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The Threat to Medical Innovation

By Philip Klein on 11.20.09 @ 5:55PM

Earlier today, I attended a panel discussion at the Cato Institute about one of the most important aspects of health care that has gotten very little coverage during the current debate -- medical innovation.

Raymond Raad, a resident in psychiatry at New York Presbyterian Hospital/Weill Cornell Medical Center and co-author of a new Cato study, presented evidence showing that the United States leads the world in the development of drugs, medical devices, and other advanced treatments. For instance, between 1969 and 2008, 57 of the 97 Nobel Prizes in medicine and physiology -- or nearly 60 percent -- were awarded to people who did their research in the U.S., and nine of the top 10 medical innovations between 1975 and 2000 were developed here. But these achievements aren't reflected in rankings of different health care systems that typically show the U.S. faring poorly and provide fodder to those pushing for government-run health care. This even though once these products are developed in the U.S., they become widely available and improve health care outcomes around the world.

Raad argued that one of the big dangers of health care legislation is that expanding the role of government and trying to impose price controls could change incentives to innovate. When the government is such a large consumer of health care, it has tremendous influence over whether some innovations succeed. As an example, Raad noted how government stunted the growth of specialty hospitals by not allowing Medicare money to spent at them. Specialty hospitals are smaller institutions formed by doctors to focus on one type of illness, such as heart disease. They can deliver better health outcomes and a more personalized experience for patients than giant factory hospitals that benefit from their tax-exempt non-profit status even as they rake in billions of dollars. Raad explained that some of the most common and important medical innovations --such as CT scans -- were quite controversial when first introduced, and thus putting more constraints on the market could prevent wider use of new products that may ultimately prove beneficial.

Gerard Anderson, director of the Center for Hospital Finance and Management at Johns Hopkins University Bloomberg School of Public Health, described himself as the liberal on the panel. He emphasized the importance of universal access to new medical innovations, and argued that it was "naive" to talk about where innovations originated, since they all tend to be developed on a multi-national basis in many stages. He also showed that the pace of medical innovation has slowed in recent years, in both the U.S. and Europe, and said that it's important to do something to change incentives that are currently in place. Currently, large drug companies spend just 12 percent to 15 percent of their outlays on researching and developing new drugs, and 30 percent on marketing them. 

John Calfee of the American Enterprise Institute suggested several reasons to worry about in the current health care bills. He said they would increase the costs to both the public and private sector well beyond what Congressional Budget Office is projecting. And he warned that it would be difficult for government to resist the temptation to impose price controls on products that were very expensive relative to their marginal costs. For instance, once drugs are developed, the cost to manufacture each additional pill is small relative to the price charged for the drug. But imposing such controls would reduce profits and thus the incentives of drug companies.