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Health Care: It’s about delivering efficient outcomes

Megan McArdle is “freaking out a little bit”. She is really worried about the implications of the fact that Pharma isn’t spending as much money on R&D as it did the year before.

Here is the meat and potatoes of her argument:

While some drugs are simply an added expense (think chemotherapy prolonging the lives of people who would otherwise have died sooner), many of the real blockbusters substitute for labor-intensive treatment.  Statins instead of cardiac catheterizations or coronary bypasses.  Avandia instead of amputations.  Hydrochlorothiazide instead of nursing home care for your massive stroke.

Her analysis is logically correct, but I think she is missing the bigger picture. Pharmaceuticals are a tool to get a job done, as are “labor-intensive treatments”, and also preventive medicine, and holistic medicine… the point I am trying to make is that there are a number of substitutes for current medical treatments that do not involve pharmacology, unfortunately none of these other substitutes are as profitable as drugs (people like drugs because they don’t require much personal effort to be effective, as opposed to most preventive medicine, and usually when people are at the point where they need Lipitor, the spectre of death is hanging over their heads to remind them that they better take their Lipitor… he wasn’t there before to remind them to take their fish oil or order a salad instead of french fries). Each tool has a certain level of cost-to-benefit efficiency when it comes to delivering healthcare outcomes, and after decades of pharmaceuticals being the best “bang for your buck”, we have long since been at a point where our marginal American healthcare dollars are better spent on other things.

The fact that returns to pharmaceutical R&D have been falling isn’t surprising to me. Pharmacology has been one of the “low hanging fruits” described by Tyler Cowen in his “Great Stagnation” hypothesis, and within this context it would make sense that we might have reached a technological bottleneck that is preventing us from creating a blockbuster drug that will do for cancer or Alzheimer’s what statins did for arteriosclerosis. From an economic standpoint, generally all returns are diminishing over time. As competition increases and technological process forces changes to the ideal business model, firms are simply unable to do the same thing for decades upon decades and expect it to remain at the same level of profitability.

Where I think McArdle completely misses the point is in her assertions that reduced pharmaceutical R&D spending may lead to a situation where “health care expenses might actually rise faster than we expect”. Assuming she is not making the error of confusing costs with outcomes, and that she is referring to constant outcomes

Health care is not so much a consumable good as it is an outcome… not an end in and of itself, but instead a means towards longevity and quality of life. Today’s standard of whatever would constitute “world class healthcare” will assuredly be less expensive in the future than it will today. Whatever new discoveries or technologies that will improve healthcare outcomes above today’s benchmark will assuredly cost more, and that is because people will literally be paying for extra years to be added on to their lives or for those last years to be more peaceful and comfortable. It is these newer longevity and quality of life technologies that are the primary cost drivers (of course, that is to say nothing of the price distortions caused by government interference in the marketplace and cartelization/misregulation within the field of medical service providers… or of the irrational components of society’s demand, which are exacerbated by the Phrma complex and its army of marketers and lobbyists).

This distinction between costs and outcomes is very important to make, because it is a misunderstanding of outcomes that has driven medical costs as high as they are. Life expectancy is rising everyday, as is quality of life for the elderly, so you compare tomorrow’s costs with today’s costs because the outcomes are going to be different. Doctors (or at least the good ones) tell us to take preventive measures, such as exercising and eating right, because they are by far the most cost-efficient ways to deliver optimal medical outcomes (an example of an outcome would be: still being able to enjoy X quality of life level at the age of Y). Someone who doesn’t want to exercise or watch their diet can still live to be just as old as someone who does take these preventive measures, but they will most likely be taking thousands of dollars worth of drugs, and have had who-knows-how-many procedures, and even then, it is doubtful that their quality of life would objectively be at the same level as Mr. or Mrs. Preventive Medicine.

McArdle attempts to sequester the most common liberal sentiments into a neat opening paragraph:

Worried about me-too drugs?  The medicalization of human variability in order to medicate them into compliance and/or sell them quack cures of dubious value?  Ever-rising prices for brand name drugs pushing seniors into penury?

Well, you can breathe a (slight) sigh of relief.  For the first time ever last year, the global drug industry cut its R&D spending.  The trend is expected to continue, at least in the near term.

If you’ll excuse me, the rest of us will be over here in the corner, freaking out a little bit.

I actually am worried about all those things, except for the last one: seniors aren’t being pushed into penuary… they are just spending more money to squeeze every last bit they can from life. Today they have the option of taking expensive drugs and doing expensive treatments and procedures that weren’t even around 10 years ago. Having that option is a benefit, not a cost.

McArdle’s worry is unfounded unless you own pharmaceutical stocks or are skeptical of our society’s ability to recognize the efficacy of the many alternatives to pharmacology. I will give her the benefit of the doubt and assume McArdle is more firmly planted into the latter camp, although I betcha a 90-day supply of generic diazepam that she also relates with the former. I also suppose that we all, as taxpayers, have stake in this game since the government is the biggest buyer of healthcare, but this should be more reason for us to want to explore the more progressive modalities of medical treatment as individuals. My biggest fear is that someone will draw the conclusion that we should be subsidizing pharmaceutical R&D (maybe we do already? I wish we wouldn’t).

We need a way to measure the efficiency of every marginal dollar spent on health care, measured in terms of outcome. People have a complete disconnect from this concept; part of this is because of capitalism, and part of this is because of human nature. When it comes to life and death situations, we hardly ever do an actual cost-benefit analysis to see if it is worth it to give Grandma another round of chemotherapy so that she can see her next birthday… maybe the money would have been better spent sending Grandma on a trip to the place she always wanted to go, but was never able to: increasing the quality life side of the outcome equation rather than the life expectancy side. Maybe we need to reform our capitalist culture so that we don’t put such a high value on excess or quantification. Maybe it is a good thing that the drug companies aren’t spending as much money making new drugs for us to take, it might force us as a society to move away from pharmacology and towards other modalities of medical care that are more cost-efficient and, perhaps at our current position on the tech curve, more efficient at delivering the outcomes we really want.

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