Megan McArdle worries that, since some of the absurdly exorbitant cost of health care in the United States goes to finance research and development into new drugs and devices, cutting back on that expenditure is likely to cut into the R&D activity. It’s hard to argue that her worry is unreasonable, though the quantitative relationship is hard to guess.
I’d put the case more strongly: in effect, the United States is helping to finance the development of knowledge that is a global public good. (It’s odd that the people who think it horribly unjust that the U.S. pay more than a fair share of the costs of protecting the planet from global warming are fine with having us pay more than a fair share of the costs of medical advancement, and vice versa.)
John Holbo responds: Yes, but pumping money into a wasteful health care system in hopes that some of it will trickle through to R&D is a classic case of feeding the horse in order to feed the sparrows. If we need more R&D for health technology, why not pay for it publicly? After all, we already spend $30B on the National Institutes of Health.
Megan replies that she’s willing to try it – she mentions the use of prizes, in lieu of patents, which seems like a great idea – try it, but not willing to give up the profit incentive for health R&D unless and until we know that the public version works with comparable efficacy.
Fair enough. Presumably you want both systems at work: no public agency is going to spend money developing a cure for male pattern baldness. But what I don’t see is the argument that we have to wait. It’s not as if long-term changes in health care revenue streams mean an immediate shut-down in the new-drug pipeline. Why not try to squeeze some of the quasi-rents out of current pharmaceutical pricing while at the same time putting money into drug development: via one or (preferably) more public-benefit corporations devoted to developing new drugs and putting them on the market at roughly the marginal cost of production and distribution, via grants to existing or newly-created medical-research outfits, and via prizes for specific accomplishments? (A billion dollars for a malaria vaccine with 90% efficacy and no greater side effects than the tetanus vaccine? A bargain!)
Then we can look up in five or ten years and see if the changes, net, have so reduced the flow of new technology development that we need either more public R&D or greater market incentive through patent-generated monopoly rents. The basic economic point is that monopoly pricing is grossly inefficient, since the gain to the manufacturer is smaller than the losses to consumers. So the government-based mechanisms could operate far from optimally and still outperform the current system.
And while we’re at it, we might ask the EU and the rest of the G-20 to start spending as large a share of GDP on medical research as we do.