Universal Coverage and Innovation

(I am going to try not to go on a big rant here; we'll see how well that goes.) Jonathan Cohn wrote an article in The New Republic looking at one of the critiques of universal health care: that it might stifle innovation. He presents his case as a balanced one where the relative trade off between costs and benefits need to be considered:

But one argument against universal health insurance isn't so easy to dismiss: the argument about innovation and the cutting edge of medical care. It goes more or less along the lines of my conversation with Mike Kinsley: In a universal coverage system, the government would seek to limit spending by forcing down payments to doctors and pharmaceutical companies, while scrutinizing treatments for cost-effectiveness. This, in turn, would lead to both less innovation and less access to the innovation that already exists. And the public would end up losing out, because, as Tyler Cowen wrote last year in The New York Times, "the American health care system, high expenditures and all, is driving innovation for the entire world."

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But it's one thing to say that universal coverage could lead to less innovation or reduce the availability of high-tech care. It is quite another to say that it will do those things, which is the claim that opponents frequently make. That argument requires several leaps of logic, many of them highly suspect. The forces that produce innovation in medicine turn out to be a great deal more complicated than critics of universal coverage seem to grasp. Ultimately, whether innovation would continue to thrive under universal health care depends entirely on what kind of system we create and how well we run it. In fact, it's quite possible that universal coverage could lead to better innovation.

This is all fine and good. I am not the type of libertarian who doesn't believe that market failures exist. I think they are often exaggerated and I remain skeptical that government can do better, but they certainly happen and health care might be one of them. Further, the issue of how much government involvement we should allow in health care is a cost-benefit assessment: how much do we want to pay for how much health care.

Where I dispute with Cohn is in his assessment of the relative costs and benefits. In computing the cost-benefits with respect to innovation, Cohn makes some assumptions that I just have to take issue with. Take this one, for instance:

The great breakthroughs in the history of medicine, from the development of the polio vaccine to the identification of cancer-killing agents, did not take place because a for-profit company saw an opportunity and invested heavily in research. They happened because of scientists toiling in academic settings. "The nice thing about people like me in universities is that the great majority are not motivated by profit," says Cynthia Kenyon, a renowned cancer researcher at the University of California at San Francisco. "If we were, we wouldn't be here." And, while the United States may be the world leader in this sort of research, that's probably not--as critics of universal coverage frequently claim--because of our private insurance system. If anything, it's because of the federal government. (Emphasis mine.)

First of all, if Dr. Kenyon believes that universities are not interested in money, she is living in a world populated with elves and fairies. It is true that most scientists and academics I have met are not interested in their personal salary, but if universities aren't interested in money why do we spend all day obsessing over grants and funding? The statement that an institution is not-for-profit does not imply that it is not interested in money and hence morally superior to for-profit institutions. Likewise, universities of late have found myriad ways to gather funds not the least of which, as Tyler Cowen points out, is to try and license drugs and new technologies themselves. This type of academia = good/corporations = bad generalizing is not only a false assumption; it is totally unhelpful to the discussion.

Second, this gets to the issue of what the purpose of private industry is in medical innovation. Cohn argues -- using the example of Deep Brain Stimulation for Parkinson's as an example -- that companies were followers in capitalizing on the inventions of academia rather than at the forefront. (I discuss thoroughly how DPS works in Parkinson's here.) Does he mean to imply that companies are dispensable in the process of innovation? More precisely, what is the purpose of companies in medical innovation?

I view the issue this way. Companies are a vehicle for capitalizing the risky and expensive venture of technology and drug development. Say it costs a billion dollars to put a drug through FDA approval. You have to collect that money somehow, and frankly it matters very little to me whether you do so at a university or at a drug company. However, do you think that universities have the capital to invest in a venture of that size? Likewise, were they to take out loans and the venture failed, how would they get rid of the debt? If the drug had horrible and unforseen side-effects, who would pay for the liabilities? The reason that corporations do this and universities do not is that they are much more effective vehicles for accumulating the capital that is required.

This is not to suggest that government-funded research via NIH does not play a vital role in innovation. It absolutely does, and corporations are most definitely parasitic beneficiaries on the results of that research. However, saying that NIH plays a vital role does not imply that corporations do not play an equally vital role or a role that can be dispensed with. Both government-funded research and corporate investment are necessary for innovation.

The other part of this whole argument that bugs me is that it is a rehash of the ongoing argument about markets vs. government in general. Frankly I think that it is getting a little tedious because I keep hearing the same generalizations put forward from both sides every time this comes up.

Saying that a market failure exists does not imply that it can be prevented by a government program. Cohn commits this same fallacy with this statement:

The ideal would be to come up with some way of achieving the best of both worlds--paying for innovation when it yields actual benefits, but without neglecting less glitzy, potentially more beneficial forms of health care. And that is precisely what the leading proposals for universal health care seek to do. All of them would establish independent advisory boards, staffed by leading medical experts, to help decide whether proposed new treatments actually provide clinical value. The fact that Barack Obama's plan includes such a provision is particularly telling, since one of the plan's architects is David Cutler-- the economist constantly promoting the value of innovation.

Of course, the idea of involving the government in these decisions is anathema to many conservatives--since, they argue, the private sector is bound to make better decisions than a bunch of bureaucrats in Washington. But, while that's frequently true in economics, health care may be an exception. One feature of the U.S. insurance system is its relentless focus on short-term good. Private insurers have little incentive to pay for interventions that don't yield immediate benefits, because they are gaining and losing members all the time. As a result, money invested on patient health may very well help a competitor's bottom line. What's more, the for-profit insurance industry--like the pharmaceutical and device industries--responds to Wall Street, which cares more about quarterly filings than long-term financial health. So there's relatively little incentive to spend money on the kinds of innovations that yield long-term, diffuse benefits--such as the creation of a better information infrastructure that would help both doctors and consumers judge what treatments are necessary when.

The government, by contrast, has plenty of incentive to prioritize these sorts of investments. And, in more centralized systems, it can do just that. Several European countries are way ahead of us when it comes to establishing electronic medical records. When fully implemented, these systems will allow any doctor, nurse, or hospital seeing a patient for the first time to discover instantly what drugs that person has taken. It's the single easiest way to prevent medication errors--a true innovation. Thousands of Americans die because of such errors every year, yet the private sector has neither the will nor, really, the way to fix this problem. (Emphasis mine.)

It is certainly true that corporations do often prioritize short-term profit over long-term gains, but the suggestion that governments are somehow inherently more suited to the long-term is simply farcical. What about Social Security which is becoming rapidly insolvent because of the refusal to look at long-term financial projections? What about global warming? When has government -- much less this government -- been any better at looking over the long-term?

Furthermore, while I agree that corporations often make bone-headed judgments -- case in point: GM squelching electric vehicles -- do Cohn sincerely believe that committees of experts make better judgments? For one, in many cases the committee making the decision -- be it corporate or government -- simply does not have the necessary information to make an appropriate decision. An example would be every time the FDA experts have approved a drug that ends up having a horrible and unforeseen side-effect. For two, disinterested-ness does not necessarily imply accuracy. Lord, how many books can I cite that shows that experts make just as crappy judgments and interested-ness actually improves performance? (Let's see...there is Expert Political Judgment by Tetlock which looks at bad expert decision making...there is the Myth of the Rational Voter which looks at how voters make bad choices and how the situation improves when they more they are financially invested...there is the Wisdom of Crowds which shows how betting markets have the best predictive performance performance.)

This gets to the core of my argument about which I think that Cohn and I agree. Cohn seems to argue that what matters about whether universal health care is compatible with innovation is the organization of the system. He is completely right about that. The organization of the system matters in determining how effective it will be. But the revisions to the system that Cohn is arguing for make several assumptions that I just don't think are true.

I was also struck by this comment that Tyler Cowen made about the piece:

The NIH works as well as it does because the money is mostly protected from Congress. It is not a success which can easily be replicated. The more money is at stake, the more Congress wants to influence allocation. We should guard this feature of the system jealously and try to learn from it. If we can.

Cowen is right on. Those who are arguing that the successful record of NIH can be applied and extended to other programs need to remember that NIH is successful because it is about as close to a meritocracy as you can get and political input is almost entirely excluded for grant approval decisions. It may be true that universal health care can be organized in a manner that it would not stifle innovation. However, this would require several preconditions to also be true: more than adequate funding, apolitical decision-making, etc. Do people believe that these preconditions will be satisfied?

Megan McArdle says something similar, commenting on Cowen:

Since we've been talking a lot recently about vouchers, education is one area where this is fairly easy to see. You get a pilot program: a curriculum, a teaching method, a high-intensity preschool program (such as the Perry program) for disadvantaged kids. You do a rigorous study of that pilot. It produces terrific results. Naturally, we should roll it out everywhere!

Not so fast. That pilot program has a huge administrative staff whose sole incentive is to ensure that it is meticulously carried out. In the real world, that curriculum will be put into place by an administrator whose priority list is crowded with everything from mollifying the latest lunatic on the school board, to ensuring that she gets out of town for a three day weekend with her new boyfriend who she really thinks may be The One.

That pilot program is staffed with a narrow band of extremely highly qualified teachers, sifted from the best the environment has to offer. In the real world, whoever happens to be standing in front of the classroom come September 5th has to do it, even if they flunked Remedial Math four times and only got this job because the school board needed a body.

That pilot program is rigidly policed for deviations from standard procedure, because deviations will kill the accuracy of the result. In the real world, tranquilizing the kid who just pulled a knife during study hall may take priority.

The pilot program is supported by a crack team that will move heaven and earth to ensure its completion; if funds are tight, they will not sleep until they have procured another grant. In the real world, it's probably less important than redecorating the teacher's lounge.

The pilot program has buy in from all participants; schools, teachers or students who don't like it, don't believe in it, or don't want it anyway, have already naturally dropped out of the sample. They will thus be striving to actually put it into place as closely as possible as described in the prospectus. In the real world 60% of everyone will think this is a moronic idea, and most of the rest will strenuously resent the intrusion on their autonomy.

Result: what worked beautifully in pilot will generally fail miserably in wider execution.

In summary, I think that Cohn is right to point out that universal health care and innovation are not necessarily mutually exclusive. He just has a significantly more bullish assessment of whether the preconditions for success are likely to occur.

Further reading:

Paul Krugman lauded Cohn's piece.
Clive Crook comments that the piece confuses terms:

Universal coverage, in its own right, poses no threat to innovation or to the availability of expensive and exotic treatments for people who can afford to pay. America can achieve universal coverage by filling gaps in its existing system--in much the way that the Democratic presidential candidates are now suggesting, and as Mitt Romney did as governor of Massachusetts. Reforms like this pose no threat to the incentives that drive medical innovation in the US. The trade-off between universal coverage in its own right and innovation is a straw man.

What might pose a threat to innovation, depending on the details, is new attempts at cost-control. A highly centralised single-payer system like Britain's or Canada's presses down on costs partly by denying expensive or otherwise cost-ineffective treatments (in the judgement of the system's administrators) to patients, and by other forms of rationing. Trade-offs between economy on one side and innovation and access on the other inevitably start to bite. The results may be better or worse for citizens as a whole--but once you start to curb costs from the top down, the trade-offs are inescapable.

On an unrelated matter, legislating the uninsured into insured status appears not to have worked in Massachusetts. (Hat-tip: Cato@Liberty)