Economists, Listen up!

Market Forces in Health Care?

It is a distortion, and perhaps a disservice, to assert that free market forces alone can fix our health care system.  Take the idea of tax deductions for all health care expenditures: Basic health care expenses are not steady expenses like food and clothing.  Health care expenses are highest at the two ends of life, birth and death, when personal income is lowest and tax deductions are not persuasive.  In between these demarcations, basic health expenses are associated with accidents and sudden-onset diseases, such as cancer and serious illnesses.  I doubt that pure economic forces would have much effect on peoples’ decisions in these circumstances.  The example of China comes to mind.  Chinese are notoriously averse to new consumer spending because, in the Chinese cash-for-service health care industry, they must devote so much of their income to saving for health care.  This has a depressing effect on Chinese consumer markets.  For these reasons I believe that basic health care is just the kind of expense that ought to be treated as a risk spread over a large population base.  Nor can this basic health care cost be left to individual discretion - the healthy people in the middle of life would choose to drop out leaving the risk base to the ill and needy, just those least likely to be able to pay.  Whether this basic coverage is mediated by private insurers or directly provided by the government, and how these basic services are defined, are important details, but they are details in the overall picture, not the main issues.  Basic coverage of some sort is, well, basic.

There is no question that some discretionary health care spending can be avoided, or at least deferred, if market power is better vested in the consumer. Beyond the basic care, everyone ought to have a palette of choices, from high-end boutique insurance plans, to something like a better, bigger Roth IRA, to pay-as-you-go.

Still, none of these solutions are likely to reduce health care costs.  Drug costs are the fastest rising components, and that portion can be reduced.

The pharmaceutical industry, the fastest growing component of health care expense, is also the most highly regulated U.S. industry.  It is unique, to my knowledge, as an industry that is so heavily regulated and yet expected to bring forth a steady stream of innovations.  A lot can be done here.

The FDA relies on a set of “Gold Standard” procedures to test the safety, efficacy and purity of all drugs,  These procedures are Gold Standards because they are proven, and proven because they have been in use without much change for decades, while the nature of the drugs and the complexity of the molecules and mechanisms, and our understand of them has increased a thousandfold.  It is just now possible to test drugs on vat grown tissues, on cell cultures, and to perform hundreds of such tests in automated arrays.  These test will not eliminate human clinical trials, but it will make them smaller, safer, more specific, and ten times less expensive.  Most safety studies can be done before any human has to try it out.  The FDA has to have the charter and funding to develop, adopt and publish these new methods.

Why do I tout smaller, more focussed clinical trials?  Because of the random noise factor that messes up results in the mass trials that now constitute the Gold Standard.  Subject A took milk with his pills, keeping the drug from being absorbed by the stomach. Subject B started on a new vitamin that had a synergistic effect.  Subject C can’t remember whether or not she took one or two pills today.  Subject D has a genetic mutation that subverts the drug’s mechanism.  Through all this noise, the statisticians are somehow expected to prove that the drug works.  Please note that many new drugs are not expected to work for everyone, and targeting them to the correct combination of illness and personal chemistry is essential.  Small, focussed, analytical trials yield clear results, and more information about purity, dosage, tolerance and how the drug works inside the body.  They can be done quickly and repeated if necessary without breaking the budget.

Having been tested for safety, dosage, tolerance, and efficacy, the drug goes to market in controlled quantities, while the pharmaceutical company and the FDA continue to monitor safety issues.  This is a provisional release, something now done only with “fast track”  and some drugs on a compassionate protocol.

The FDA is supposed to operate as a transparent, completely objective, scientific agency, and if it adheres to this charter, it will reverse the current decline in new drug approvals.  Unfortunately, it has become an element of political policy.  Beside the well reported contraceptive drug, the FDA has recently turned down a generic transdermal patch that uses fentanyl, a narcotic, when there is already such a branded patch on the market.  Whenever, as in this case, the FDA issues a ruling without precedent, without public disclosure of a standard for approval, and without any evidence that the drug has failed to pass all the usual measures, it has a quelling effect on all applicants.  In this instance the lack of a generic drug for this widely prescribed patch supports a price for the branded product that is, according to market models, 200% higher than the generic price.

Treating a cancer with a $25,000 outpatient drug is a small percentage of the cost of treating the same patient in a hospital, and the effect of the premature loss of a loved one on her family and dependents is incalculable.  LIkewise, keeping a diabetic on maintenance medication that preserves a functioning individual in society is far less expensive than treating a blind, crippled, bedridden person.  The fact that we have these choices is almost entirely due to drug innovation, and no pure market model accommodates this technical aspect of health care.  Certainly, it is a legitimate function of government to sponsor and encourage research into the root causes of endemic diseases such as Type 2 Diabetes, with an eye toward a possible cure, not just a palliative.  Pharmaceutical companies themselves cannot perform such basic research.  It is not their job.

Along with innovation that provides benefits for the many comes risk for a few.  It is not now, and will be even more difficult in the future, to make all drugs safe for all people in all circumstances.  The current market model is to force innovators to weigh risk/reward ratios in the form of law suites versus profits.  This seems cold and heartless, but I know of no better model.  I would recommend opening the risk horizon to the level required by innovation, because I see the likelihood of less risky, targeted drugs if innovation is allowed to proceed.  As long as the drug companies and the FDA allow full transparency of clinical results both before and after release, then I believe the law should restrict damages based only on disclosure.  Disclosure is an easier standard to demonstrate before a jury than biochemistry.  If the risk was disclosed, there is no penalty.  If it was not, then make an award.  While standards of disclosure are not trivial, they are well within the current expertise of the FDA.

Passing at least a part of the burden of understanding risks and costs associated with health care on to the patient/consumer is at the core of any attempt to reduce health care costs by market forces.  It is true that consumers often make economic decisions without knowledge, but in the case of health care the costs of bad decisions tend to get passed on to the rest of society.  Certainly there is a growing component of the health care market dedicated to consumer education, but it has to get out of the control of the lawyers and insurers and into the hands of the doctors and patients.  Online web sites like Wikipedia and WebMD are a good start.  Perhaps health education in high school ought to be less about sex and recreational drugs and more about health care choices.  Finally, I question why we have so many laws restricting drugs to prescription use.  If we want market forces to prevail, we have to free the consumer to make choices and put doctors  more in the role of practitioners and advisors, where now they tend to dictate every detail of patient treatment, even to moderately healthy patients.  In an emergency room, it’s a different story.

You can see why market forces in health care are controversial.  Uninformed people are scared, and buy whatever falls to hand.   There is no safety net for basic health care, they are rarely given informed choices even in discretionary health care.  The FDA, instead of serving as a source of reliable scientific data has been cast as a father-protector with political leanings, the drug industry is becoming gun-shy with regard to the FDA, the government misinterprets its role in basic research, and the tort lawyers are getting rich on the confusion.