Stop Taking R&D for Granted

A lot of the debate over health care reform focuses on how to pay for new medical technology, mainly drugs and medical devices. Some of this technology is expensive, but the health benefits are immense. Deaths from heart attacks have dropped by more than half in recent decades because of technology-driven prevention and treatments like cardiac stents and cholesterol-reducing drugs. Biotechnology-based drugs have revolutionized the treatment of a wide range of diseases, including rheumatoid arthritis, multiple sclerosis and certain forms of cancer.

The list of recent advances in medical technology seems endless. In fact, the list is endless, but only if we play our cards right. If the conditions that foster medical technology R&D remain in place, future advances will probably dwarf what we have already seen. Personalized medicine based on DNA profiling has barely begun. The same is true of gene therapy (fixing DNA mutations instead of just tolerating them) and therapeutic vaccines (which attack illnesses rather than preventing them, still impossible for most conditions). Much more is in development.

You might think, then, that the preservation of R&D incentives would be a central goal in the health care reform legislation Democrats are trying desperately to rush through Congress. On the contrary, it has been almost completely ignored. Even prestigious medical journals like the New England Journal of Medicine, whose editors are certainly aware of the benefits of monoclonal antibodies and deep-brain stimulus, have said almost nothing about R&D incentives in their articles pressing for comprehensive reform. The popular press and most of the think tanks have not done much better.

The list of recent advances in medical technology seems endless. In fact, the list is endless, but only if we play our cards right.

There is actually a good reason for this: We enjoy the luxury of taking R&D for granted. Firms routinely pursue years of incredibly expensive and financially risky research because they expect to reap handsome profits from the rare products that make it all the way through FDA approval and the critical scrutiny of health care payers. The entire process is spontaneous and decentralized. Neither health care payers nor government authorities allocate research funds (except for basic research funded by the National Institutes of Health). They do not construct research agendas; they don't even promise to pay for the results when research succeeds.

Why would we worry about health care reform? The answer lies in profits--the dominant source of research funds and the prime motivator of risky, long-term research. The U.S. accounts for close to half of worldwide drug profits (it may be less for devices, but data are scarce). Other nations impose artificial constraints on drug prices and spending so that economic giants like Germany provide but a small fraction of the sales and profits from the U.S. market. If health care reform moves us closer to European models, which is what many Democrats want to do, the consequences for R&D would be severe.

The immediate problem is that the Senate and House reform bills contain worrisome provisions, and more could be added in the feverish rush to get something passed before the end of the year. There are mandatory discounts in the Medicare drug benefit. At least one bill shifts millions of low-income Medicare beneficiaries to Medicaid, where price controls already keep drug prices below market levels (those controls would be strengthened). Various little noticed provisions would, for example, rein in certain kinds of drug marketing in order to cut spending.

In the Senate, only a filibuster by the Democratic leadership stands in the way of amending the reform bill to invite large-scale drug importation from price-controlled nations. The goal importation is to push prices here down to the lowest European government-controlled price. That threat could easily foster some sort of international agreement that would finally bring formal price controls to the U.S., with destructives consequences to drugs profits and R&D expenditures.

But the long-run threat is even greater. Both the House and Senate reform bills are dominated by regulations, mandates and subsidies, all of which will increase costs throughout most of our health care system. To deal with cost pressures, the Democrats have inserted a flotilla of cost-control measures. But those are mainly demonstration projects, research plans and the like. They represent wishful thinking, not proven methods.

We can be sure that soon after health care reform is launched, the administration will start to feel tremendous pressure to cut costs. But cutting costs will not be easy. Congress and the White House will know that suppressing physician or hospital fees runs the risk of creating shortages and political backlash from practically every Congressional district. They will be strongly tempted to do what is done in other nations: push down the prices of products whose prices are far above the marginal costs of manufacturing. The obvious candidates will be medical devices and especially pharmaceuticals.

When drug prices are cut by government fiat, supplies are usually not cut off because there is still money to be made from selling pills that only cost pennies apiece to manufacture. But research investment is different. The prospect of price controls tomorrow translates into subdued research goals today. In the radically reformed health care system envisioned by the Democrats, what was an extraordinary stream of new preventatives and cures based on biotechnology and other tools would become altogether less remarkable. Worse, no one will ever know what will be sacrificed in this newly constrained world of technical progress. No one keeps a list of cancer cures that could have been created but weren't.

The lesson is simple. Congress should fiist eliminate the reform provisions that simply aim to push drug and device prices and costs below natural market levels. That is the easy part. The hard part is to revamp the reform legislation so that it does not automatically make health care more expensive while leaving no way out except through clamping down on prices and expenditures for new medical technology. This is just one reason for slowing down the reform process, to allow enough time to figure how to get what we want without throwing the baby out with the bathwater.

John E. Calfee is resident scholar at AEI.

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About the Author

 

John E.
Calfee
  • Economist John E. Calfee (1941-2011) studied the pharmaceutical industry and the Food and Drug Administration (FDA), along with the economics of tobacco, tort liability, and patents. He previously worked at the Federal Trade Commission's Bureau of Economics. He had also taught marketing and consumer behavior at the business schools of the University of Maryland at College Park and Boston University. While Mr. Calfee's writings are mostly on pharmaceutical markets and FDA regulation, his academic articles and opinion pieces covered a variety of topics, from patent law and tort liability to advertising and consumer information. His books include Prices, Markets, and the Pharmaceutical Revolution (AEI Press, 2000) and Biotechnology and the Patent System (AEI Press, 2007). Mr. Calfee wrote regularly for AEI's Health Policy Outlook series. He testified before Congress and federal agencies on various topics, including alcohol advertising; biodefense vaccine research; international drug prices; and FDA oversight of drug safety.

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