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Eye on the News

Benjamin A. Plotinsky
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 it’s 1962, the hottest point of the Cold War, and that you’re 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, France’s Cold War strategy is far more efficient than America’s. And you snicker at the obvious flaw in the reasoning, since you know that what has kept the Soviets away from France is precisely America’s 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 you’ll 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 countries—mortality rates, survival rates for various diseases, and so forth. One common objection to this approach is that these outcomes don’t always reflect the quality of health care, because so many other factors—diet, exercise, environment—enter 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 Docteur’s and Berenson’s don’t 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 lion’s share of new chemical entities (NCEs)—that is, genuinely new drugs—are 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 them—far more than any other country—with 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 world’s leading drug markets.” (A chart makes these numbers clear.)

Just last month, Health Affairs released a reexamination of Grabowski’s and Wang’s 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.” Light’s 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 2003—183, versus America’s 152—and 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 Commission—a “seminal report that has shaped European policy,” Light says—agrees that “the European industry has been losing competitiveness as compared to the USA.” Further, the drugs that European companies do invent probably aren’t 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 America’s drug dominance (though far from the only one) is America’s unsocialized medicine. Here, with the exception of a few programs like Medicaid and the VA system, the government doesn’t regulate the price of drugs, so when a company invents something big—the latest miracle cancer drug, say—it 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 Research—“with real costs of about $5 billion in foregone R&D spending, 1,680 fewer research jobs and 46 foregone new medicines.” True, America’s unregulated environment benefits any drug company that sells here, regardless of its nationality—but American companies profit most, since even in today’s 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 doesn’t pay its way, either. As Guy Sorman wrote recently in City Journal, France’s 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 isn’t 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 microbes—just as America did in protecting it from Soviet missiles—we 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 wouldn’t work nearly as well as they do without unsocialized American medicine.

Benjamin A. Plotinsky is the managing editor of City Journal.

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