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The World Doesn't Mooch Off U.S. Health Care R&D

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(Bloomberg View) — The economics of health care is a devilishly complicated subject. Between the complexity of the market, the degree of regulation and the unusual nature of the things being sold, the topic is so vast that any single economist is practically incapable of grasping the whole picture.

That’s why I’m skeptical of arguments that rely strongly on economic theory. Unlike the market for oranges or blue jeans, health care defies simple theoretical analysis. Debates between advocates of government-centered and free-market systems tend, out of necessity, to focus on only a few points and leave much of the picture unaddressed.

(Related: Merck CEO Says Drug-Price Debate Doesn’t Account for R&D Risks)

To me, a much more compelling argument is simply to look around the world at the various health care systems that have been tried. One system stands out from all the others in the developed world — that of the United States. Most countries have some form of universal health care. The United States, however, up until the advent of Obamacare, allowed most people to buy or not buy insurance as they chose or were able. The results seem clear — Americans pay way too much for their health care. In dollar terms, the United States spends more than anyone except Switzerland and Norway:

But since these countries have higher incomes, as a% of its economy the United States spends a uniquely large amount.

This would be fine if the United States got more bang for its buck. But most health outcomes in the United States are about the same or worse than in those other rich countries. The Commonwealth Fund, a private foundation, has done an excellent job of documenting this disconnect between what the United States spends and what it gets in terms of results. Though the United States does better at combating cancer, it has lower life expectancy overall, and suffers far more from chronic conditions. A stark example is the rate of death from childbirth, which has risen in the United States even as it has fallen steadily in other countries.

Some might believe that the United States needs to spend more to achieve the same outcomes, because Americans are more irresponsible with their health in the first place. But whether Americans are more likely to lead unhealthy lifestyles, there’s plenty of evidence that much of the money the country spends on health care isn’t going to any useful purpose. Analysis of health spending shows that Americans just pay higher prices for most health care goods and services — the same MRI or hospital toothbrush will cost an American much more than it will cost a British, Canadian or Japanese person. For example, in 2012, an appendectomy would cost the average American patient $13,851, but only cost the average Australian $5,467 and the average British person $3,408. That implies that much of the excess money Americans spend on health is just wasted.

This is striking evidence. At some point, endless discussions of economic theory need to yield to blunt fact — government health care systems just seem to do better than the U.S. system.

Lab (Photo: Thinkstock)

(Photo: Thinkstock)

That is understandably a bitter pill for many free-market types to swallow. Faced with the superior performance of universal health care systems, some supporters of a less regulated system have argued that the United States is somehow subsidizing the rest of the world. The most common of these arguments claims that high U.S. prices go to pay for innovation that the rest of the world copies for free.

This was the theory advanced by Craig Garthwaite, a health care economist at Northwestern University’s Kellogg School of Business, in a recent interview with Vox:

The rest of the world drafts off of the innovation generated by the profits of the United States. If I’m running the health care system in another country, and if I have the United States here to generate huge profits to provide incentives to develop new drugs, I can choose to provide lower prices that take innovation less into account. I mean, the world of the Western European systems might be a little bit different if they had to think more carefully about that point.

Garthwaite’s interviewer, Sean Illing, takes him at his word, but we shouldn’t. Innovation-mooching can’t possibly explain the cost differences between other rich countries and the United States.

The numbers just don’t add up. Total U.S. biomedical research spending was only about $158 billion in 2015. Suppose, just for the sake of argument, that Canada, Germany, the U.K. and all the other countries where health care is dramatically cheaper than in the United States copied every last bit of U.S. R&D for free and didn’t do any of their own research. Even in that extreme case, they would only be saving $158 billion, which is a much smaller amount than what the rest of the developed world currently spends on health overall. So mooching off of the United States can’t explain the big gap between them and the United States.

Also, as economist David Eil points out, about half of U.S. biomedical research is funded by the government. Excess costs in the private U.S. health care and health insurance industries aren’t going to pay for those government-funded innovations.

Eil provides several other reasons not to buy the innovation-copying story. There seems to be little reason why higher innovation costs should be reflected in the price of hospital toothbrushes. What’s more, lots of expensive research doesn’t even succeed — research efforts fail all the time. So the true amount of money that other rich countries are mooching off of the U.S. health care system is going to be a lot smaller than $158 billion.

In other words, don’t believe the argument that the cost difference between the United States and other countries is the inevitable price of a more innovative health care system. Americans really are being greatly overcharged for their care. For whatever reason, health seems to be one industry where government does things more cheaply than the private sector.

— Read Pharma Group Punches Back on Drug Prices As Pressure Rises on ThinkAdvisor.


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