Thomas Sowell has an excellent column today laying out in lucid terms the economic ignorance behind current proposals to reform health care in the US.
An OECD study shows that the percentage of patients waiting more than 4 months for elective surgery in English-speaking countries is in single digits only in the United States, where we “lack” the “benefits” of a government-run medical system. In Canada 27 percent of patients wait more than 4 months and in Britain 38 percent. Elective surgery includes some heart surgery.
Shortages where the government sets prices have been common in countries around the world, for centuries on end, whether these shortages have taken the form of waiting lists, black markets, or other ways of coping with the fact that what people demand at an artificially low price exceeds what other people will supply at such prices.
. . . .
Americans, who produce a wholly disproportionate share of the world’s new life-saving drugs, are being asked to imitate price control policies in countries where such policies have dried up the costly research behind such discoveries.
. . . .
Politicians who claim to be able to “bring down the cost of health care” are talking about bringing down the prices charged. But prices are not costs. Prices are what pay for costs.
No matter how much lower the government sets the prices paid to doctors, hospitals, or pharmaceutical drug manufacturers, none of this reduces the costs in the slightest.
Evidently, most of our policymakers and “thought leaders” are so gobsmackingly stupid that they cannot retain elementary economics and history in their pointy heads, and by all accounts honestly believe such gibberish as “price controls lower costs.”
No matter how many times socialistic policies crash and burn, no matter how many times market-based systems beat the pants off of top-down autocratically controlled systems, the “liberal” elites in government, academia, and the media in the US return time and time again to shopworn socialist prescriptions.
Like a dog to its vomit.
In Brian Crozier’s and Arthur Seldon’s fine book Socialism: The Grand Delusion, they note explicitly that socialism hides most of its deficiencies by making people wait.
Game, set, and match: capitalism, including capitalist health care.
We aussies have a hybrid system with a fair percentage of people having insurance and using the private system. The insurance is heavily regulated as well, so that higher risk people get the same premium.
There’s been a long term trend for the young to abandon insurance and rely on the public system, which is sensible when you consider that risk waiting is banned.
Anyway, I recall seeing that we spend something like 9% of GDP on health and the yanks are at about 14%. I don’t know if that includes fake boobs etc, which seem far more common in the USA, but it’s hard to imagine cosmetic surgery amounting to that proportion.
Public systems do lower overall health costs per capita and Sowell has that wrong. The saving is through rationing and that bit is correct.
If you think about the crux of the debate, it is between less government control leading to more cost and better services, or more control with less cost and worse service. We get to this point because sick people might be expensive, but they are very focused voters. Nothing clears the mind like impending death I guess.
The real question is why health does not show the same trend as other services in a competitive capitalistic system. Everything else seems to get cheaper. Perhaps it is the pervasive nature of insurance. Once you’ve paid the premium you might as well get as much back as you can.
I will post a position that I have left on several other weblogs. To wit, that the US consumer is subsidizing many other countries’ socialized prescription drug programs.
Since companies cannot make a decent profit on drugs in countries with price controls such as the UK, Canada, etc., we are being overcharged for drugs here in the US. Probably to the tune of $100’s of billions per year and this is what allows the other countries mentioned above to use price controls.
Does anyone care to dispute/discuss this hypothesis with me?
Pedro doesn’t paint the full picture of our Aussie medical system. We are all charged an income tax levy of (I think) 1.25% of annual earnings. This levy is only a fraction of the cost of the system, but the public are never aware of the real cost to the government. Our Pharmaceutical Benefits Scheme subsidises the cost of drugs to the tune of about 80%, but the people in the street have no idea that their $20 prescription costs the government another $100. There is now a very strong suspicion that many immigrants go to the doctor to acquire subsidised drugs that can be sent back to their country of origin (usually in Asia).
He seems to ignore the law of supply and demand and doesn’t realise that lower prices stimulate demand, which applies to drugs and many types of elective surgery.
Merlin writes: “Since companies cannot make a decent profit on drugs in countries with price controls such as the UK[…] we are being overcharged for drugs here in the US.”
Not usually my brief to defend the British Health system, but:–
1. It’s news to me that the UK has price controls on drugs–though I know Canada does. Since the Health Service and its appendent Agencies do have a near monopoly in the hospital sector they are in a good position to squeeze suppliers over the products used in hospitals, though. And lots of products are not available through the Health Service, if the National Institute for Clinical Excellence [ho, ho] determines in its wisdom that the NHS won’t be helped enough to justify the expenditure.
2. It is a strange–almost socialist–view of economics that if one person is charged a lower price than another, then the second is being overcharged. It is generally understood that sellers get the best prices they can, bearing in mind their own long term interests. Drug companies have to consider the range of prices they can charge in different markets when deciding how to market a product, but US prices will be what Americans are prepared to pay and not (except for grey imports tending to lower prices) affected by those other markets.
Guy,
In this case, the company is not choosing to charge different prices. The consumers are not offerring different prices. The government (Canadian) is saying that if the company wants to sell there, they must charge certain prices. Since the company can make money producing and selling the drugs at that rate, they do so. However, that still leaves the development costs to be paid for, and that cost is born by Americans.
To re-iterate, these are not transactions freely entered, they are falsely constrained. The more countries that have price controls, the less drug development that will occur.
Byna
Spending on health in the US at 14% of GDP seems a bit high considering that military spending in the US is app. 3%-4% of GDP. If I remember correctly when Hillary Clinton attempted to socialize the American health industry in the 1990s the estimate was app 8% of the GDP. However I could be wrong. Other than being a watchdog for bad medicines, bad medical procedures, and quack doctors I would prefer that the government and most lawyers stay the hell away from the American health system.
Pedro wrote – “Public systems do lower overall health costs per capita and Sowell has that wrong. The saving is through rationing and that bit is correct.”
Why equate spending with costs? By that logic, a society which spent nothing on healthcare and watched its population die in droves as a result would be incurring no health costs. Most people view mass death and illness as rather costly.
And how can you describe rationing as a “saving”? A saving is something which makes you better off. Rationing makes you worse off, hence why people are prepared to pay money to avoid it. Therefore it is a cost, not a saving.
It’s therefore incorrect to assess the total costs of a public healthcare system by simply looking at the monetary price paid. You have to factor in the cost of the delays, poorer quality of treatment, lower levels of healthcare provided to the population, and so on.
As for the reason why people pay more in a free market for healthcare than the government pays in a socialised system, the answer should be obvious – it is because the government is supplying *insufficient* healthcare coverage. In a free market, people pay more because they *want* more (or better quality) healthcare – because it is *worth* the extra spending, in their opinion. The value of the provision of a good on the free market is not measured by how little you (or society) spends on it.
It is pretty easy to see why socialised medical systems spend less than free(er) market ones – they are way too low far to the left(ho ho) on the supply/demand curve. They are providing too little supply, at a lower price (which is artificially low purely because of price controls). It’s 1st year economics – if the quantity/price is at any point to the left of where the supply and demand curves intersect, then you are providing far less supply than is demanded (bad for consumers), and are passing up the opportunity to charge higher prices that the consumer would willingly pay (bad for the supplier). Thus *both* supplier and customer are worse off than they would be in a free market equilibrium – *society* is worse off overall. It would be far better for the government to charge free market rates, then pass on the “surplus profits” ( the amount charged over their previous fixed price, times the extra quantity provided) to poor medical patients. Everyone would then be better off. This is why intelligent socialists prefer voucher or subsidy systems over price controls.
An OECD study shows that the percentage of patients waiting more than 4 months for elective surgery in English-speaking countries
Why does he ignore the non-English speaking OECD countries?
The report (presumably this one: http://www.oecd.org/dataoecd/13/35/16584600.pdf ) actually finds that three nations have virtually eliminated waiting lists – the USA, Germany and France.
It also notes that the US “spends much more on healthcare compared to all other OECD countries” and that 14% of the population is not covered by health insurance.
Much as Mr Sowell may wish it otherwise, the American system of providing healthcare is clearly not the only one capable of delivering minimal waiting times.
Frankly I only have a couple comments on this thread.
1. Price controls on drugs is coming to America.
I think it’s ridiculous that Congress is thinking of allowing people to import drugs from Canada. WTF? Why not just impose price controls here in America, keep the money flow out of Canada and then sit back and watch the R&D of new drugs die a agonizing painful death.
If Congress is willing to import drugs to lower costs, then it’s just one short step to imposing regulations and price controls. After that all new R&D in drug research will end quickly. Then we all can enjoy an R&D free world where nobody is going to bother trying to develop cures or treatments for anything.
A new SARS epidemic? Need a vaccine? Some new ultra-killer disease rampaging? A totally anti-biotic proof version of MRSA (flesh-eating bacteria) infesting all the hospitals?
You’re on your own.
This would be an extra special kick in the teeth to those countries that have price controls. It would be even more interesting in those countries that specifically invalidate drug patents and allow domestic companies to produce patented drugs, like Brazil.
2. There is a bright side to enforcing price controls on drugs.
The first aspect is that, with the death of new drug R&D, many more highly qualified people will be available to conduct research into Adult Stem Cell therapies. Frankly it’s a financial and logical dead end to conduct endless rounds of therapies and treatments in order to maintain health. It’s this very system that is causing most healthcare systems of the world to totter towards collapse.
The real money is in actually curing ailments. If you can regenerate/repair nerves, internal organs and the central nervous system then you’re 90% of the way there. In this way a true low cost universal healthcare system could be implemented, either as a nationalized service or privately. By making the long-term costs minimal, even a highly expensive treatment can be cost effective.
An example is kidney dialysis.
I’m an American with Medicare and insurance. I undergo dialsys 3 times a week. It costs approximately $8,000 per *week* to keep me alive. I’m also immune suppressed which means that I also have to deal with multiple and extended hospital stays along with numerous surgeries. This year has been pretty bad with 16 weeks in the hospital and 7 surgeries. Total cost of surgeries and hospital stays? About $120,000 for this calender year alone.
Total cost for just 2003? $540,000 USD.
Hey! That makes me the Half-Million Dollar Man! 🙂
So there will, eventually, be price controls in America. The drug R&D will die. There might be more investment in Stem Cell treatments. Or there might not. Whatever happens it’s very certain that this state of affairs cannot continue. Regardless of the consequences, the excessive costs borne by the American consumer is far too high and totally unfair. If the only way to change this is to condemn a rather large portion of the world’s population to death, due to a lack of new drug R&D, then so be it.
Hey we all die sometime right? And if nothing else, it’ll annoy the Canadians. Or perhaps the French. In which case that’s all the reason needed to do it.
🙂
***
To give context to this point of view, I’m a renal dialsys patient with total renal failure. Without drugs and constant therapy, I would die. But what the heck.
As for the kidney failure thing. If you have high blood pressure or if you don’t know what your blood pressure is, then get that fixed RIGHT NOW. I can attest that dialysis and kidney failure is no joy. I get stuck with a **15 gauge** needle 2-4 times every other day. If you don’t know what that means, go to a hardware store and pick up a roofing nail. Now stick that in your arm a few times. I assure you all. If you don’t take care of your blood pressure, you will be able to see the context of this post from a first person view.
***
ed
sigh. I’m an idiot.
$20k per week * 16 weeks = $320,000
Avg $15,000 per surgery * 7 = $105,000
$8,000 per week of Dialysis * 52 = $416,000
Approximate total= $841,000 for ONE calendar year.
Why are they willing to spend so much?
Maybe because I’m so very pretty. 🙂
ed
steve – how does that OECD study square with the irrefutable evidence of this past August that France’s health care system suffers from dire shortages and fatal wait times?
I refer, of course, to the thousands of deaths that occurred in the recent heat wave due to personnel shortages in the French health care system and the resulting unavailablity (read: long waits) of necessary care.
I suspect, and it seems the general opinion, that the deaths this past summer is a combination of:
1. wholesale vacationing by hospital staff
2. excessive temperatures
3. lack of air conditioning in hospitals
4. lack of immediate relatives that could actively care for the elderly (since they were on vacation too)
5. a certain amount of indifference towards the elderly by their relations
Another interesting point is that France is evidently going to mandate that each hospital have one air-conditioned public room.
:O
ed
Harry wrote:
‘Spending on health in the US at 14% of GDP seems a bit high”
No, per the OECD, that’s about right.
http://12.31.13.115/HealthNews/reuters/NewsStory050820034.htm
llater,
llamas
R.C. Dean – the OECD report, and the article by Mr Sowell concern themselves with waiting times for surgery, which is quite a different thing to waiting times for emergency treatment.
Whether or not many of the heatwave deaths were due to people having to recieve treatment in emergency rooms, or due to other reasons, such as those outlined by ed a few posts above is unclear. Extreme conditions will stretch any system – consider the 700+ deaths in Chicago in 1995 in a heatwave lasting only a few days.
I’ve heard that the pharmaceutical companies have threatened to stop selling to Canada if the U.S. starts to allow importation in any form. If this is true, it sounds like it would be a great turn of event: the U.S. allows importation (which is already occurring to a limited extent), the drug companies ratchet up their prices to the Canadian system to basically market levels, Canada is forced to drop the charade that they’re not free-riding and accept the higher prices, U.S. prices drop by some amount. In the long term it would be a benefit for the drug companies. Is there a flaw in this logic? Could Canada threaten strong-arm tactics like breaking patents?
ed, if you fish around in the Samizdata archives a little bit, you will find a post that argues that the items you list above are predictable features of a government-run health care system. Such systems become focussed internally, on satisfying staff and bureuacrats, rather than externally, on satisfying the customer. Such systems also reinforce the notion that it is the state’s job, rather than the family’s, to see to the care of the elderly.
I’ve heard that the pharmaceutical companies have threatened to stop selling to Canada if the U.S. starts to allow importation in any form.
More likely, this would trigger the Canadians to start breaking patents until big pharma falls back into line. The Canadians would argue that the interruption in supply of critical drugs was a public health crisis that could only be met by breaking patents so that the drugs could be supplied by anyone.
I find the idea that the drug companies would reduce prices to the US in Augustus’ post pretty funny. When’s the last time that happened?
Byna: “…the company is not choosing to charge different prices. The consumers are not offerring different prices.”
If I choose to sell at a price, I am accepting that price, whether I’m given one offer, or a thousand different ones. In an ordinary market, I can always refuse to sell if I don’t like the price. Countries with compulsory licensing regimes (not the UK, and I think not Canada) effectively compel sales at the price they choose, but drug companies are sophisticated enough to take this into account in budgeting their research programmes and write-off those markets.
(Speculation: A virtual symmetry.
The latter fact may even account for the relative lack of research on common tropical diseases. Though we’re often told that wicked drug companies don’t make drugs for poor people because the money is to be found among the rich, poor people actually have more to gain from good health and more comprehension of the disadvantages of bad. There are an awful lot of poor people, therefore, who would pay proportionately more for health than the rich. It might be that the typical tropical government just won’t let drug industries operate at a profit. Such governments would be effectively refusing on behalf of their people to accept the price on offer and cancelling the transaction–or all the potential transactions.)
There are an awful lot of poor people, therefore, who would pay proportionately more for health than the rich
Agreed, but the difference in per capita incomes between the poor and the rich is of such magnitude as to make the willingness to pay a greater proportion of income insignificant. We in the rich world enjoy an income several orders of magnitude greater than the poor. I don’t think the scale of this difference is widely appreciated.
Some rough figures:
If you are a manufacturing company which group is it most rational to target: 4 billion people earning 300$ a year and able to spend 1% of their income on your product or 1 billion people earning $20000 dollars a year and willing to spend 0.125% of their income on your product?
Assuming everyone in both groups spent what they could on your product, developing for the larger poorer group could yield you $12billion, targeting the smaller, richer, group $25billion.
The distribution of wealth we have today skews the development of products in favour of the rich because that’s where the money is. Even in developed countries we see this: compare the number of “luxury” property developments with those that people on low, or even average, wages are able to afford. As wealth becomes concentrated in increasingly few hands this trend will surely accelrate – dispropotionate profits can be made by creating products that fulfil the needs of those few individuals that control a majority of the wealth.
I am interested in libertarian ideas because I find Nozick’s idea of a “framework for utopia” very inspiring. I also feel that progress towards such an ideal will be very difficult whilst such massive disparities in wealth continue to exist. Whilst they remain, our libertarian claims to rights over our property remain vulnerable to the accusation of “what makes you so sure it’s yours?”.
‘Tis still only speculation. Yet I don’t think steve’s figures make much sense. People and their income distributions don’t work like that in any world I recognise.
I’m sure he’s right there’s more variety available for the rich, and its easier to develop potentially profitable products for them. (Though if everyone else is doing this too, actually making money doing it may be no easier.)
However, in Western countries and in less controlled markets, the big money is made by selling to the poor, and at wildly higher ratios at the margin than steve suggests. Walmart, anyone?
Consider, if you can bear to, Tommy Hilfiger. It’s a pure brand. The utility to the purchaser is almost entirely in brand recognition. Buying those clothes won’t make you warmer or live longer. And it is a label that was targetted from the first at the ghetto. Because the money in fashion is from diffusion lines aimed at the poor, they did the diffusion lines to begin with. This cut out all the hassle of getting admired among the wealthy and gradually coarsening and loudening the distinctive features till they could be recognised by the barely educated under bad lighting conditions.
What proportion of their income does a typical poor Western buyer of (objectively useless) “designer” wares spend on the label? Necessity can rack those ratios up. It might be possible for my neighbour with a hundred times my income pay even ten times as much in absolute terms for the flat they live in, but I’ll still pay 50% of what I earn for a roof over my head if that’s what I have to do. Incomes aren’t fixed: if a product let me work better and earn more–as medicine might–I could, if I valued the rest of my life, afford the whole of my gain. If something came between me and death then the proportion of my existing wealth I’d give up for it might be quite high. None of this workes for people actually at starvation level, of course, but the proportion of people in the world with no disposable income whatosever is getting lower all the time.
However, in Western countries and in less controlled markets, the big money is made by selling to the poor,
Well, not really. The big money is made selling to vast middle-class at Walmart.
On top of this, even the poor in the West have lifestyles that would qualify them as well-off in any other time and place. Given this, I am not sure it makes sense to talk about the “poor” in the US anymore, for example, unless you are talking about the truly dysfunctional micro-minority that will never be economically viable.
RCD you’re right about the absolute wealth of the “poor” in rich countries, but I was disagreeing with steve on a point about relative wealth. (A mass-marketer’s margin is the roughly the same whether he sells the product to a middle-income or a poor person.)
Pedro,
When health care in America was a private enerprise system prices were going up at an astounding 5% a year.
Now that the governent controls most of the system prices are going up at a more reasonable 10% a year.
I hope that answers your question.
The drug companies are not totally blameless.
They make about 30% of their profits on anti-anxiety drugs. Pot might replace a significant portion of this medication at tenths of a cent on the dollar.
Guess what companies are in the forefront of the prohibition movement?
The drug companies have been in bed with governments for a long time. They want to keep new entrants out of the business. FDA requirements to bring a new drug to market make the process cost around $100 million to $250 million or more. It used to cost 1/10th that until the FDA required the companies to not only prove safety to proving effectiveness.
The drug companies are only reaping what they have sown. We are all the losers for it.
Steve,
The rich have always been at the leading edge of new developments. There was a time when only the rich could afford bits of iron and steel.
Several thousand years of development have turned that stuff into everyday items for even the poorest of the poor.
The attempt to hobble the rich will lead to slower progress for the poor.
M. Simon,
The rich have always been at the leading edge of new developments. There was a time when only the rich could afford bits of iron and steel.
I agree with your point. What I was trying to express earlier (sorry for the endless italics, not sure what went wrong there!) was that while the majority of the world’s population are poor, they actually form a small market, market size generally being a dollar value. As such the dearth of drugs for, say, malaria can be explained by drug compaines making rational economic decisions. Since conventional economics provides a good explanation of the state of affairs in this matter, speculation as to the deterrent effect of price controls is just that, speculation.
I think US government ought to change the health system and insuring better delivery of services for all the people.
From better Did u mean Unexpensive…?:P