Reason for a New Age

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    What you will expect to see here are discussions of politics and tangentially economics. This blog will do its best to present a rational look at the world of today, how the modern world came into place, and the issues that are currently being discussed in the public realm.
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The Cost of Health Care – Part 4

Posted by publius2point0 on 2010/01/06

And continuing…

The US pays more for pharmaceuticals
According to data from the OECD, we do pay more. The average American pays about $728 every year, while as the average European pays about $366. If spending were decreased to match European levels, we would be paying approximately $362 less per year.

In Part 1 I was able to find a few numbers where spending could, theoretically, be cut. That amount was at most $600 and at minimum $260. Taking the greater number and adding in the reduction by pharmaceuticals, we would still have $2138 left to cut in order to match other nations’ spending. So while it would certainly be nice to save this money, it’s certainly not the source of our financial problem.

Or is it?

Our spending is roughly double that of other nations, irregardless of the age of the person receiving care. Your average American visit to the doctor costs twice as much, no matter what. To me this signals that whatever thing there is driving up the price is systemic. If doctors were paid more in the US, for example, then you would see an overall higher rate. Doctors aren’t paid more however. But we do pay double for pharmaceuticals. What if we pay double for not just pharmaceuticals, but in fact everything you see in a doctor’s office?

Do we pay more for all medical equipment?
It’s hard to compare between nations unless you have a single source which computes the numbers for several locations. One study might include certain things as being “medical equipment” while as another might not. If you compare the results of those two studies without being able to quantify what the differences are, then your comparison is meaningless.

Fortunately, I’ve found a source which does offer a comparison of several nations. Here are links to the USA, Canada, France, and the UK. Respectively, these countries pay $304, $145, $132, and $127. The US pays double.

Adding this plus pharmaceuticals, it seems that the US still only has about $520 excess spending. The thing is though–and though I will present more theories of health spending–I haven’t found any other region of spending that explains our spending than the objects used in medicine like lab equipment, pharmaceuticals, and so on. These fit the expectation of something that would factor in to every single medical bill and are consistently double the cost. I haven’t been able to find information on the cost of constructing a hospital in the US versus in other countries, and I really don’t know what all counts in towards being “medical equipment” and what isn’t.

I know, for example, that about 31% of health spending goes towards hospital care. But another 31% is going to “professional services” which, so far as I can tell, is the doctor’s and nurses’ salaries. Probably some of this goes to profit, some to administration, some to janitors and IT personal, but other goes to things like TVs in each hospital room or nice new computers or whatever. I don’t have a breakdown of this data but I suspect that so far as niceties and new equipment are concerned, the US probably spends more than they do in other countries.

Overall, having studied all the various theories of US health spending, my personal bet is that it is on actual physical objects that most of our extra spending goes. I just don’t have the data I need to show it.

But so how do we spend more on “objects”?
A major problem with American health spending is that the person receiving care isn’t really the client of doctor. Nearly all health insurance is simply given to a person by their place of work. The money which goes to pay for your insurance is deducted from your paycheck before you ever see it.

A company offers health insurance as a perk of your employment. The amount that they guarantee you–though secretly removing it from your paycheck–is intended to make you feel benevolent towards the company. It’s not intended to give you the best health for the minimum necessary amount of spending. Instead of being a market for “health” it’s a market for employee satisfaction.

Now, taking a slight tangent, let’s look at cars. When I buy a new car, I’ll pay something like $25k for it. If I turn around and sell that car one year later, I’ll only be able to sell it for about $20k. If your average car has a lifespan of approximately 9.2 years, then at $25k value, I’m paying $2717 per year of use. If I buy a car that is one year old for $20k, then I am only paying $2439 per year of use. The original owner should have sold it to me at a cost of approximately $22.3k based on the expected use time, but instead by selling at $20k, he is effectively giving me a free $2283 for no particular reason.

More impressively though is if you look at the cost of electronics and other new products. A new PC game, for example, might sell for $50 the day it is released, $20 the next year, and subsequently it’s in the $5 bargain bin. In all of these cases, it’s still the same unused product. Unlike a car, the quality doesn’t diminish with time since there’s been no use of the product. It simply doesn’t have the wow-factor of newness. The early adopter ends up paying a significantly higher value than everyone else for no other reason than wanting to have it early.

Now certainly there is something to be said for having the newest and the best when it comes to health. I imagine that if you can afford health care in the US, then you probably have access to more advanced care than most other places. But the US is most likely not properly budgeting itself in terms of actual benefit from these technologies. If I simply wait one year to buy the newest technology and in that time its price has declined by 50%, unless that technology is literally twice as good as the older method, I’m receiving far more benefit from it per dollar spent, and I’m still nearly as technologically advanced as the US. One year behind isn’t terribly significant.

The problem, though, is for example you might note above where I looked at the price for medical devices in the US, the report states that the US is 41% of the worldwide market. If the US starts budgeting to only pay as much as other nations, then there is no early-adopter and the market shrinks by 20.5%. No company can survive a sudden loss of 20.5% of its revenue. The US is paying a significant percentage of the total cost of health technology for the sake of the rest of the world. Of course, a gradual shift towards a more budgeted approach to purchasing would give the industry time to adjust prices to match and offload this burden onto the rest of the world.

But I don’t think that this should be our only solution.

While I can see something of a wow-factor with laboratory equipment and fancy hyper-laser-oscillating-imaging-scanners or whatever, I don’t imagine there to be a large wow-factor for most pharmaceuticals. But if I go into the store and look at NyQuil and compare its price to Store Brand Cold Medicine, the prices will be quite impressively different. If I look at what’s actually in these products, on the other hand, they’ll be exactly the same. They have to be exactly the same or the FDA would strike it from the shelves, in point of fact.

Any customer who buys NyQuil instead of Store Brand is getting duped, one might say. He’s simply paying for advertising. And of course, by extension, a health care system which properly budgeted would always simply mandate that you purchase and use a generic brand rather than a name brand.

But the thing is that generic brands are simply piggy-backing on the labor of others. Any new realm of study in biochemistry is immediately patented. It can take anywhere from 5 to 15 years to develop this little quirk of chemistry into something that might be useful. Developing that into a medicine, testing it, and producing it can take another 5 to 15 years. With development times that span into decades and massive costs in expensive research technology, highly trained personnel, and lots of money wasted on all the paths that didn’t prove out, creating a new drug is a process that costs on average about a billion dollars. But now notice that a patent lasts a mere 20 years. From the moment a path of study is patented to actually going to market, those twenty years are likely almost or entirely gone. So long as your competitor can replicate your drug to the FDA’s satisfaction, so far as I can tell, nearly from the instant you begin selling your drug that you developed, your competitor can begin selling it as well, while having entirely skipped the billion dollar, twenty year process of R&D. He can undercut your price by a significant amount without you ever having a chance to gain a single customer to your side. Only advertising can help you, and of course that only adds to the price.

As a result of this, while our pharmaceutical research companies should be developing new and interesting drugs, they instead are forced to resort to employing their researchers in rather petty pursuits like adding a hint of caffeine to their product so they can re-patent it and sell it as a newer, better product. Having known starting points, the R&D period and testing periods are both reduced, allowing them to get to market and claim that they have something that no one else does, and actually being able to enforce that.

Overall, the course that should be followed is quite certainly that the duration of patents that pertain to pharmaceutical use should be extended by another several decades. Cutting edge R&D shouldn’t be reliant on government-funded research, as it is now.


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