent at one point (she is executive vice president and chief financial officer of Merck & Co.), "we could sell the rest to everyone at cost. Imagine, though, what that would do to that one patient's insurance premiums!"

Just so. But of course there is a potential insurer willing to pay that hypothetical $800 million fixed cost for a successful treatment -- not just for one such disease but for many. (The $800 million figure comes from a Tufts University study of medical R&D.) That could-be insurer might be a government, charged with looking after the health care of its citizens.


Warsh points out that government typically provides "push" funding for research, including "grants to researchers, tax credits for companies, support for government labs." A reward or prize for developing a particular drug would instead be "pull" funding.

Warsh also links to an industry-bashing article by Marcia Angell. She writes,


unlike other businesses, drug companies are dependent on the public for a host of special favors—including the rights to NIH-funded research, long periods of market monopoly, and multiple tax breaks that almost guarantee a profit. Because of these special favors and the importance of its products to public health, as well as the fact that the government is a major purchaser of its products, the pharmaceutical industry should be regarded much as a public utility.

By that argument, almost every industry ought to be a regarded as a public utility. The computer industry benefits from government research, as does the energy industry and agriculture. The entertainment industry gets "long periods of market monopoly" for its intellectual property. Most industries receive tax breaks.

The rest of her article consists of arguments that I criticized in Quack Economic Prescription.

For Discussion. When I think of a government-run utility, I think of Amtrak or the postal service. Would we be satisfied with a pharmaceutical industry of that caliber? Are there examples that are more positive?


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TrackBack URL: http://econlog.econlib.org/mt/mt-tb.cgi/106
The author at In the Pipeline in a related article titled I'll Have the Price They're Having writes:
    Thanks to Arnold Kling, I found this piece on the economics of the drug industry. It comes from the remarks at a recent industry conference, and it's worth reading (even if it does make an approving reference to Martha Angell... [Tracked on August 24, 2004 6:11 AM]
COMMENTS (10 to date)
Robert Schwartz writes:

Marine Corps. Sir!

DSpears writes:

"Would we be satisfied with a pharmaceutical industry of that caliber?"

Once the government takes something over it won't matter if you are satisfied or not. Unless you think your 1/ten millionth of a vote in electing 4 out of 536 members of the government means that this new bureaucracy would be different from every other bureaucracy since the beginning of time.

George writes:

My daughter tells me that funding for research that uncovered the tinman gene came mostly from non-governments sources.

Lawrance George Lux writes:
When I think of a government-run utility, I think of Amtrak or the postal service. Would we be satisfied with a pharmaceutical industry of that caliber? Are there examples that are more positive?

The Drug industry, I hope you notice I did not use pharmaceutical, stands as one of the greatest hypocrisies of all time. Ninty-five of all R&D costs consists not of finding an effective Drug, but in sufficiently altering existing Drugs to acquire the magical Patent. Doctors are recruited to push the new crap, though older medicines serving the same need effectively, can be had for a quarter of the Price of the new Drug. lgl

Mcwop writes:

The government is not responsible for 100% of drug development. The pharma industry plays an important role (spending slightly more than the government), and nationalizing it would be a disaster. Currently, the government spends resources on "political diseases" (e.g. AIDS). If the government has complete control over drug development, then politics will dictate where the money is spent, and not disease incidence in society.

The NIH spends on average about $700 per flu fatality. In contrast, it spends about $12,000 per Alzheimer's death, $14,000 per Parkinson's death and $158,000 per AIDS death. NIH spends $25 million a year on flu research, but it spends $79 million a year researching anthrax, which killed five people in 2001. Flu spending is so modest that it isn't listed on the NIH budgetary breakdown for disease spending.

Link To For Quote Story

Flu deaths in U.S. 36,000
AIDS deaths 14,000

Mcwop writes:
The Drug industry, I hope you notice I did not use pharmaceutical, stands as one of the greatest hypocrisies of all time. Ninty-five of all R&D costs consists not of finding an effective Drug, but in sufficiently altering existing Drugs to acquire the magical Patent. Doctors are recruited to push the new crap, though older medicines serving the same need effectively, can be had for a quarter of the Price of the new Drug. lgl

Please point to some supporting evidence for the 95% stat. I must take issue with minimalizing improvements to old drugs. I have a condition that can be treated with an old, cheap generic. Unfortunately that old generic has awful side effects, and over time many people develop allergies to it. The new medicine, which is more expensive by a factor of 10, has none of these side effects. This is the difference between showing up for work or not. I have to take this medicine every day for the rest of my life.

Boonton writes:

Mcwop, your stats are one sided. Why should R&D spending be measured in dollars per death? How about R&D dollars per cost in medical expenses? In this case, AIDS and Alzheimer's would sensibly be given a lot of R&D weight since caring for those with it costs quite a bit while treating those with the flu (even those who die from it) is much less expensive. (AIDS here, BTW, has an added opportunity cost since it hits so many people who are young as opposed to old...robbing them and the economy of their peak years).

By this metric R&D on anthrax & other bio-weapon diseases should be given almost no attention...yet common sense tells us that we should have good treatments for these diseases.

Mcwop writes:
How about R&D dollars per cost in medical expenses?

Lets take cancer then, which kills 564,000 people a year (just under 400,000 if you pull out lung cancer deaths that are preventable by not smoking). Cancer is very expensive to treat and effects young people as well. According to the CDC cancer incurs $64 billion in direct medical costs and more than $125 billion in lost productivity.

Diabetes consumes 25% of the medicare budget, yet the NIH gives it 1/4 of the spending as AIDS.

Boonton writes:

Cancer does effect young people but rarely. Economically AIDS is much more potent because it is both very expensive to treat and it hits people when they are very young. Unlike cancer, there is no theoretical limit to how many people AIDS can kill. Only so many people out of a 1000 will get cancer but there is no particular reason 1000 out of a 1000 could become infected with AIDS.

I'm not saying that AIDS is not over represented in R&D budgets. I'm simply saying it is simplistic to assign weights on a single statistic such as how many people are killed per year by a particular disease.

jason writes:

Boonton:

"Only so many people out of a 1000 will get cancer but there is no particular reason 1000 out of a 1000 could become infected with AIDS."

Behaviour.

Aside from avoiding smoking most people can't dramatically reduce their risks of developing cancer at some point in their lives. AIDS (or rather the HIV virus), however, is almost impossible to get if you avoid a few risky behaviours.

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