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Smothering Medical Innovation

If we want to maintain our innovative mojo, the one thing we cannot do is continue down the road we are on of socializing the whole system.

by
James V. DeLong

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April 2, 2011 - 12:06 am
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Two propositions dominate current debate over health care: that the nation spends too much on it, and that these expenditures will bankrupt our governments if current trajectories extend out into the not-so-far future. Indeed, these are the basic premises used in the attempt to sell ObamaCare.

The first of these is nonsense. How much we should spend on health care is a question of how much value we get for our money, and that depends on millions of individual calculations, not on some abstract budget. If one restates the proposition to say that the system is inefficient and we should be getting more value for the money spent, then the point becomes valid. The shift in perspective is important, though, because it dictates that we focus on improving efficiency rather than meat-axe budget cutting.

The second proposition is true, but trivial. As the saying goes, if something cannot go on forever it will stop, and commitments that can’t be met won’t be met, so health costs will not destroy the nation. The correct approach is to recognize the point made in PJM last week by Beth Haynes – once health care expenditures are turned into a commons, over-use becomes inevitable, soon followed by arbitrary rationing.

A logical response to both these concerns exists, and only the whinging culture of the liberal state could take one of the greatest opportunities ever presented to humanity – the astonishing progress in medicine and biology – and convert it into a cause for complaint and despair while at the same time taking one of the best-known issues in institution building — the over-use of a commons — and see it as an intractable problem beyond society’s capacity to address.

The response is to change. Innovate. Find better treatments to replace the inefficient approaches, and develop new institutional structures to meliorate the forces that are driving us to the economic cliff.

And therein lies the rub. In the abstract, the nation, including the government, is dedicated to innovation. Searching Amazon Books for “innovation” yields 43,000 hits, the White House issues sonorous reports on innovation strategies, and every other day brings another conference.

In the concrete — not so much. Serious change always runs into roadblocks, and in the health/medicine area even the basic innovation machinery of drugs and devices is getting creaky, while the barriers to institutional innovation are formidable indeed. Several recent studies, mostly commissioned by affected industries but carried out by reputable organizations, view the trends with alarm:

  • A 2009 report by Batelle, commissioned by the Council on Medical Innovation, stated: “Today, global leadership in medical innovation and resulting biomedical development is ‘ours to lose.’ And we seem to be doing just that. While many other nations are strategically investing to support medical innovation as an economic growth strategy, we have allowed our ecosystem for medical innovation to decline.”
  • A Stanford-based study of FDA Impact on US Medical Technology Innovation (Nov. 2010)(Makower Report) charged: “Unpredictable, inefficient, and expensive regulatory processes put the U.S. at risk of losing its global leadership position in medtech innovation.”
  • PwC, in Medical Innovation Technology Scorecard (Jan. 2011), noted: “The innovation ecosystem for medical device technology, long centered in the United States, is moving offshore. Increasingly, medical technology innovators are going outside the United States to seek clinical data, new-product registration, and first revenue.”
  • The number of new drugs approved annually by the FDA is stuck in the low-20s, and the payoff from R&D has fallen steadily over the past decade. The cost of bringing a new drug to market has reached  a billion dollars, at least, a level which means that only a blockbuster is worth investing in. Big Pharma is pulling back from its investments in research, adopting a model that relies on buying innovations from small biotechs that do not have the regulatory and marketing muscle to finish the race alone.
  • As for institutional innovation, it is like swimming through molasses. Clayton Christensen has written a fine book called The Innovator’s Prescription: A Disruptive Solution for Health Care, which focuses on organizational and institutional structures and how they might and must change to improve quality, provide incentives for innovation, bring the organization of the industry into the 21st century, and cut costs. But, as he says, institutions have a lot of inertia, and rarely change unless forced.

These trends are not caused by “spending too much” or some other buzzword de jour but by serious problems in institutional incentive structures, and by the barriers to innovation erected by the regulatory state. A proper diagnosis of the disease sapping innovative energy includes:

Regulators’ Incentives. It has long been known that the incentive structures facing the FDA are skewed. If a good drug is disallowed, the victims of the decision die quietly off-stage. If a harmful drug makes it through the system, the victims are identifiable, and, given the incentives of the plaintiff’s bar and a sensationalist media, very loud. The pressure on the regulators to err on the side of caution is great.

The FDAReview.org contains good information on the issue (up-to-date as of about a year ago, its masters tell me), and the late, and very lamented, John Calfee of the American Enterprise Institute returned to the issue often. See particularly his case study of Vioxx, where the equivalent of a flash mob overwhelmed science, reason, and risk/benefit calculations.

The effect is a one-way ratchet, as each new panic triggers another search for a barn door to close in the effort to make sure that no one ever suffers a bad effect from a powerful drug, or, just as good, that anyone who does cannot blame it on the regulators.

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