Arnold Kling  

The European Model

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Health Savings Accounts... Health Care Policy...

Fareed Zakaria writes,


Talk to top-level scientists and educators about the future of scientific research, and they will rarely even mention Europe. There are areas in which it is world-class, but they are fewer than they once were. In the biomedical sciences, for example, Europe is not on the map, and it might well be surpassed by much poorer Asian countries. The CEO of a large pharmaceutical company told me that in 10 years, the three most important countries for his industry would be the United States, China and India.

You see, a pharmaceutical industry might want to make profits (boo, hiss), and that is not something Europeans can tolerate.


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COMMENTS (18 to date)
AJE writes:

Is the USA really a bastion of a free market in pharmaceuticals? Three letters: FDA

Less of the pantomime xenophobia please.

silvermine writes:

Um, yeah it is? The FDA merely regulates what can be sold. They don't tell you how much you can sell it for.

Just like you can't sell children's toys that are full of lead, or cars that don't work. It's still a free market -- just one where there's a little safety net to keep people from being defrauded or killed by people who are evil.

In Europe (or Canada, or tons of other places) they actively set prices on drugs, not taking into any account if that's a reasonable price for the drug or not. The price is not driven by supply and demand, or even by the manufacturing (and R&D) costs at all.

AJE writes:

Rubbish: a bureaucracy that dictates what can and can't be sold - over and above normal contractual obligations - is not a free market.

Your assertions on the European market are wild and wrong - some drugs have price controls (as do some in the US), many don't.

And since when were antique cars (i.e ones that don't work) illegal?

Ramon writes:

After watching TV and reading french newspapers for many years now, I have noticed that in french politics there are only one retorical argument:

"Bill X (Always with the world social in its title) must be aproved because we cannot let the unfeathered markets decide on human happiness, children, the elderly,.. )"

John Brothers writes:

Working as a software architect on a pharmaceutical pricing system, I actually know some things about pharmaceutical pricing.

European nations specify at a national level what the prices on various drugs will be, based on historical averages of other countries. A few of the larger ones set specific prices, and the others follow on, in annoyingly complicated ways. I don't know what the percentage of price-controlled drugs is, but it is significant enough that there are organizations in each of the large pharmaceutical companies specifically dedicated to understanding and studying price changes and negotiations with the european states.

There is no equivalent structure in the US. Each and every HMO/PPO/Hospital group negotiate contracts with the pharaceutical companies on a one-by-one basis for each drug, using an annoyingly complicated variety of tactics and structures.

At this point, I don't know precisely how Medicare/Medicaid pricing is structured, but I believe it is competitively bid as well.

The US government does mandate the price of the flu vaccine. That's the only specific price control I'm aware of in the US.That is not to say there are not others, but I am not aware of them.

The US market is not perfectly free. But then, I don't recall Prof. Kling claiming it to be. But it is definitely true that profit opportunities for drugs in the EU are lower than the US. because as far as I can tell, the EU countries always negotiate prices that are lower than the average price in the US.

liberty writes:

>Rubbish: a bureaucracy that dictates what can and can't be sold - over and above normal contractual obligations - is not a free market.

The way I see it, a free market is one without controls on supply and deamnd; eg on price and output. The making illegal of certain items does not fall into this category, so long as the law is across the board rather than based on price or the comapny in question or the size of the company or some other arbitrary factor.

For example, the fact that (illegal) drugs are illegal does not make the market less free, but if drugs were legal in general but the price of marijauana was controlled, this would be a market price regulation and make the market less free. If the biggest pot dealers were kept in check by regulating output and mergers so that the small pot dealers would have a chance, this would be an output regulation and make the market less free.

The FDA is more or less compatible with the free market (though it could be privatized and hence not require high taxation and a publicly run company - public companies in their own way are contrary to the free market but this is separate from the FDA as a regulatory body). It is compatible because it simply monitors quality of the medicines and allows free trade of any medicines that pass the rules of the monitoring agency. So long as all pharmaceutical companies are treated equally, allowed to determine their supply and price as they wish, etc., it is not contrary to free market principles as I see it.

That is probably more opinion than textbook, but it is how I understand free market principles.

John Pertz writes:

Niether the U.S or Europe are a complete free market. However, what we shouldnt quible about is that the U.S is certainly closer to a free market than Europe. Most socialists will certainly concede to some degree that government rationing of goods can not compete with markets when it comes to technological progress. I remember reading a paper from a prof at the notoriously marxist econ department of the University of Utah who condceded this much.

AJE writes:

I think most of you are missing my point, which is that it's childish and brash to paint America as "free market" and Europe as "anti-free market".

Regulation decided by government bureaucrats is not a free market institution, and consequently in some cases it's easier for consenting adults to exchange pharmaceutcial products in Europe than it is in the US.

I don't know the background, but notice more unpasteurised cheese in France than in the US. Who'd deny that the French have a freer market for this product?

MS writes:

Its not absolutely clear what the prefered model is here, given the health insurance systems in Europe (and the US). Given that the co-payment rate in many countries on drugs is something like 10%, without any control on new drugs, there would just be too many new drugs out there (which there already is, by the way).

Consider a drug that individual X has a WTP of €10. Given that the copayment-rate is 10%, this drug can actually cost the pharm.company up to €100 and still be profitable.

That is not anywhere near allocative efficiency, which I guess Kling thinks is a good normative goal for a society?

Thus, given the health insurance system, and the fact that consumers in more or less no European country bears their full cost for a drug, it would create massive inefficiency if the drug market would become close to totally free. That would require a complete change of insurance systems, co-payment rates etcetera. I don't see that happening in the near future.

In many countries the pharm.companies need to show cost-effeciency analyses of new drugs for getting them into the insurance system, and then prices can be based on this. There are certainly better ways to deal with it all...but going laissez-fair at the moment is not one of them.

Mikael writes:

Its not clear what the prefered model is, given the health insurance systems in Europe (and the US). Given that the co-payment rate in many countries on drugs is something like 10%, without any control on new drugs, there would just be too many new drugs out there (which there already is, by the way).

Consider a drug that individual X has a WTP of €10. Given that the copayment-rate is 10%, this drug can actually cost the pharm.company up to €100 and still be profitable.

That is not anywhere near allocative efficiency, which I guess Kling thinks is a good normative goal for a society?

Thus, given the health insurance system, and the fact that consumers in more or less no European country bears their full cost for a drug, it would create massive inefficiency if the drug market would become close to totally free. That would require a complete change of insurance systems, co-payment rates etcetera. I don't see that happening in the near future.

In many countries the pharm.companies need to show cost-effeciency analyses of new drugs for getting them into the insurance system, and then prices can be based on this. There are certainly better ways to deal with it all...but going laissez-fair at the moment is not one of them.

liberty writes:

>without any control on new drugs, there would just be too many new drugs out there

I can't imagine that you know very much about how pharms work if you think companies would suddely flood the market with new drugs just because they can charge the insurance companies 100 quid a bottle for each. First of all it costs billions to create most new drugs, they had better be sure that its profitable. Second, many drugs will have to cost much more than that because regardless of cost to the customer there is very limited set of customers - many diseases are rare and the cost of developing the drug very high. Third, its not as if consumers are lining up to buy an endless stream of drugs - even viagra and the more "optional" drugs have a limited customer base; although recreational drugs ave a broader range, pharms can't survive off ritalin alone. Fourth, many insurance companies in the US also have copay, $15 copay, reagrdless of the cost of drug in many plans, and yes we have more drugs but no problem with flooding.

Mikael writes:

Liberty:

I think pharm.companies work as most other companies (even though the daily business is somewhat different considering the innovation process is very long, costly and uncertain).

And further, I'm not sure you exactly understood what I meant. I didn't say that there are an endless line of prospective drug consumers out there for each product. However, the bottom line is extremely simple:

A. If I'm company A and I'm thinking about developing a product that I estimate will have to have a market price of say 90 to be profitable, and I also estimate that the WTP of consumer A is probably going to be around 10. What do I do? Well, I consider something else...

B. However, take the exact scenario above but a health insurance system that subsidies drugs and has a co-payment rate of 10%. What happens? I can go forward with the drug, sell it for a maximum amount of 100 and make a profit. (If there is no "gate-keeping" system for drugs etcetera).

And...that is not a good approach if we like allocative efficiency. Which we do.

Of course the above assumes away thousand of uncertain events, but very much ceteris paribus, the fact that we have low co-payment rates and for the consumer no obvious connection to the true cost, there are too many new drugs out there. This is somewhat reduced by regulations that can e.g. ban drugs that doesn't show cost-efficiency or similar (although I'm certainly very sceptical to how that works in practice).

liberty writes:

>B. However, take the exact scenario above but a health insurance system that subsidies drugs and has a co-payment rate of 10%. What happens? I can go forward with the drug, sell it for a maximum amount of 100 and make a profit. (If there is no "gate-keeping" system for drugs etcetera).

And...that is not a good approach if we like allocative efficiency. Which we do.
=------------------------------------

You're right, I'm not sure what you are saying. what I was saying is that more drugs is usually good, since there is not some endless stream. Subsidies are not good - but insurance is fine whether it uses a copay of 10% or not.

The UK public insurance is based on taxation rather than payment plans, yet that does not prove that the percentage of copay is necessarily lower and purchase of drugs higher.

In the US we have private insurance, very often 10% copays and more drugs than in the UK - but that is all good.

Ideally the UK should privatize the program and stop using regulations to strangle the system that you see (probably correctly) as inefficiant because of subsidies/public financing.

Mikael writes:

Liberty:

My last note. Yes, more drugs is usually good. But so is more money, more apples, more cars, more beers too. Thus, it's all about whether or not quantities are in line with allocative efficiency. Since consumers don't bear the full cost, they demand "too much" from an efficiency point of view.

Consider the example of GP visits. In many countries in Europe they are more or less "free" in the sense that they are completely covered by different health insurance systems (national or not). E.g. in Germany there was an outcry when the rules was recently changed so that an out-of-pocket cost of 10 euros were introduced for a GP visit. The same was true in my own country, where GP visits used to be more or less without any out-of-pocket cost.

We all agree that usually GP visits are a good thing; you can get good advice, get cured, feel better about yourself or whatever. That doesn't mean that this system is good. When there is no out-of-pocket cost people ran to the GP for everything and nothing, cranking up health care costs dramatically. This is more or less the same story as in the big RAND experiment of course.

So, why shouldn't the same be true for drugs? Of course the same is true. If there is no third party involvement except for who bears the cost, I think the prediction is quite clear that its gonna be too many new drugs out there (and less money, cars, beers or whatever). Thus, regulations, rules, gate-keeping can be a good thing as a second-best solution here. However, if they actually are in practice a good thing as designed right now...I don't have the slightest idea...

liberty writes:

>Thus, regulations, rules, gate-keeping can be a good thing as a second-best solution here. However, if they actually are in practice a good thing as designed right now...I don't have the slightest idea...

I understand your argument. What I am saying is that insurance on the whole doesn't hide the costs - only the subsidies do. When costs aren't hidden, more drugs is good (because its not artifical, its price based and hence efficient allocation). Therefor the answer is not to intervene even more and add regulations to the mix, but rather to privatize the insurance.

Your assertion that regulations are good because they help allocate more effiently if the subsidies don't exist is not a given - there are going to be unintended consequences and further inefficiencies given the nature of the market as a complex system.

liberty writes:

if the subsidies do exist, I meant to say (in that last line).

James writes:

liberty writes "The way I see it, a free market is one without controls on supply and deamnd; eg on price and output."

I agree. I also would make the bold claim that banning something regulates output by constraining it to zero.

Mr. Econotarian writes:

We should keep in mind that governments (Federal and State) in the U.S. pay about 50% of all medical dollars, and this will go higher with the Medicare drug benefit. So while the government has limited control over pricing, it certainly is subsidizing health care, which we expect to increase demand for it and also lead to deadweight losses.

My wife is alive because of a non-FDA approved drug. It passed FDA safety tests, and is used widely around the world for its side effects (enhancing breast milk flow), but its maker decided it would be too expensive and dangerous to get FDA efficacy approval for the drug with regards to her disease because it is relatively rare, and the maker got burned before by a silly US FDA decision that blew away its world market for another drug, which is perfectly safe if doctors read the warnings and didn't give it to people with heart problems.

Kind of sad when we need to get life-saving drugs from Central America...

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