Manhattan Moment
Don’t surrender innovation in the name of health care reform.
By: Tomas Philipson, PhD
Manhattan Moment Contributor
March 10, 2009
President Barack Obama’s budget proposal for 2010 offers a $630 billion “down payment” for health care reform, leaving the details to Congress.
Two things are certain though: one, extending universal coverage will be very expensive – at least $1 trillion over the next ten years. Second, the private sector is going to be asked to bear most of that burden through European-style price controls on new medical goods and services.
We can do better. Rather than trying to reform the whole system at once, we should concentrate taxpayer dollars where they are likely to do the most good while encouraging market reforms that improve competition, reduce costs, and expand coverage.
Reigning in health care costs – especially for government’s Medicare and Medicaid programs – is a critical priority. But policymakers must remember that the U.S.’s commitment to a relatively free market for medical products and services pays enormous dividends in terms of increased innovation and improved health and longevity for all Americans.
The temptation for reformers will be to contain costs in the short term by expanding government’s role in health care markets and using its enormous bargaining power to drive down prices. This is exactly the tactic many European governments have embraced and it can work - but at the cost of lost medical innovations in the future. In fact, Europe is a good model for what not to do.
Although the United States accounts for about 20% of global GDP, it is the world’s primary profit center for new medical innovations. For example, for drugs and biologics, the US accounts for about 50% of global sales and an even larger share of profits as markups are higher in the US. Over the last 20 years, as Europe tightened price controls in its health sector, innovative companies have come to rely on the US for making their returns on investments.
How to encourage innovation while still controlling costs? First, Congress should concentrate scarce federal subsidies on the sickest and poorest patients so they could buy their own private health insurance coverage. This can be accomplished by a tax credit or a sliding tax deduction for health insurance, and would encourage insurers to compete for sick patients, rather than avoid them.
The main advantage of a tax-credit is that it unties medical insurance from employment, a relationship that has no economic basis were it not for the IRS ruling that makes fringe benefits tax-exempt.
Next, we should bring down insurance premiums through competition. Today, states regulate health insurance in the small group and individual markets, adding mandates for chiropractors or fertility treatments that make insurance more expensive than it needs to be. Congress should allow consumers to buy plans across state lines, encouraging companies to sell plans consumers were willing to pay for, not what governments wants them to buy.
Finally, Obama should reform the FDA to reduce the cost of innovation. Researchers estimate that it can take nearly a decade and cost $800 million or more to bring a single new drug to market.
Those costs have to be recouped in high prices during the product’s remaining patent life before it becomes a cheap generic. Reforms in clinical development that lower the costs and time in bringing new drugs to market would encourage more innovation and competition, driving down drug prices.
Pointing to Europe as a role model is misguided as the European model works only because medical innovators can still find profits in the United States. Products developed or paid for here not only benefit Americans, they improve global health. Closing off that profit-making opportunity through price controls would mean a dramatic downturn in investment in innovation—and a drastic increase in otherwise preventable morbidity and mortality for future generations. This isn’t the kind of “reform” that America needs.
Tomas J. Philipson, PhD, is the Daniel Levin Professor of Public Policy at The University of Chicago and The Chairman of Project FDA of The Manhattan Institute. In 2003-04, he served as the Senior Economic Advisor to the Commissioner of the FDA.
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