Is What's Good for Pharma Good for America?

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Last week, I expended a lot of words trying to explain my objection to the centrally administered universal health care system that he, and most liberals, would like to see us evolve towards.  In particular I was responding to Matt Steinglass, one of my favorite liberal bloggers.  He in turn responds:

I feel that we are really getting somewhere in this discussion. I have two basic questions here. The first is this: if Megan thinks the Dutch system is fine apart from the price controls on drugs, why don't we adopt the Dutch system but not the price controls on drugs? If Megan's problem with the House insurance reform bill is not the actual House insurance reform bill, but the prospect that it will ultimately lead to price controls on drugs, why doesn't she back the House insurance reform bill and insist that it not adopt price controls on drugs?

The second question I have is this: if the House health insurance reform bill is so bad for drug innovation and research by pharmaceuticals companies, why are the pharmaceuticals companies buying $12 million in ads promoting the House health insurance reform bill?

I think these two questions get at the heart of our misunderstanding--and some of the fundamental differences between liberals and libertarians.  

The answer to the first question is simple:  we can't.  The political logic of pharmaceutical price controls is nearly overwhelming.  You have a product that has a very low marginal cost and a very high fixed cost, which means that you can force them to provide it cheaply and eat the fixed costs if you have enough market power.  You've got program that is rapidly turning into the sucking chest wound of the US budget.  And you've got a big line item supplied by companies that are unpopular--unlike the other major players in the system, like doctors, nurses, assorted health care workers, and the local hospital.  This is why most of Europe has turned to some form of price controls.

To put it another way, let me quote from Milton Friedman's Free to Choose, in which he details an exchange he had with a scientist about the various dysfunctions of the FDA:

What would you think of someone who said, "I would like to have a cat provided it barked?" Yet your statement that you favor an FDA provided it behaves as you believe desirable is precisely equivalent. The biological laws that specify the characteristics of cats are no more rigid than the political laws that specify the behavior of governmental agencies once they are established. The way the FDA now behaves, and the adverse consequences, are not an accident, not a result of some easily corrected human mistake, but a consequence of its constitution in precisely the same way that a meow is related to the constitution of a cat. As a natural scientist, you recognize that you cannot assign characteristics at will to chemical and biological entities, cannot demand that cats bark or water burn. Why do you suppose the situation is different in the social sciences?

This is slightly exaggerated.  But in this case, I think it holds:  price controls are a feature of national health insurance schemes, just as log-rolling is a feature of democracy.  We might hold out for a while.  But eventually, we'd have a combination of populists in office and a budget problem, and the pharma profits would go.

As for the second question, this is where I realize that liberals often really just do not grok what libertarians are about.  For them, this is a battle between people who like health care companies, and want to defend them, and people who like the government.  But I don't care about the pharmaceutical companies qua pharmaceutical companies.  The pharmaceutical companies are interested in what is good for pharmaceutical companies.  I am interest in what is good for society.

I am not under the delusion that those are necessarily the same thing.  "What's good for General Motors is good for America" was a Great Society slogan, not a libertarian, or even a conservative one.  Right now, pharmaceutical companies spend a great deal of effort on innovation because they have to in order to survive.  But if survival means ditching the R&D labs and churning out low-cost copies of things they've already invented, then I'm pretty sure that's what they'll do.  To paraphrase Adam Smith, it is not to the benevolence of pharma that I look, but to its self interest.  In the current system, that self interest means inventing new drugs. 

In other words, I'm not in favor of business.  I'm in favor of competition.

Government intervention in markets tends to dampen competition, which is something that executives like; I'm sure that's one reason that they're getting with the program.  Too, administration has made it clear that they intend to do this deal with pharma or without them; they're trying to negotiate a surrender on the most favorable possible terms.  But while I'm sure this is good for Obama, and I think it may even be good for pharma, I don't think this will be good for us.  Companies cut deals with government all the time, and they rarely, in my opinion, redound to the benefit of the American people. 

The benefits of competition are, incidentally, why I don't think that the defense model of innovation works very well in the pharmaceutical or medical technology industries. To start with, military procurement is a massive jobs program.  Congressmen rarely take much action on behalf of their unemployed chemists.

But more importantly, military spending is competitive--even now, we're mostly doing this because we want to maintain our military primacy.  Pharmaceutical technology is just not competitive that way.  Nations don't really compete on their health care systems, and anyway, if we develop a drug, it will be patented abroad, and everyone will get it.  Also, we're not all that worried that the French health care system will come over here and kill us.


I'm not sure the cognitive gap between liberals and libertarians can be bridged.  At the very least, as long as they think of us as defending corporate interests, rather than defending a system that most often aligns corporate interests with ours, everything we say will continue to seem vaguely puzzling.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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