Reader Question – Don't we need to pay for innovation?

A reader writes:

Our costs are higher because we foot the bill for everyone else across the board. If everyone was paying their fair share than our costs would be reduced. But if we did that Europe and Canada would scream. Why do you think drugs manufactured by US companies are so much cheaper everywhere else?

This is a favorite talking point of those who oppose reform.  But it’s odd, for so many reasons. So many others have answered this question, I’m going to let them speak for me.  First up is Jim Henly:

The argument is that if we further nationalize health-care financing it will mean reducing expenditures which will mean squeezing the profits of Pharma which will reduce innovation and more people will die and that’s bad. How is this not also an argument against any course of action which reduces health-care spending? For instance, favored right-wing programs are tort reform and increasing the share of health-care costs borne directly by the consumer. The argument is always that these changes reduce “unnecessary procedures” and – ta-da – control costs. But this would also, then, reduce the incentive for innovation in the health-care sector. Lower profits; less capital attracted.

I think y’all are proving too much.

Smart!  If we buy the reader’s argument, then we can never contain costs because it would be bad for innovation.  So no tort reform, no Medicare reform, no Medicaid reform, nothing!  But for some reason, we only make this argument when we try to contain costs through government intervention in insurance.  That’s hypocritical.

Next up, Ezra Klein:

The problem with that objection is that it’s all theory. I’ve never seen empirical evidence quantifying the benefits of domestic overpayment, nor the cost to innovation of, say, a government health-care system that cut spending by 15 percent. Similarly, you’d also want to consider whether further drug innovation was the most productive use of those dollars. Out of every $100 we spend paying more for drugs and devices than other countries, would those last $8 do more good contributing to “innovation” (along with profits, advertising, me-too drugs, etc) or funding early childhood education? Or cutting taxes?

Nor do proponents of this theory seem to take it particularly seriously. They’ll use it as a cudgel against single-payer, but never as an argument to increase domestic spending. But why not? If the benefits to innovation are really so grand, why shouldn’t we double our spending? Or increase it by 20 percent? It seems unlikely that fortune has delivered us to the optimal point on the curve. If the need to better fund global medical innovation were truly so persuasive, you’d imagine that it would cease being a convenient objection to universal health care and be built into an affirmative policy proposal in its own right.

Smart!  If we need to spend to innovate, why doesn’t anyone ever argue we need to spend more?  No?  If not, then how do we know that this is the set point for optimal innovation?

Last up is Ben Domenech.  You should know that Ben is a conservative blogger who co-founded Red State.  He also used to work for the US Department of Health and Human Services.  If I had the room, I’d post his entire piece:

While I consider myself a pro-market and pro-consumer conservative, specialized medical research is one area where government funding is still needed. And to be honest, I see no inconsistency between holding that view and also holding the view that a government takeover of our health insurance system is a bad idea… talking about government-funded advanced medical research is an entirely different arena, and it just doesn’t have anything to do with how our health insurance system is run. It’s a red herring, and what’s more, it’s one still slick from the water.

Smart! While I likely disagree with Ben about the need for and methods to achieve health care reform, on this point we agree.  You should go read the whole thing.  It’s fantastic.

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