A quarterly magazine of urban affairs, published by the Manhattan Institute, edited by Brian C. Anderson.
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The Pharmaceutical Umbrella
One reason European health care works: America
22 September 2009
To understand one of the most persistent myths in our health-care debate, forget for a moment about public options, health co-ops, and loopholes for illegal immigrants. Instead, imagine that its 1962, the hottest point of the Cold War, and that youre reading a report comparing two countries strategies for resisting the Soviet menace. The United States, the report points out, spends billions of dollars a year on troops, tanks, warships, and missiles, while France spends a tiny fraction of that. Nevertheless, France and America are both unscathed by Soviet bombs. Therefore, the report concludes, Frances Cold War strategy is far more efficient than Americas. And you snicker at the obvious flaw in the reasoning, since you know that what has kept the Soviets away from France is precisely Americas enormous military budget. If not for the nuclear umbrella that the United States has unfurled over the Continent, Volgas might be cruising down the Champs Elysées.
What does this have to do with health care in 2009? In a recent paper widely circulated on the Internet (the best paper youll read today, blogger Ezra Klein calls it), Urban Institute researchers Elizabeth Docteur and Bob Berenson review various studies that compare health care in America and in other developed countries, most with nationalized systems. The evidence suggests that other developed countries achieve comparable quality of care while devoting at most two-thirds the share of their national income, the authors write. This should give pause, they continue, to those who oppose proposals to reform American health care in ways similar to those used in other countries. They conclude: One can surely argue that U.S. health care quality is not at risk from the kinds of health reform proposals receiving attention.
Authors of studies like this base most of their conclusions on outcomes in different countriesmortality rates, survival rates for various diseases, and so forth. One common objection to this approach is that these outcomes dont always reflect the quality of health care, because so many other factorsdiet, exercise, environmententer into the equation. If Americans eat a lot of fast food, say, it stands to reason that they will suffer from a lot of heart attacks, no matter how good their cardiologists are.
But another, less widely heard objection is that studies like Docteurs and Berensons dont consider what we might call the pharmaceutical umbrella that America spreads over the developed world. Drugs supply almost all the real health care these days, Peter Huber has written in City Journal. And as a 2006 article by Henry G. Grabowski and Y. Richard Wang in the peer-reviewed journal Health Affairs makes plain, the lions share of new chemical entities (NCEs)that is, genuinely new drugsare invented in the United States. Between 1993 and 2003, the authors found, 437 NCEs were introduced around the world. America was responsible for 152 of themfar more than any other countrywith Japan coming in second with 88 and Germany a distant third with 42. The United States also led the world in the introduction of global NCEs, drugs introduced in a majority of the worlds leading drug markets. (A chart makes these numbers clear.)
Just last month, Health Affairs released a reexamination of Grabowskis and Wangs work by Donald W. Light, who boldly claimed that the very same research actually shows that the United States never overtook Europe in research productivity. Lights argument, however, is simply that the European Union as a whole was still producing slightly more NCEs than the United States was between 1993 and 2003183, versus Americas 152and that European drug production did better than American if you factor in how much less was spent on research and development in Europe. More recent figures, however, show that starting around the beginning of this century, the United States finally overtook all of Europe in new drug production. As for the scarcity of R&D money in Europe, it hardly seems something for the Continent to celebrate.
And the Europeans know it. A 2000 study prepared by Alfonso Gambardella, Luigi Orsenigo, and Fabio Pammolli for the European Commissiona seminal report that has shaped European policy, Light saysagrees that the European industry has been losing competitiveness as compared to the USA. Further, the drugs that European companies do invent probably arent the most useful ones, judging from their sales. In 1999 more than 80 percent of the total sales of the world top 15 drugs was originated by US companies, the Gambardella paper found. US firms are now the dominant source of innovation and innovative drugs, with Europe lagging behind.
Why is this important? One reason for Americas drug dominance (though far from the only one) is Americas unsocialized medicine. Here, with the exception of a few programs like Medicaid and the VA system, the government doesnt regulate the price of drugs, so when a company invents something bigthe latest miracle cancer drug, sayit strikes it rich, making its executives hunger for more. Take away the profit motive, as government-run medicine often does by forcing drug companies to sell at discounted prices, and innovation will dry up. EU policy has kept pharmaceutical price inflation equal to average consumer price inflation over the last 19 years, write Joseph Golec and John Vernon in a 2006 paper for the National Bureau of Economic Researchwith real costs of about $5 billion in foregone R&D spending, 1,680 fewer research jobs and 46 foregone new medicines. True, Americas unregulated environment benefits any drug company that sells here, regardless of its nationalitybut American companies profit most, since even in todays global economy, a higher proportion of their sales than of European companies sales takes place in America.
So socialist Europe, by using American drugs (especially the global NCEs that Grabowski and Wang identify), is profiting from good old-fashioned American free enterprise. Europe doesnt pay its way, either. As Guy Sorman wrote recently in City Journal, Frances socialized health-care system bullies American pharmaceutical companies into accepting bargain-basement prices for their wares. The companies make up for the loss by charging Americans more.
But the lesson here isnt that America should be stingy about subsidizing French health care. If American consumers and drug companies play a disproportionate role in protecting the world from dangerous microbesjust as America did in protecting it from Soviet missileswe should be proud. (It would be too much to hope that this good deed will go unpunished among European elites.) No, the lesson is to be skeptical of reports speaking glowingly of socialized health-care systems, because those systems wouldnt work nearly as well as they do without unsocialized American medicine.
Benjamin A. Plotinsky is the managing editor of City Journal.