Is Crony Capitalism Good Enough for Health Care?

In the Wall Street Journal, Paul H. Rubin and Joseph S. Rubin make an argument in favor of “crony capitalism” as a second-best solution. Their example from health care is Medicare Part D:

Some claim that Medicare Part D, which pays for drugs, was a giveaway to the pharmaceutical industry. But 40 years of research has clearly shown that the Food and Drug Administration’s regulatory process makes drug development and approval unnecessarily and inefficiently expensive. Perhaps, in this environment, supplementing the costs of drugs may move us toward a more efficient drug policy, and bring more life-saving drugs to market.

That’s not quite the way I see it. Medicare is widely accepted in American society, and excluding prescription drugs made no sense because prescription drugs substitute for more expensive treatments, especially hospitalization. Costs are below budget and seniors’ have lots of choices. So, Medicare Part D is a second-best solution, but it is a second-best solution to the socialization of health care for American seniors. It is not a second-best solution to the unnecessary costs imposed on pharmaceutical development by the FDA.

The best way to reduce those costs is to reduce the power of the FDA, not just make it easier for the pharmaceutical industry to pass these costs onto taxpayers. Indeed, we have a bit of a problem here, because the FDA is increasingly funded by user fees paid by drug makers and medical-device makers. However, this has accommodated industry to the FDA without improving the FDA’s performance. Another proposal, patent-term restoration, would have a similar consequence. Patent-term restoration refers to a proposal to add more time to a drug’s patent, determined by how long it took to be approved by the FDA. This would largely restore drug makers’ forgone profits, but it would not address patients’ suffering due to the FDA’s unwarranted obstruction of access to new medicines.

If a powerful industry is suffering from poor government policy, effective reform requires that policy wonks influence the industry to fix the poor policy; not to shirk the problem by seeking relief in taxpayers’ pockets.

Comments (15)

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  1. John Fembup says:

    “The best way to reduce those costs is to reduce the power of the FDA, not just make it easier for the pharmaceutical industry to pass these costs onto taxpayers.”

    Yes.

    Just as the best way to reduce medical medical insurance premiums is to reduce the cost of medical delivery in the first place (e.g., reduce malpractice liabilities; control excessive utilization; improve public health; and many others) – - not just make it easier to pass those costs onto taxpayers.

    In fact, I think the fundamental flaw in ACA is that it is an insurance scheme (subsidies for thee, not for ye) that passes the cost of medical care, plus the subsidies, onto taxpayers.

    Unfortunately creating and passing along costs is the government’s preferred solution to most problems, because higher revenues translate into greater political and bureaucratic power.

    • Devon Herrick says:

      Yes, the easiest way to reduce administrative costs in health care and cut spending would be to outlaw insurance coverage. The second easiest method would involve converting medical licensure into medical certification.

      I don’t think either of these two solutions are politically palatable. But if we admit that there are perverse externalities from 3rd party payment and from rigid regulations, one would think that future reform ideas would take this information into account. As you point out, the ACA does the opposite — purposely trying further severe the link between what we pay and what we get.

  2. Frank says:

    I don’t think extending the patents on drugs would be beneficial to society as a whole. Companies that create the product recoup their cost with the patent, and it would only hurt consumers that are strapped for cash from buying generics. I think what the FDA is doing now in speeding up some the approval of some drugs needs to be more common.

    • Thomas says:

      Exactly. I think quicker approvals will help much more than patent extensions. If it takes a drug nearly a decade or more to get on the market, it has lost over half its potential to recoup costs. Speedier approvals ensure they make back their money with more time on the market.

    • Buddy says:

      Not to society as a whole, but to pharmaceutical companies. Keeping patents their current length is in the best interest of the consumer, so they can receive a generic once the patent expires.

      • Frank says:

        Forgive my lack of clarity. What I meant to say was that the current patent length is already sufficient because pharma companies are able to recoup their losses and make a healthy profit. So yes, extending the length of patents would only harm consumers because they would have to wait longer for affordable generics.

        • John R. Graham says:

          Despite reading the literature quite thoroughly, I have never been satisfied that there is a way to define the perfectly optimal term for a patent. Even if there were, it would be too complex to make it into legislation, I think.

  3. Matthew says:

    “The best way to reduce those costs is to reduce the power of the FDA, not just make it easier for the pharmaceutical industry to pass these costs onto taxpayers.”

    I agree here. When the issue is the policy, it only makes sense to fix policy, not to pass costs onto taxpayers.

  4. James M. says:

    Well all other costs from ObamaCare are being passed onto American taxpayers, I wouldn’t be surprised to see pharmaceutical companies pass on added expenses onto them.

  5. bob hertz says:

    John, you cannot cover an entire industry in one post, but you do leave out the fact that drug companies have been raising prices on older drugs that are 20 years past the FDA process. There were brutal price increases when some specialty drugs that were even thirty years old were brought back to the market. And Elizabeth Rosenthal of the New York Times has recently documented major increases on generic drugs too.

    You cannot blame the FDA for all of the blatant price gouging that goes on. Drug companies take advantage whenever they have a monopoly, and the FDA is too weak to stop them on prices. Why we do not have more antitrust actions against big pharma is beyond me.

    • John R. Graham says:

      Thank you. FDA also regulates manufacturing and those regulations have increased costs of some generic drugs. FDA has no interest in prices. I’m not sure where you see antitrust being useful. Are you referring to the bran-name deals with generic drugmakers to delay introduction of generics?

  6. dennis byron says:

    The author says:

    “So, Medicare Part D is a second-best solution, but it is a second-best solution to the socialization of health care for American seniors.”

    There are two words that confuse me in that sentence: “socialization” and “solution.” I am also confused by the three card monte of substituting the words “health care” in the second half of the paragraph for “prescription drugs” in the first half.

    Is your point that you think socialized health care for seniors would be the best solution?(Or just socialized drug distribution to seniors given prescription drugs were the main subject of the post? Or…?). If so, why just for seniors?

    And what was the issue that we seniors needed solved before Part D (for which socialization instead of Part D would have been the best solution)? Before Part D, almost all of us who wanted it could get drug coverage without government involvement (except to the extent that the government regulated Medigap plans). And those of us seniors that could not afford this readily available drug coverage pretty much received the drugs for free or a nominal co-pay through Medicaid (as they do under Part D via LIS).

    Part D is not the success that the right claims. It is just another great example — like PPACA — of forcing a mandate on 100% of the population for an issue faced by less than 1% of the people in the population (I am saying “less than 1%” because that is the percent of the senior population that reaches catastrophic coverage under Part D).

    Or is “second-best solution” some arcane academic terminology that really doesn’t mean the same to wonks as it does to people who take the words at face value?

  7. Bob Hertz says:

    Interesting post, Dennis, thanks.

    When Part D was passed in 2003, I believe that there were about 40 million seniors on Medicare.

    Are you saying that less than 400,000 of this group were exposed to large bills for drugs?

    Could be, I just do not know. I have read that the use of credit cards by seniors to pay for drugs is more widespread than “less than 1%”.

  8. dennis byron says:

    I am saying “less than 1%” because that is about the percent of the senior population that reaches catastrophic coverage under the Part D definition of high drug costs that was not getting assistance of some sort before Part D. I include those not on Part D (had/have retiree insurance or grandfathered Medigap plans with drug coverage in them) and I do not include those on Extra Help and state pharmacy assistance programs because they were covered before Part D through Medicaid and/or SPAPs.

    Your 400,000 number might be in the right ball park though. The Obama administration reports that only a few million seniors (out of 50,000,000) have been affected by the PPACA donut hole changes and the donut hole spend parameters are much lower than the catastrophic coverage threshold. (Again, of course no one on Extra Helps pays in the donut hole and those on state pharmacy assistance programs pay nominal amounts. The Obama administration does not count those on state pharmacy assistance programs in its calculation. Nor does it count people with secondary donut hole protection through former employers.)

    As for your credit care question, I always use my credit card to buy drugs — even with a $6 co-pay for 90 days supply — so I can keep a record. I am not sure what that has to do with it?

    • John R. Graham says:

      To be sure, Medicare Part D has costs too. At the top of the list I would put the pharmaceutical industry’s collaboration with Obamacare from day one. They are now very used to government deep in their business.