But I gather that liberals are getting more and more worried. Why? Because the gratuitous nastiness from across the aisle. Take this post from the American Prospect:
I'm not saying The Atlantic should fire her. But perhaps her bosses ought to sit her down and have a discussion about the rigor with which one should approach writing, even blog writing. For instance, there are claims of opinion ("Coffee ice cream is tasty"), which require no particular support or justification, and then there are claims of fact ("Pharmaceutical companies make most of their profits in the United States") which do require that one be accurate. McArdle doesn't seem to know the difference. Fortunately, today we have this thing called "the Internet," which on a whole range of topics allows one to quickly and easily verify whether the impression one has, or something one vaguely remembers hearing somewhere, is actually true. If you can't be bothered to look it up, you might try inserting some qualifiers - "I seem to remember that..." or "I believe that..." or "I'll have to check this, but I think that..." - before making emphatic empirical claims. That way, if it turns out that you're wrong, you can easily correct the record, without looking like an idiot or a jerk (or maybe both).
If they had that conversation with her, then maybe she'd be less likely to find herself saying things like, "It wasn't a statistic - it was a hypothetical."
The reference is to my off-the-cuff remark about slashing pharmaceutical profits by 80%. I should note, to be fair, that there were two portions of the comment: one in which I repeated an estimate I had heard from several people, that the US accounted for something in the range of 85% of pharma net profits after you accounted for various issues, which I then turned into 80-90% when typing--a fairly common way to give a range on an uncertain verbal statistic. And then I said, "So if you slashed pharma profits 80% . . . " When asked about it on the Washington Post live chat, I forgot the first, and thought the commenter was referring to the postulated hypothetical destruction of all US profits. It's not clear which part of the comment they are referring to.
But this "error" that I didn't check was not, contra Waldman, in a blog post, but in a comment, followed by a live chat on the Washington Post's site. Waldman doesn't seem to know that, which implies that he didn't look. I mean, I'm not saying that Waldmann should be fired. But maybe his bosses should sit down and have a talk with him about primary sources.
I may be in error on that--I've heard 80-90% from people in healthcare consulting, and I've seen that sales and profits in the US are usually larger when they're broken out on financial statements, which they aren't all that often. But they were not speaking on the record, and financial statements are not necessarily a very good guide to allocating the net profitability of a drug, because of various tedious pricing strategies involving market timing that you can read about in an exhaustive volume from the OECD that I have on my desk, if you want to come to my office, or spend $100 to buy it yourself. There are also issues of the way that companies allocate profits across international borders, which vary for all sorts of reasons, including the location of the company.
For example, GlaxoSmithKline, which Waldman mentions as a counterargument to my estimate, just had a catastrophic collapse in its US revenues due to the expiration of important patents like Wellbutrin XL, Paxil CR, Imitrex, and Lamictal. Waldman would have known this had he, like, Googled it.
But there are other ways that we can back into the question of which markets are the most important. Sadly, there are no definitive numbers on the topic that I am aware of. And I've asked a lot of researchers, left and right.
We can, first of all, look at financial statements longitudinally. We can examine what happens to profits of pharmas when sales in the US decline, while sales in Europe (and overall revenues) rise. The answer, for GlaxoSmithKline, was that profits fell 13%. The US is punching massively out of its weight class on their balance sheet.
Next, we can look at where the revenues come from. According to the OECD's invaluable Pharmaceutical Pricing Policies in a Global Market, which really is a bargain at the price, 45% of global sales come from the United States, 30% from Europe, and 9% from Japan, meaning that the US accounts for the lion's share of profit--sales in other countries are too low margin to be currently important markets, though they're undoubtedly nice gravy, and serve an investment function. The OECD also says that the United States accounts for more than half the growth in pharmaceutical revenue. And it singles out the United States as the "important exception" to the otherwise iron rule that no country's prices much affect the level of R&D spending.
We can look at per-capita pharma spending. The United States spends about twice the OECD average, and as aforementioned, does more than half of the OECD spending on pharmaceuticals.
We can back into it from prices. We know that prices are higher in the United States than anywhere else for on-patent drugs (our generics can actually be cheaper, which further ups the implied profit on first-line treatments). How do we know this? Because the American Prospect, among many other media outlets, spends a great deal of time complaining about the fact that we don't use Medicare's "purchasing power", etc. etc. If the prices are higher here, so are the profits.
We can look at prices in Canada and Mexico. They're higher than they should be, relative to the general price level in those countries and other national health systems. This implies that companies are protecting a very profitable US market.
Or we could go to the academic literature. Not the literature from advocacy groups which too often fills the pages of political magazines on the left and right, but something from someplace like Rand. And fortuitously, Rand happens to have published a paper on this very topic! Their analysis of the effect of a 20% price decrease--about what they estimate we could get:
If you're wondering how much levels of spending matter, you could go to Acemoglu and Linn, who estimate that a 1% increase in market size (aka revenue) for pharmaceuticals results in a 3-4% increase in the number of drugs being approved.Exhibit 1 illustrates the impact of introducing U.S. price controls on the longevity of cohorts ages 55-59, using our baseline parameter values. It shows that the introduction of price controls would reduce life expectancy by two-tenths of a year for Americans ages 55-59 alive in 2010 and by one-tenth for Europeans ages 55-59 alive in the same year. In percentage terms, these correspond to 0.8 percent and 0.7 percent declines from the status quo.
The longevity effects are larger for the older cohorts, because the effects of price controls take time to set in. The early cohorts are not exposed to innovation reductions for a number of years. This dampens the impact on their life expectancy. By 2060, Americans and Europeans in this age group lose almost 0.7 years of life expectancy as a result of U.S. price-control implementation.
On the benefit side, U.S. price controls reduce spending on dr ugs and medical care. Exhibit 2 quantifies this effect. Price controls adopted in 2005 would reduce lifetime per capita health spending by $9,000 in the United States and $400 in Europe, for those ages 55-59 alive in 2010. Reductions in Europe come about as a result of reductions in life expectancy. The U.S. effects combine life expectancy reductions with direct reductions in cost. For those ages 55-59 alive in 2060, Americans can expect $14,400 less in lifetime spending; Europeans, $2,100 less.
Exhibit 3 shows that U.S. price controls have very modest benefits in the present but substantial costs in the long r un. For the 2010 cohort, price controls pro-duce $1,100 of net per capita benefit in the United States but $8,000 of net per capita cost to Europeans in that cohort. By 2060, the cohorts ages 55-59 lose $51,000 and $54,000 in the United States and Europe, respectively.
I don't want my off-the-cuff comment, based on conversations with people who were not speaking on the record, to become the source of a fake statistic for the right. 80% may not be right, and I can't back it up with any hard numbers, because there are no hard numbers available. But multiple corresponding sources suggest that the number is well over 50%. 60% is probably the floor of likely.
The thing is, the US is less than 25% of the population of the OECD. And we're the ones driving the majority of the revenue growth.
The really irritating thing is that this is not remotely controversial to anyone who has ever spoken with anyone who is in the pharmaceutical business. It is not controversial that the center of gravity of pharmaceutical research and biotech is slowly but steadily tipping towards United States, though the reasons for this are still debated. It is not controversial that when the US starts looking like it might move towards price controls, R&D departments hunker down and wait. It is not controversial that the United States is by far the most important market for pharmaceuticals as a whole. This is only a surprising finding to people who do not want to sully themselves by getting any information from the pharmaceutical industry, who, after all, are interested parties. Rather than risk contaminating themselves with the dreaded taint of business, they rely on reports written by "experts" who have never run, or even studied, businesses.
Perhaps I shouldn't use scare quotes, because of course, those experts often are real experts in important things. But their work usually betrays the belief that running a business does not take any very interesting skill beyond a ruthless willingness to kill babies for fun and profit.
So we can quibble about whether the percentages are in the high double digits, or the very high double digits, but what does the exact percentage matter? Even if we had a beautiful, firm number, it would change two years hence--probably, if history is any guide, in the direction of making the US a higher percentage of profits. The upshot is that the overwhelming weight of the available evidence indicates that the effect of price controls in the US would be real, significant, and bad.
This is particularly rich since in his actual written columns, not his off-the-cuff remarks, Waldman displays a certain penchant for inflating already inflated statistics:
Fifty million uninsured, the highest per-capita costs in the world, millions of people pushed into bankruptcy by medical bills, worse health outcomes than most of the industrialized world? Are you kidding me?We don't even have "millions" of people pushed into bankruptcy by all causes. He's inflated the number of uninsured by almost 10%, and that number is itself inflated by the inclusion of people who lack insurance for as little as a day. Worse health outcomes is, to say the least, highly contested outside of Waldman's circle of advocates. Etc.
The left used to be the side that said "You're entitled to your own opinion, but not your own facts." The idea that the United States market is by far the most important pharmaceutical market in the world, and that any significant change in the profit margins on drugs sold here will have enormous impact on the future of pharmaceuticals, is as close to a fact as we can get in this vale of uncertainty. This is not the hill on which liberals should try to stake their claim to the moral high ground.
You sure do get long-winded and defensive when you're exposed.
This blog has been going downhill lately and it's posts like these that are causing it.
You sure do get long-winded and defensive when you're attacked for no good reason.
FTFY.
Long winded? Perhaps.
Exposed?
Uh... did you bother to read what she wrote? When she did what Waldman asked, she appears to be correct. Both intuitively AND analytically, the United States accounts for the vast majority of pharmaceutical profits. This is why Megan can rightly state that the USA is also the engine that drives innovation - which, btw, is really her main argument.
Since her data is solid, is the American Prospect going to terminate Waldman? Inasmuch as this is what he is saying should happen to bloggers who make errors due to intellectual laziness - which he clearly has here - I presume that he's going to resign, before his supervisor has to fire him.
Ouch! That's going to leave a mark.
Wow. You're winning on a daily basis!
Megan is similarly flabbergasted when someone actually makes cogent arguments against her rancid defense of gun-totin' nuts:
http://bloggingheads.tv/diavlogs/22192
Avert your eyes: that's ugly, kids.
The sun seems to be setting on McMeg's journalistic career. How long before Bradley induces her to "accept a very enticing offer" from FreedomWorks?
Unfortunately Dick Armey's already beaten her to the punch, as he recently secured the position of "Director of Taking Opposition to Stop Socialized Medicine."
http://www.freedomworks.org/publications/three-questions-politicians-must-answer-before-the
I'm surprised at some of the people you engage with. Waldman isn't worth your time.
Also, you're being overly charitable when you call his allegation of "worse health outcomes than most of the industrialized world?" controversial. No one takes the OECD study he echoes seriously (its proxies are too attenuated); studies of the medical outcomes of specific conditions prove the U.S. dominates. To have credibility, you have to acknowledge that and then you can make the point that its too costly.
You know, it's fine for you to disagree, but Waldman has authored or co-authored four books on politics, and has a Ph.D. from University of Pennsylvania (assisting on a book by Kathleen Hall Jamieson). That is ... four ... more books than this blog's author has had published.
Authoring a book in and of itself means nothing. American academics churn out mountains of books nobody reads every year.
look at krugman, he won the nobel prize but is a raving madman
Man, I'm stunned by the rank cruelty of the so-called liberals in the comments here and at Tapped. They seem to like humanity in the aggregate, but exude pure bile toward those who dare disagree.
Megan has different values than you, but she's an intelligent, interesting human being.
This might come as a shock, but the majority in this county does not self-identify as progressive or liberal. Maybe if you stopped to consider that many of those for whom you're fighting to provide healthcare are people you'd hate based on their values, you'd give up.
The "silent-majority" claims of the Nixon era are no longer true.
While democrats don't hold a majority, they hold a plurality, which is far better than republicans can claim.
http://www.fivethirtyeight.com/2009/04/party-of-nobody.html
http://www.fivethirtyeight.com/2009/05/party-id-revisited.html
Those who self-identify as liberal:
http://www.electionstudies.org/nesguide/toptable/tab3_1.htm
extremely liberal 2%
liberal 9%
slightly liberal 12%
I guess I stand by my statement: the majority does not self-identify as progressive or liberal.
My point was that, having lived a good part of my life in college towns and another good chunk of it in conservative enclaves, I understand the shock and outrage that comes from someone "from the other side" voicing ideas that "everyone" opposes.
The liberals who post vitriol here are _shocked_ that a nice place like the Atlantic could allow someone who _doesn't even believe that healthcare is a human right_ to stain its virtual and non-virtual pages. I get it.
However, if you took a look around the country, you'd find that Megan is not the only one who doesn't share progressive values.
Yet they can't look around the country and notice.
Which shows such an absolute inability to comprehend humans as to cast down on the rest of their agenda. How, if they can't manage something as simple as that, can they possibly alter society in any way for the better? It's like someone telling you he can build this fancy engine out of steel when he clearly doesn't understand the properties of steel.
It seems you are mistakenly conflating an issue of branding with an issue of fact. Some time during the early 2000 s "liberal" was effectively labeled by conservatives as a bad word in the media, so the liberal side of the political system rebranded as "progressive". Your use of this term makes me suspect that you understand this fact as well. The names of the political parties representing these respective constituencies certainly haven't changed, and as my poll shows, the liberal representaive clearly outnumbers the conservative and holds a plurality overall. So if you were trying to make a statement about the actual views of people in this nation, you are incorrect. Trying to retreat to the position that you were really just talking about the various terms used in this nation to identify liberals seems to me like a tactical retreat to save face in lieu of admitting that what you meant is not the case. But who knows maybe you really just wanted to let us know that a percentage if people holding liberal views who are absent in your survey no longer identify themselves using the term "liberal".
This is slightly off topic, Megan, but I can't process the hate-filled venom of the pro-socialized medicine crowd without thinking about the equally parts "exquisitely mean" and "exquisitely stupid" film Sicko last year. Seems like most folks approved of the film .
The piece de resistance of Moore's film involved a bunch of 9/11 first responders, suffering no doubt from horrendous respiratory problems resulting from inhaling asbestos and who knows what else from Ground Zero, and also allegedly unable to get adequate health care from NY/NJ. As Moore filmed it, these folks were taken first to Guantanamo and finally to Cuba, where some friendly Cuban GP gave them a puffer and a pat on the back. This, apparently, was an example of "adequate" health care provided by otherwise nasty commies.
You can infer, Megan, that the 93% approval for Sicko means the vast majority of viewers saw that puffer scene and concluded that authorities in NY/NJ are nothing but a bunch of assholes because they won't give these poor people puffers, like those nice Cubans will.
I bet that substantially none of those reviewers considered the possibility that, even if those authorities in NY/NJ are assholes (I don't know), sheer self-preservation would cause them to find a way to throw a $30 puffer at a horrific respiratory case if that's all it took.
Its sad to say, but your enemies Megan really do see you and those like you as willing to deny poor sick patriots $30 puffers. Its why they love Michael Moore's movie. Its why they hate you.
As a libertarian you must defend peoples' right to process the world in whatever stupid simplistic way they please. But as a citizen consuming shared services, you must continue to emphasize that there's more - so much more - to quality health care than a friendly Cubana throwing puffers at complicated, horrendous respiratory cases.
That your opponents won't engage at an intelligent level, preferring vitriol and assertions like 'McArdle would deny a patriot a puffer', is not reason to stop making your arguments.
ROFLOL.
"People" does not equal "people who rated it on rotten tomatoes"
"I'm not saying The Atlantic should fire her. But perhaps her bosses ought to sit her down and have a discussion about the rigor with which one should approach writing, even blog writing."
The "sit the little lady down and have a little talk" condescension on display here is fairly typical of the misogynistic trope leftists spout when they're out to get someone who dares go up against Obama.
It's Chicago politics, Megan. They will get you ... one way or another.
They're dangerous. And we simply cannot continue to allow them to be in charge.
They're dangerous. And we simply cannot continue to allow them to be in charge.
LOLOLOLOLOL
Cheetos-stained patriots like you will definitely save this country.
WOLVERINES!!!!!!!!!!!!!!1
Plus, "It's Chicago politics, Megan".
movertyperguy is such a smart parrot. I wonder if he can still recite the "Massachusetts health care legislation was designed for Muslims" sentence. It was a while ago, but I bet he still remembers.
I remember pointing out that Muslims were specifically exempted from paying the Massachusetts health tax; while the tax is required to be paid by Jews and that as such, the Massachusetts solution to health care reform is horribly anti-semetic.
And that's true.
I didn't realize there were so many hatemongering Nazis here who favor anti-Semetic laws when I raised that issue.
Quite apart from the empirical kerfluffle, I just don't understand how your argument makes any sense. Why should current US pharmaceutical consumers finance all future pharmaceutical innovations? What if we don't want to? And on what free-market economics basis do we maintain a closed high-price US pharma market and a lower-priced non-US market for the same products?
Well, if you've figured out a clever way to write laws that apply to other countries, by all means share. The fact is that we can choose to control domestic prices, or choose not to, and that's it.
I'm confused. How would we need to write laws that apply to other countries? We merely need to eliminate the restrictions on purchasing drugs from those other countries.
The US is the only country of any size that doesn't engage in price controls for drugs. Unless you can change that fact(and really, I'd love it if you could), the US gets the choice between high prices and new drugs or low prices and old drugs.
Furthermore, simple game theory says that, until the EU acts as a proper government for this stuff(*shudder*), it's the only one who will have any reason to make that decision at all - France doesn't get enough benefit from the slight marginal addition of new drugs to justify the large marginal addition of costs, never mind Switzerland or Luxembourg. The US is the only one for whom the upside even comes close to outweighing the downside, so even barring political reality, until the US gets to write foreign healthcare law, it's a choice between letting Europe free ride, or just shuttering most of pharma R+D entirely. It's a crappy choice, but that doesn't mean you can wish it away.
The Rand/Pfizer article that Megan sites actually states that prices of drugs are not significantly different in Europe. It says that greater revenues in the US are because US consumes a higher volume of treatment, but with the same prices per item.
It also notes pharma revenues have a US:Europe ratio of 1:.666. Given this, it is nonsensical to believe there is a 4:1 US:World profit ratio.
The Rand/Pfizer article that Megan sites actually states that prices of drugs are not significantly different in Europe.
Sounds like a counter argument to price controls.
lets try some simple math:
Lets say the revenues in US vs Europe are $1 and $0.66 respectively
if the full average cost to operate were $0.56 for both --
then profit would be $0.44 in the US, and $0.10 in Europe --
resulting in US profits being 4.4 times European profits.
Hardly nonsensical
@moosecat
not signifacantly different from the us, this implies moving toward a European system of healtthcare will not result in lower prices
@market karma
you make a mistake, I say that it is nonsensical for the us:world ratio to be 4:1 not us:Europe. For your statement to refute my claims pharma profits is all other places not US or Europe would need to be zero. Something we know not to be the case. Thus you fail to prove your point even with your arbitrily selected favorable numbers.
My larger gripe here(with both you and Megan) is that valid arithmatic on meanigless numbers leads to meaningless statements. If your response to my back of the envelope attempt to sanity check your arguments is to regress your numbers to ones with even less basis in reality, you don't make your claims any less meaningless. Of course, i've already noted you've failed to do even this.
The idea that the United States market is by far the most important pharmaceutical market in the world, and that any significant change in the profit margins on drugs sold here will have enormous impact on the future of pharmaceuticals, is as close to a fact as we can get in this vale of uncertainty. This is not the hill on which liberals should try to stake their claim to the moral high ground.
Well, no, they shouldn't, seeing as the drug companies' absurdly-high profits in this country as compared to theirs in other nations isn't something that liberals have any interest in defending. I for one would not shed many tears if the pharmaceuticals' profit margins were knocked down a few percentage points. Who knows: instead of seeking to extend the lives of their patents via specious means, reductions in profit might spur their r&d folks to develop new, truly-needed drugs.
To put matters bluntly, reasonably-priced meds are a greater good than preserving the pharmaceuticals' present profit margins. That should be a hill liberals, at the very least, are willing to take.
Well, we disagree there. But I think you have to bite the bullet a little harder. IF you believe Rand, you're not just talking about cutting pharma profits; you're talking about cutting lifespan.
The paper you link to examines more than reductions on revenues: "We focused on two general classes of policy interventions: reductions in manufacturers' revenues (holding consumer prices constant), and reductions in the prices paid by consumers (holding manufacturer prices constant). Examples of the former include restrictions on or aggressive negotiation of manufacturer prices. An example of the latter is a subsidy scheme that reduces copayments for consumers, while holding manufacturer prices fixed. We refer to these general classes of policies, respectively, as “price controls,” and “copayment reductions” (p.3). The copayment reductions not only save people substantial money over the long run, their increased use of drugs (due to their lower out-of-pocket expenses) also increases their life expectancy (see exhibits 4 and 5, pp. 10 and 11).
It would seem, would it not, that some sort of subsidy program for meds would result in the best of worlds for both the drug companies and consumers: more people would have more, and more sustained, access to medications, and the pharmaceuticals would still make money. I'd hope that this time, as opposed to the time of the 2005 Medicare Act, the government would allow its agencies to negotiate prices with the drug companies . . .
No, that's not what it said. The benefit from copay reductions is less than the loss from price controls. Copay reductions might be a good idea, but that doesn't mean we should combine them with price controls, which don't get better because there's a copay. The problem is, world health policy is moving in the other direction, towards higher copays, because there's evidence that it lowers utilization without usually resulting in worse outcomes. So you have to look at what is politically more likely: larger subsidies in the face of budget problems, or larger price controls. I think the political economy support for the latter is more compelling than the former.
Megan is wrong here. She assumes that a policy that did both subsidy and price controls, would do both at ratios identical to those proposed in the Pfizer/Rand paper. Obviously, we could craft a policy that has a ratio of subsidy to control that generates a break-even in lifespan.
The Pfizer/Rand paper also notes(pg 11) that the variation in their results is not symmetric with respect to variation in estimates of the critical parameters. In other words, if the real results differ from their estimates, the effectiveness of subsidy, might have benefits dollar for dollar that are greater than the costs of price controls.
Instead of extending lives, they should develop truly-needed drugs?
Please explain that bit, I don't quite follow. Even if we accept the fiction that things like Viagra are wastes of R+D, what drug is really more needed than one that extends lifespans? And how do you extend lifespans by specious means, anyways? Pharma companies aren't exactly getting into necromancy here.
Alsadius, I wrote, "instead of seeking to extend the lives of their patents via specious means . . ." You seem to have read "patients" instead of "patents."
Whoa, okay. Yeah, I see your point. I misread you, sorry about that.
They are making life-saving drugs. They are entitled to be richly, richly, richly rewarded. We want people who do good things to be lavishly rewarded.
Those who called it "absurdly-high profits" are merely greedy.
Sigh. Not in a blog post, eh? Let's check the record:
And of course, anyone is free to scroll down the page to see this 80% pop up again and again. So, no, this was not just some comment.
Also:
"I have cites, I just can't show them to you?" C'mon, either you have the figures or you don't. And no, you can't say that you do have those figures but they were "off the record" so you can't really check them. Once again, this sounds like Megan is pulling a Nathan Thurm. Megan, if enough people keep telling you the same thing, over and over and over again, don't you think that maybe there might be just a grain of truth in what they are saying? Scholarship - it's not there just to impress the rubes.
Would you be happier if it was a newspaper article that mentioned "Sources within..."? Off-the-record commentary isn't exactly rare in the news media.
And look what that's gotten us (cough - Iraq - cough)
If by Iraq, you mean half of all political reporting ever, then yes.
SoV:
1) I envy your memory.
2) I envy your hilarious youtube links.
Alsadius:
Megan said the 80% figure was not in a post, it was in a comment. Megan added "Waldman doesn't seem to know that, which implies that he didn't look". SoV provided a freakin' link to a post in which Megan quotes the figure.
That's 3 sentences. You may now finish reading the last one without forgetting the relevant information in the first. Hopefully, you will then be ready to write marginally relevant comments. You're welcome.
Yes, Nimed, that's the hypothetical. Obviously, I have no precise estimate of the exact effect of price controls on future pharma profits. Maybe we'll cut them 80%. Maybe we'll cut them 40%. Hell, maybe we'll double profits and throw them all a big party. If you thought that I had foreknowledge of the future, I really apologize.
Come on, Megan--you can't make a statement as fact, then retreat to calling it a "hypothetical," and then, when it's revealed that you have no basis for offering the statement as either a fact or a hypothetical, make sarcastic remarks about the people who point this out--all the while complaining that people aren't being civil and respectful in this debate!
If I spent, say, $1 billion to develop a drug and shepherd it through approval (That's a charitably low estimate of the cost.) and now could sell produce it for $25 per month's dose and sell it in the U.S. for $75 per month (times, say, 20 million patients) and $26 per month in Europe and Canada (times, say, 75 million patients), should I sell in Europe and Canada?
If drugs shipped to Canada and Europe cannot be re-imported, then yes. My profit would be $50 * 20M == $1B for the US and $1 * 75M == $75M for the rest. Total $1.075B per month.
If the drugs shipped to Canada and Europe could be re-imported, then my profits would likely be $50 * 0 (because who's going to buy at the "American" price?) plus something like $1 * (75M + 20M) == $95M as Canadians and Europeans buy at their government-mandated low price and re-sell to the US market. Total $0.095M per month.
That said, I'd favor Rich's implied solution: allow reimportation, but also allow drug companies to tell Europe and Canada to "f--- off". The drug company profits would fall to something like $50 * 20M == $1B. (That is, they cannot reimport what drug companies don't sell them.)
Amen. Considering we have to compete with Europe, there's no reason to let them be free riders.
So your argument is that pharma companies intentionally denying Europeans lifesaving treatment for reasons of pure profit is a wise and sensible move? Look, I'm all for hardball in negotiations, but you'd do a better job of utterly destroying these companies that way than by any other means I can think of. If you think Big Pharma is a whipping boy in the public consciousness now, wait until they actually do act like the villainous stereotypes suggest.
My argument is that the US should not set up any barriers to drug reimportation, first and foremost. The drug companies can consult their PR departments as to how they should act.
I'm sure drug companies would love to do just that, but since all the profit in a new drug is contingent on respect of intellectual property, those countries have the ultimate bargaining chip: Sell your drug at a price we can live with or we'll invalidate your patents and produce it domestically.
Oh, as opposed to the sort of respect for property you seem to favor: sell it to us at the price we want or we take it.
If drug companies earned $0 profit in Europe, how exactly would they be harmed by Europe making the products on their own?
I had presumed that the US would, recognizing the benefits of companies that actually develop drugs (remember all the liberal moaning about how "copycat" medicines are a waste?) would not allow the patent-invalidated medicines to be imported.
And with the refrain, thrust home :)
Well, let's say that I don't feel you should be fired, Megan, and I'm a liberal who rejects your innovation argument. But I DO think that you should nail down those profit figures. you've walked back 80% to 50-60 % in this blog post alone. That's a MAJOR walk back, not just a rounding error. Tell you what, do some research, and try to nail down a figure better than " I've looked at these figures and take my word for it, they suggest its at least 60 %". I'm sorry, that's just not very convincing. With all due respect, that sounds more like a lobbyist talking than reasoned argument .
She's put forward 60% as a safe floor.
In other words, definitely above 60% inclusive 80%. Thus, it's not a 'walkback' its a lower bound. In any case, I can't think of any assertion she's made that would be disqualified if the number were, in fact, 60%.
If you can demonstrate that the 80% assertion is factually incorrect, I'm interested to see your support.
I'm sorry, SHE is making the claim. She has to support it, I don't have to disprove it. It seems that many people don't buy her claim . She just has to show her work .
I'm agnostic on the figures, because even if it is correct, her argument still fails.
That post was nothing but her "showing her work". Her basic thesis is "There are no hard numbers, but the US is obviously dominant, and possibly overwhelming. If I had to guess at numbers, 60-90%.", backed up by a fair bit of evidence. It's hardly a mathematical proof, but it's a pretty good batch of evidence. Yes, the onus is on her to provide evidence to support her claims, but that onus doesn't extend to requiring signed affidavits from forensic auditors she hired to ferret out the national breakdown of pharma profits. The evidence provided is sufficient for the statement to be taken at face value, unless you provide at least some counterevidence beyond "I doubt it".
Yes, that always worked in my graduate classes. This blogger has an MBA from Chicago. She should know how to use financial statements and make a table or provide links or something. "Sources say" isn't an argument. It's an assertion with no supporting evidence beyond the word of the author.
Yes, and if this was a class in grad school, or a court case, or a research paper, I'd agree with you. It's a damned blog. For that matter, I've seen genuine academic papers with similar argumentation - as long as you acknowledge that soft arguments are being made because hard data doesn't exist(which she has), it's not even that hideous a sin. We don't live in an ideal world, sometimes soft data is the only data.
stone tools, imagine the government took 90% of your paycheck and gave it to a bum you see when walking to work that shakes a rythm using the coins he collects.
how would you feel? would that dampen your will to work?
And with the refrain, thrust home :)
That's a MAJOR walk back...
Even granting that it's a walk back (and Ryan W has a point), is it as big of a walk back as should now be required of the innumerable people who say idiotic things like "There's PLENTY of pharma research done in Europe!" or "LOTS of pharma companies have their HQ in Europe!" or similar inanities?
I'd like to know the real number, and I'd like to see how it was derived, but it seems clear to me that the US is accounting for a huge share of pharma profits.
On the issue of foreigners, innovation and cost control.
4. Cost controls stifle innovation.
False. The United States is home to groundbreaking medical research, but so are other countries with much lower cost structures. Any American who's had a hip or knee replacement is standing on French innovation. Deep-brain stimulation to treat depression is a Canadian breakthrough. Many of the wonder drugs promoted endlessly on American television, including Viagra, come from British, Swiss or Japanese labs.
Overseas, strict cost controls actually drive innovation. In the United States, an MRI scan of the neck region costs about $1,500. In Japan, the identical scan costs $98. Under the pressure of cost controls, Japanese researchers found ways to perform the same diagnostic technique for one-fifteenth the American price. (And Japanese labs still make a profit.)
http://www.washingtonpost.com/wp-dyn/content/article/2009/08/21/AR2009082101778_2.html
This was not written by some keyboard jockey who never left the USA, but by an investigator reporter who went around the world to report on health care systems and who wrote a well regarded book on the topic.
http://www.amazon.com/Healing-America-Global-Better-Cheaper/dp/1594202346
You can't quite brush off his research and conclusions. He seems to contradict Megan pretty clearly.Now Megan doesn't have to write a book in support of her claim, but she does have to at least provide a link-something!
The Japanese thing is interesting and very relevant, but the entire preceding paragraph is flat-out boneheaded. Medical research doesn't need to be done in the place where it generates the most profit, any more than consumer products need to be manufactured in the place where they are sold. The existence of the US market is highly relevant to British, Swiss, and Japanese labs' work.
Almost all running shoes are made in China. This does not mean that if we enacted running-shoe price controls in the US, Nike could carry on as if nothing had changed.
The point is that innovation is occurring in medical labs outside the USA aimed at markets outside the USA. Megan seems to be saying that European and Japanese researchers are only working to achieve innovations aimed at the US market and that they care not a whit for products aimed at their OWN markets. Sorry, I don't buy it.
Nothing you've posted says anything about where the research is "aimed." And indeed, it's not likely that it's really "aimed" anywhere in particular, so much as aimed everywhere it might be useful.
But when an overseas pharma company's executive decides how to direct resources in its German or Swiss labs, you have to think they consider US profits. At least, unless they're total idiots.
The point is that innovation is occurring in medical labs outside the USA aimed at markets outside the USA.
Again, the location of the research or its sponsoring entity's headquarters makes no difference whatsoever. The profits available in the lucrative US market encourages production by both US and non-US companies.
You're arguing against the Law of Supply. That's going to take quite a bit of evidence.
So stonetools thinks that the English have particularly limp penises and the French have particularly weak knees?
The problem with the American left today, -- you can call them liberals but a European would not and, no, they are not very far left either -- is that they do not understand the difference between rent and profit any more.
I suspect that conservatives here -- who really seem like Radicals or Liberals, anywhere else -- do get the difference but obscure it behind Law and Economics humbug glibly confusing capital, property, and wealth.
In the present controversy, ethical drug companies -- often foreign -- make profit pretty steadily from manufacturing, distribution, and marketing operations worldwide that compete, on the margin, with generic drug companies that have a similar scope of operation.
Many such firms are multi-national and engaged in both ethical and generic drug markets. Some manufacture, distribute, or market each other's drugs. This is very complex: It is hard to account for, manage, regulate, tax, or understand. Maybe it is profitable, maybe not, ... hard to say, really. I would not dare to guess.
Some firms develop and license drugs, processes, or proprietary facilities subject to trade secrets, thus earning monopoly rent.
This rent varies wildly from time to time and place to place, sometimes perversely, but with the locus of any corruption usually governmental. The firms are admired for occasional innovation and sometimes even share the limelight with an actual scientist.
Firms worldwide also engage in discriminatory pricing, generally with the approval, even plaudits, of governments, especially leftist or just corrupt ones that think that discriminatory pricing and indirect taxation is a better way to redistribute something, not least to a few especially helpful political parties, families, or principals.
Firms in the US also engage in an array of advertising, branding and other promotional practices which generate some more monopoly rent, net of the cost of such promotion, and, today, it would appear, the cost of confusing criminal with ethical practices in at least one exemplary conviction.
In any case, the monopoly rent, earned or unearned, and net of legal costs and fines, unlike profit, is always zero or positive. Even if it seems to be negative, net of a conviction, say, the negative part is really just a negative profit and charge against capital or, perhaps, just a "cost of doing business" sometimes in some places.
Given the fact of competitive world markets in ethical and generic drugs, it would seem to me (a) that international marketing conventions might make drugs less costly and efficient firms, ethical or generic, more profitable by reducing the burden of government protection and corruption associated with monopoly rent-sharing and indirect taxation, and (b) that such conventions, if adhered to or imposed unilaterally in the US might lower the cost of drugs and increase the profit of efficient firms, by excluding costly advertising, branding, and other promotional practices that strain the definition of ethical, even when not criminal.
In any case, if firms cannot realize unearned rent from monopolistic practices, because of healthcare reforms or uniform application of internationally-recognized standards of medical practice, and the old-fashioned "Ricardian" distaste for monopoly rent, then the firms will still be profitable or not based on accumulating and managing capital efficiently.
Some corrupt governmental or parasitical private interests may realize less of the tariffs they impose or extract from firms with unearned rent to share, but that might be a good thing.
However, I do not see how anything of this sort can be dealt with, if rent, profit, capital, property, and wealth earned, unearned, or shared secretly, privately, or publicly are all confused.
Such confusion or deception seems even more damaging to discourse than hypothetical numbers which may, indeed, be useful or at least innocuous compared with accurate but distracting or misleading statistics.
So when she said "80%" earlier, why wasn't that a floor? Note, again, that her comments were in a post she wrote, not just some comment she happened to throw out.
This is just crazy. As stonetools said:
That's just basic, basic, basic stuff. The way you would have things is just playing the "If you can't make me say I'm wrong I win" game. Nope. Not going to happen.
Note, btw, that the issue is not that Megan is necessarily wrong, per se. It is that she habitually does not provide factual support for the things she says. As I said in another thread, if she's actually got the numbers and the facts that would show that these sorts of reforms would 'kill innovation', I'd readily concede that she has made a good point. But she is not allowed to raise the issue, and when challenged on it, ask if we can afford to act as if she is wrong. As it stands, she's got nothin' except some idle speculation.
80% is best guess, 60% is lowball. This really isn't difficult.
In some sense, SoV, this is all idle speculation. You think that a national health system will be teh awesome. I think it won't. If we get a national health system, we will be able to see whether we're right or wrong. If we don't get a national health system, we won't.
But the assertion that I haven't provided facts is ludicrous. We know gross margins are way bigger here than Europe. We know that the United States provides more revenue than the rest of the developed countries. These are facts.
We know that pretty much every other country with a national health care system has some variant on a price control. This is also a fact that you can look up. I recommend the OECD primer, which really is quite exhaustive.
I can obviously not give you a fact in the sense of running a simulation that will provide concrete proof one way or the other. The simulation will be--the world.
But neither the facts about the pharmaceutical industry, or the effects of price controls, are contested. We may argue about the size of the effect. But there will be some effect.
Again, Grad School 101 - cite your sources. And, no, "google it" isn't a source. You want others to provide evidence. Provide it yourself.
Claiming that "these are facts" doesn't make them facts. My old baptist preachers used to say "the earth is 6,000 years old. That's a fact." At least they had citations from a book that they would point to (Genesis).
You don't even provide that.
Dude. Read. The. Post. The figures you are asking for are in it.
Agreed.
Plus the numbers, even in the apology post, are thrown out without units or context.
80% of what? 80% of all profits? 80% higher than Europe? 80% of all profits after "various factors" subtracted? 80% reduction after implementing some ill-defined policy?
To make useful claims, you need to be precise. Don't y'all know that 80% of statistics are made up?
You'd have a point, if these assertions were made in a vacuum. But they're not. They were made to challenge Megan's claims.
This is like coming in late on an argument and hearing that 'Democrats are better for the economy than Republicans.' Er, no, the original assertion was that Republicans were better for the economy than their counterparts, and this was then challenged by digging up the actual performance stats. Iow, the diologue went, "if Republicans are better for the economy, how come so many performance metrics show otherwise when the Democrats are in the majority?"
I agree that Waldman's post is unnecessarily nasty and also does not indicate much willingness to entertain the possibility that Megan might have a point. That said, I have to comment on the following:
This is only a surprising finding to people who do not want to sully themselves by getting any information from the pharmaceutical industry, who, after all, are interested parties.
Megan seems to be saying that since the pharma industry people are interested parties, they probably know the facts at a detailed level and are good sources of information on the topic. Yet pharma industry folks are not "interested parties" in the same way that astronomers are interested in understanding the workings of far-away galaxies. They are interested in maximizing the profitability of their industry. So they have a motive to stretch the truth a bit. That doesn't mean that all of them or even many of them do stretch the truth, but it's something to bear in mind.
So "just talk to people in the pharma industry; they know the situation as well as anyone" is a bit simplistic. I agree that anyone who wants to be an authority on this topic should talk to industry people, but what they say should be considered with some skepticism.
Of course it should, and you can say that I am insufficiently skeptical; it's entirely possible. But there are a lot of really, really elementary mistakes about the way businesses are run--see Jerry Avorn claiming that we don't need Big Pharma because biotechs are getting all this VC funding, among other howlers--that indicate that people aren't talking to industry at all. I mean, yes, be skeptical that the United States really dominates their profits when they say it--but in fact, everything else that the left believes is consistent with, indeed reinforces, this belief. If you think that we spend much more on drugs than everyone else, take more pills, and pay higher prices because we don't control prices or distribution the way other countries do . . . well, you, me, and Big Pharma all agree. Your interpretation of the facts may vary, and of course, once it gets to predicting the future, we're all on shaky ground. But the facts actually aren't really in dispute. America is just immensely profitable for pharma, far more than other areas. It's odd to see progressives challenging this, when the rest of the time, it's one of their chief complaints.
Why is this a "howler"? I still have yet to see from you a clear response to Holbo's argument that government R&D is an equal substitute for market R&D because price of care isn't a signal that improves the efficiency of research.
You never really get down to this specifically. At best, I hear broad tangential analogies to this effect.
Indeed, and I'm planning to write a post on this this morning.
VCs lend funding to biotechs because if there is a successful product they expect the biotech to be purchased by Big Pharma before Phase III trials. That makes the idea that we don't need Big Pharma because VCs fund biotechs a howler because it exposes a complete lack of understanding about the industry actually works.
It is as if Avorn read somewhere that biotechs make lots of discoveries and failed to think one step beyond that.
Egg-zactly!
Megan,
I've generally found your writing on this and other topics very persuasive, but I think this defensive approach is a mistake that hurts your credibility far more than the original misstatement did. The simple truth is that your 80-90% comments were stated in an authoritative way that led readers to think you had a solid foundation for the numbers when, in fact, you didn't. That's not good, but it's not a terrible sin either. Everyone accidentally overstates their case from time to time.
When you got called on it, though, you had a conscious choice to make - to either own up and apologize or to try and bluster your way through. If you'd done the former, good-faith readers like myself would be perfectly willing to accept it. The fact that you're choosing to bluster instead, though, makes me question whether your other posts similarly put ego before truth. I sincerely hope you don't keep going down this route.
Anyway, just my 2 cents. I know it's painful to fess up, but seriously, it's never the crime that ruins you; it's the cover-up.
- Dave
Maybe I wasn't clear, but Alsadius summed it up. 80% is best guess, 60% is the lowball.
Now, I may be wrong about this--I may also be wrong that innovation will slow or stop if we go any further down this path. But I'm not arguing in bad faith. And in fact, the original quote was "something like", which I thought at the time was a qualifier, but apparently means to everyone else that I had a peer reviewed study sitting under my hat.
You'd have a point, if these assertions were made in a vacuum. But they're not. They were made to challenge Megan's claims.
But they're irrelevant to her claims. Orthogonal, you might say. Pharma companies might make 80% of their profit in the US, or they might make 4.5%. Big profit might be very linchpin of innovation, or it might be discouraging innovation (see stonetools on MRIs in Japan). Pharma might be saving our very lives with innovation, or it might be all a big marketing smokescreen.
But the fact that research occurs in countries other than the US has nothing whatsoever to do with any of those claims. It's like having a discussion of running shoes and asserting that Nike doesn't depend on the US market for its profits because their factories are all in China. It makes no sense.
You are assuming that the innovative research is occurring in th=e labs of PHARMACUETICAL companies. But its just as likely-indeed, more likely that the research is occurring in government or university labs in those countries (That's where basic research is generally done). In that case, the labs and their researchers would be uninterested in the US profit margins of pharmcuetical companies.
True, with two caveats:
1) Going from government lab to market is not necessarily a cheap road; you still need a financial incentive to do that, and
2) To the extent that the research in question is simply government funded, price controls in the US or abroad have nothing whatsoever to do with anything, and needn't be discussed at all.
Nobody, anywhere, has said that the Swiss and Japanese are incapable of doing medical research; such a statement is obviously ridiculous. What people have claimed is that the US provides the necessary financial incentive for privately funded medical research. Do you agree or disagree with that statement?
I've said it once, I'll say it again, pharmas make money selling drugs to Canada and Europe at 50% the price they sell them for in the US. We are not subsidizing innovation, we are subsidizing profit.
Lets take everybodies favorite mergers and acquisitions company, Pfizer. Last year they had revenues of 48 billion, and profits of 19.3 billion . For simplicities sake, I'll assume that all their revenue came from sales of patented drugs, which makes Megan's case the strongest. The US market comprised 39% of Pfizers sales, which means revenue of 19 billion. If we paid the measley 50% rate that Canada and Europe do for drugs, that would slice Pfizers US revenue to 8.5 billion, and knock their profit down to 10.8 billion. So an 18% drop in revenue, and a 42% drop in profit.
So, if the US developed a health system which used it's purchasing power to obtain Canadian/European style drug costs, Pfizer will still enjoy robust profit margins, and still have incentive to develop new drugs, which would generate more profits. I imagine the same will hold true for other drug companies.
So, if the US developed a health system which used it's purchasing power to obtain Canadian/European style drug costs, Pfizer will still enjoy robust profit margins
Pfizer's choices are not a binary "continue to do business exactly as now" or "close up shop". No doubt they have many products that would be profitable even if the US had price controls. But it's overwhelmingly likely that they also have products that would not be profitable if not for the larger profits available in the US. This also holds true for future research that they consider. US price controls reduce the expected value of bringing new products to market, and that *will* tip the balance from profitable to unprofitable in some cases. Maybe not often, or maybe only for things you don't care about, but that it will happen to some extent is as close to a tautology as you can get in economics.
I think you miss the point that the European market is profitable, just not as profitable as the US market. Pfizers expenses last year were 30 billion with R&D made up only 7.5 billion. And there was very little R in the R&D. If Pfizer and the other big pharma choose to close up shop, or, more likely, simply become development and marketing firms (the path that most pharma are on now), then opportunities will be there for smaller more efficient firms.
No, you're missing the point. Products do not come in binary modes, profitable vs. unprofitable.
Some products will be profitable. Others won't and will fall by the wayside.
Colin Frazier:
Must... resist... temptation to snark. Don't want.. to be... bilious... cruel liberal...
Exercise:
Re-read the very revealing sentence above. Try to put yourself in this individual frame of mind. If your fellow Americans, not to mention members of the human species, would hate you based on your values, what would you consider a just punishment for said individuals?
a) nothing should be done to people who don't share my values and would indeed hate me for mine (but they can't forget about Christmas postcards).
b) They should be forbidden from getting ice-cream from the months of April to October. This would screw the signaling function of ice-creams prices, but it's totally worth it.
c) They should be forced to parade naked on the Winter Solstice in the main street of their respective places of residence.
d) b) AND c). MUWAHAHAHA!
e) Oh, so those little uninsured f***ers don't like my values, huh? I was not aware such people existed. Well, in that case, they can drop dead. Because UHC for me means providing basic health care for atheists who like Arcade Fire.
The RAND paper contains the following disclaimer:
Of course, one of the things not mentioned in the RAND paper was that if Pfizer reduced its dividend payout to the rate of, say, Cisco Systems it could double spending on R&D. But, hey, why ruin a good party.
The question is, what would happen the next time Pfizer needed to raise money?
The pharmaceutical industry has any number of weird features; it combines low marginal cost with absolutely astronomical startup costs, the failure rate of companies is high which is why even Big Pharma is rapidly headed towards GlaxoSmithKlineSanofiAventisMerck. And its primary asset, in-house patents, doesn't show up in financial statements, which makes all the standard metrics that analysts use skyrocket. It's subject to nearly binary outcomes at key points, etc.
Maybe there are economic rents in the industry, in which case we should revisit patent terms, and I think almost anyone would agree that the US Patent office needs a serious rethink of its generosity. But you can't just say "Pfizer should reduce its dividend" or "Pfizer should reduce its marketing spending" because this isn't a static budget problem where we're trying to divide up the fixed existing stock of cash. We're trying to optimize a flow, which means that if you want to raise money again, you have to make your shareholders happy, and if you want to maximize the return on R&D, you have to market your product. And maximizing those things maximizes the R&D, ultimately. Maybe we shouldn't maximize it. But we shouldnt' minimize it either. I am very not confident in the government's ability to discern the "right" level.
What is all this about her being defensive? She just gave a convincing intellectually honest and well researched answer. In the argument, she blew you liberals away with her reasoned arguments.
Very well done Megan. Your arguments are at a much higher level intellectually. arguing with these liberals is like pissed off third graders arguing against an ivy leaguer.... because they didn't get their candy today hmmmmm
And having the U of C MBA obliterates the others when talking about financial statements.
If those that can't talk income statements and the line items that go into it, then they shouldn't talk about how a big pharma makes excess profits.
If you believe that markets are efficient, as per the Strong Efficient Market hypothesis, then ANY profits are excess profits.
your use of emh so reflects your misunderstanding of finance that i'm not going to respond.
Megan,
... There is so a lot with this post, I guess I'll just number my points. I did try to spend some time to make my points clear, well reasoned, and with a minimum of ad hominem, so I hope you really try to understand what I'm saying, if only to make your argument stronger..
#1 The study you cite, supposedly written by disinterested academics, isn't so disinterested it seems. If you read to the end, you find out that this paper is funded by a grant from Pfizer. As you know, a huge pharmaceutical company.
#2 It is good that you admit this "%80 of profits" number is,at best, a rumor. Not only that, but by your own sources, a widely exaggerated rumor. The Pfizer/RAND article, suggests that revenues in Europe are 2/3 of revenues in the US(pg 2). Leading to a 1:.666 US:Europe revenue ratio. Necessarily, the US:World ratio must be closer to 1:1. It well beyond reasoned speculation to claim that this modest, yet significant, difference in revenues leads to a 4:1(ie 80%:20%) ratio US:World difference in profits. Perhaps you meant that profits in the US are 80% higher than profits in the rest of the world? That,1.8:1 ratio, is at least plausible...Although it would belie a pretty cavalier attitude toward statistics in journalism.
#3 Profits don't matter in this analysis, anyway. R&D is a cost, the higher your R&D expenditure the lower your Profit. Profit is money returned to the owners, usually in the form of dividends. So revenue is the more effective proxy of R&D anyway, which we can model as a percentage of revenue. You don't help the clarity of your argument by perpetually conflating these ideas.
#4 Your usage of the claim about the lifespan changes due to price controls is essentially a Strawman. Despite your fears of slippery slopes, explicit price controls on medical products are not on the table in any of the proposed bills. Much in the same way that you confused the different senses of 'rationing' in your debate with Holbo, you confuse the different senses of 'Price Controls' in this post. There is a difference between explicit price controls on products(ie Nixon 1970s) and controlling the price of overall expenditure.(ie deficit reduction 1990s) You can do the latter without the former, and the bills currently in congress propose to do exactly that. The biggest cost-saver on the table right now is comparative effectiveness research, which should, if anything, increase longevity.
#5 The Pfizer/RAND article states that the prices of drugs in Europe are not substantially lower(pg. 2) than in the US The difference in revenues comes from increased volume of expensive care in the United States. From this we can infer, that moving our healthcare system towards a more European system, as reform intends to do, would not result in changes of price.(ie no de facto price controls, that you fear at the bottom of some slippery slope.)
#6 The paper's model assumes that government spending doesn't fill the R&D gap filled by decreasing revenues from price controls. As commentators, and Holbo, have noted, we have no reason(short of faith) to believe that government wouldn't fill the gap in R&D that would be created if we ever did find ourselves on a slippery slope to price controls.
#7 Speaking of R&D substitution. You never answered Holbo's argument that government R&D is an equally effective substitute for private R&D because private R&D doesn't use market features(like prices) to create more effective R&D. This essentially means that your whole argument boils down to faith that huge corporate bureaucracy is intrinsically more efficient that huge government bureaucracy. For your argument to be sensible, this would have to be a very significant difference(ie 200% not 3%) There is no reason to believe this is the case.
#7 You misconstrue the attitudes of the Pfizer authors, toward government provided insurance. At one point(pg 12), they state that the benefits from subsidizing drug costs or not implementing price controls, are *almost* as large as the benefits from Medicare. Clearly, a strong endorsement of government provided health insurance. Note, this is not a contradiction to #1, despite your firmly held beliefs, government provided health insurance is in no way contrary to the interests of drug providers, or to medical providers in general.
#8 Your failure to note the reservations of the authors themselves, is characteristic of your reckless treatment of statistics in your writing. The authors note that the robustness/variance of their results is dependent on 3 parameters that they had to estimate(pg10), #1 the value of a human life, #2 the benefits of pharmaceutical innovation, #3 the change in innovation that results from a change in revenues. These three points are the fundamental points of disagreement in the debate you've been having the last couple of weeks. Citing a result from a model that assumes the outcome of our debate as its premises, doesn't make your argument any stronger. And in general, one statistical model doesn't make fact. You should state statistics as if this were the case.
There's a lot here.
1) If you can find articles on the subject that are not funded by an institution with a clear dog in this fight, please send them. Rand is a widely respected institution.
2) The relevant question isn't revenues, it's margins. The point is, on margins we're already at 60%. Then you consider things like, how many pills do you have to make and distribute to make a profit-margins are higher in the US. What is the mix of generics vs. first line treatments? The evidence is that we pay more for first line treatments, and sometimes less for generics, and that we consume more generics once a drug is off patent.
3) You're thinking of this as a stock, not a flow. In multi-period games, profit is what generates the money to fund the R&D--this is true whether or not you actually try to fund out of retained earnings.
4) I have explicitly said, many, many times, that I'm talking about a generalized opposition to the whole process, not any particular bill, since there is no particular bill. How can I say I think there's a slippery slope? Because progressives think there's a slippery slope. That's what they say all the time when people complain that the current bills aren't good.
5) You and I have a different definition of "significant" and also, I did mention it.
6) I'll cover this in a post today.
7) They're not "Pfizer authors" and this is really beneath you. I quite agree that subsidizing the hell out of something with no attempt at cost control is a boon to research. It's also not what I perceive to be in the feasible universe if we start adding more people to the system, and maybe not in the feasible universe for much longer anyway.
8) This is trivial. Of course their estimates are sensitive to their starting assumptions. If I have to state that every time I link a forecast, you will grow quite sick of hearing it. And I really doubt that you apply this standard of disclaimer to papers that agree with you.
But at any rate their estimates of a human life are now the US bog standard, their estimates of the change in innovation comes from by far the best available paper on the subject by a top-notch widely respected economist, and the benefits of pharmaceutical innovation are, of course, the very topic of this debate. If you think they're trivial, then obviously my concerns are ridiculous. Do you really think the benefits of pharmaceutical innovation are trivial? And if so, why are we even worried about the cost of drugs? Who cares whether people can afford something stupid that doesn't do them any good?
At any rate, their assumptions about the benefits of drugs are pretty damn conservative--in the "err on the side of your enemies" sense. Their first assumption is that only the top two selling drugs in a category do any good at all, which is obviously untrue in multiple important categories, such as antidepressants.
Thanks for your response,
In order:
#1 I agree, it would be hard to find an author without bias, some biases are going to be more or less innocuous. But we would expect that the authors incentives are aligned such that they receive funding in the next round of the funding game. I'm not surprised to find that the authors getting the Pfizer grant find that subsidizing the cost of Pfizer's goods is the best policy option.
That said, I don't necessarily think this is a bad thing, maybe Pfizer really is the best source for this sort of information, but it seemed like you implied that there authors were somehow above the fray. Instead, it seems that they are not much better than talking to Pfizer directly.
#2-3 A. On margins we're already at 60%? Profit margins? Marginal Cost? Of what? Please be-specific, simple math clarifies statements too.
#2-3 B. As was noted in your post "Department of Awful", Pharma is a high fixed cost, low variable cost industry. Practically, There are minimal variable costs(~$0) and the initial fixed R&D costs allow sale in all markets across the globe. So costs are effectively global. Since profits are revenues minus costs, and costs are global, the only regional statistic of merit is revenue. Which is 1:2/3 US:EU and something closer to unity for US:World. (because non-US non-EU revenues are non-zero).
#2-3 C. I think what you may be getting at with this point is that profit can be an incentive for market entry or exit, but other factors matter as well. A better statistic might be the return on capital per annum. Historically, this is estimated in the Rand/Pfizer paper to be 12%(pg 6). A clearer argument for your point might make the claim that "The opportunity cost for Pharma is something like 11%, thus we really are at the critical point." The problem is that since Pharma operates under a legal monopoly and their fixed costs are a large barrier to entry, it is likely that their returns far in excess of their opportunity cost.
#4 A. If your generalized opposition to the process doesn't apply to the proposals under discussion in the process, doesn't that make them irrelevant to the process?
#4 B. As to the slippery slope, We need to be careful about which slippery slope and not treat one slippery slope as fungible with another. I think progressives hope that the public option will put health care on a slippery slope to universality and maybe single payer, but I it is a stretch to assume that this means they want a slippery slope to destruction of Pharma.
#4 C. Even then, It seems to me that you are doing a bit of bait-and-switch with progressive proposals and progressive aspirations. Maybe some progressive activists would like to see Pharma destroyed, but that seems to quite far from the truth when it comes to the progressives in government, who seem to be quite willing to negotiate to protect pharmas interests.
#5 Its in the paper. The prices of drugs are the same, the selection of drugs Americans buy are different. The paper looks at the effects of subsidy and price controls, it doesn't look at compositional changes. Thus even though you might infer that the composition of drugs purchased would change if we moved to a European model, we can't use this paper to draw inferences about the consequences of the change to this model.
#7 A. See #1. I would expect that a Libertarian whose views seem descendant from Ayn Rand and Public Choice Theory, would be leaping to agree that money talks when it comes to behavior incentives.
B. Goldilocks anyone? Any increase in Pharma profits would break the bank, any decrease would destroy innovation? It just so happens that the status quo is just right? Pardon my skepticism.
#8 A. Wrong. This would be trivial if they were doing the sort of study that determines the value of one of the inputs to their model. There is always variance when estimating a statistical parameter from data, but this isn't estimation from raw data. They've created a statistical model that largely assumes the conclusions in, most scientific models do. It is not accurate to start citing the resulting statistics as fact until its prognostications are verified.
#8 B. As to agreements on input statistics. Value of statistical year of life, Pfizer/Rand pg 7 "The monetary value of a statistical year-life is controversial."
#8 C. My quibble with the likelihood of being beneficial is that the rate estimated from recent data is extrapolated out into the future with the assumption that it is constant, but what appears to be year on year percentage increase in longevity(ie exponential curve) is almost certainly a sigmoidal curve. In other words, a priori, is is very improbable that we won't see diminishing returns in the longevity-efficacy of drug research. You mention exclusion of anti-depressants, but something like an anti-depressant increases quality of life, but not necessarily length of life. (Which goes somewhat to the point being addressed elsewhere of efficacy of government R&D versus private R&D, if we valued all lives equally we would target dysentery note depression)
#8 D. Their estimate of revenues-responsiveness to innovation is only a reasonable estimate if the only actors being responsive are private drug-companies. If other actors(non-profits, governments) take up the research slack, this isn't really accurate. We should expect that they would. Non-profit/Govt don't care about drug-revenue, so their incentive to not-research wouldn't increase as Pharma's does. They would be left with the same prior desires to perform research but with less R&D competition.
Sigh. No, I don't think that a national health care system will be 'the awesome', and if you think I have said otherwise, please provide the quote(s). My thought is that the current system could hardly be any worse(though it appears that some people are trying to make it so), and in any event it's rising costs will be unsustainable over the long run.
I simply want you to provide some sort of proof for you claims. No, proof is not 'unnamed authorities', nor is it 'a book on my desk that you can come and look at'. And it certainly is not 'just google it if you think I'm wrong.' If you've got some sort of credible proof, fine. As I've already said twice, if you can make a case with your argument I will certainly concede that it is a very good point against any sort of price controls (or, if you can go further, 'government sponsored health care'.)
'Way bigger' and 'more revenue', even if true, do not magically become a figure like '80%'. Facts associated with numbers are what you have to produce. You haven't even given a figure where it's loss makes the reduction in innovation acceptable. Can profits drop 50% and still sustain an acceptable rate of innovation - assuming your argument is correct? How about 40%? Or 15%? Or 1%? If you're just going to say that any loss of innovation, however small it may be, caused by any drop in profits from 0% - 100% is simply unacceptable then you haven't made any argument at all. Certainly not one where you've balanced the lives saved now against those potentially saved later.
I simply want you to provide some sort of proof for you claims. No, proof is not 'unnamed authorities', nor is it 'a book on my desk that you can come and look at'.
Yes it is. Since when is the standard for research that you can only cite sources that some guy on the internet can get for free while sitting on his ass?
Sigh. No, it's not. Really. Megan is perfectly free to quote from the book on here desk, along with the page numbers, and that's fine. But just saying it's there is, well, . . . let's just say that this sort of thing doesn't fly in the real world.
You can buy the book yourself, SoV. But "page numbers" is stupid, because I'm describing a process that covers many pages. You can look at the reference chapters on pharma pricing in different countries, which spread across three or four chapters, and the end of Chapter 2 for the information on Pharma profits. But you're going to have to read the whole thing, I'm afraid, if you want to get a sense of how global pharma pricing works. They neglected to boil it down to a soundbite.
My comment is not related to the other comments, as near as I can tell.
I have two points.
First, in investing, there is an inverse relationship between risk and return - the greater the risk, the greater the return must be to compensate for the risk. Pharmaceutical companies invest in research & development and new drugs. The U.S. has more stringent standards for drug approval than most of the rest of the world. The FDA has rejected drugs that are approved in Europe. Some drugs that are by prescription only in the U.S. are available OTC in Europe. When a company tries to bring a drug to market in the U.S., it faces a risk that the drug will be rejected by the FDA. Because of this additional risk, companies require a higher return as compensation.
Another source of risk is the tort system. Companies face the possibility of billions of dollars in verdicts and millions in attorney's fees. You may think that the tort system justly rewards those who are injured, but tort lawsuits are nonetheless a risk that drug companies face. More risk means more return.
Second, pharmaceutical companies tend to make little more than their marginal costs in many countries (i.e., Brazil, India, China) because those governments have been reluctant to recognize drug patents. Those companies must choose between selling the drug at the government price or having their patent dedicated to the public.
In the U.S. and most of the developed world, we give patent holders monopoly power. We want them to make lots of profit on their patent because we want to encourage innovation. If profits were not a key to driving innovation, the entire patent system would not exist.
Now, this doesn't prove that 80% of profits come from the U.S. But it does support the assertion that we should expect a larger share of pharma profits to come from the U.S., whatever that share may be.
I've been going through pharmaceutical 2008 financial reports and compiling the data into a public Google Documents spreadsheet available at http://spreadsheets.google.com/pub?key=t0cxvg9lQi8RsYlw33u028A&gid=5. Links to the reports are available there.
Short answer: I'm having a very hard time finding numbers that support the assertion that 80% of pharma profits come from the U.S., or even 60%.
Take GSK as an example, since they have the most detailed report that I've found.
Revenue breakdowns (2008) are (in USD millions):
Total: 45,112, U.S. 18,005, Intl. 27,058, or 40% U.S.
Restricting to pharma revenues only gives:
Total: 37,756, U.S. 16,476, Intl. 21,280, or 44% U.S.
Now, revenue is not exactly what we're looking for; we'd prefer profits or income breakdowns. Luckily, they have just that: operating profits broken down by region, with numbers for 2006, 2007, and 2008.
For 2006, U.S. income was 32% of the total, for 2007 it was 38%, and for 2008 it was 27%.
This isn't definitive, because the breakdowns were done by subsidiary location, so it's possible that, say, a British subsidiary was actually making most of its profit in the U.S. But still, these are the best numbers I've been able to find, and I can't find any support for the 80% profit number. Anyone who'd like to page through financial reports like me, I'd be happy to add whatever data you find to my spreadsheet.
Sorry, the extra period at the end of the link appears to have broken it. Try this instead:
https://spreadsheets.google.com/pub?key=0AhvL_CFCw7ajdDBjeHZnOWxRaThSc1lsdzMzdTAyOEE&hl=en
I think you have multiple issues here that are going to have to do with the way you allocate costs of things like research facilities--I can think of at least three different ways you could do it. There's also the fact that lead drug approval tends to be in one of a few countries, with follow-on approval elsewhere. America does more clinical trials per capita than anywhere else, but obviously, the results of these trials do not stay here. etc.
I still can't look at the global figures and get a reasonable number under 60%. Prices decline pretty closely inversely with GDP, with the US, Mexico, Israel, Canada, and one other country that I don't think was large or rich as the major outliers. So margin outside the developed world is pretty thin. We do more than half of the drug spending in the developed world, and in pharma, spending correlates pretty closely with profit because the good has low marginal cost.
Oh, I agree --- it's remarkably hard to do profit breakdowns, because while it's straightforward to break out revenues to different markets, costs are much more difficult to assign. I'll take a look at the OECD report, which I conveniently have institutional access to, and look at the data presented there. (OECD link is at http://www.oecd.org/document/36/0,3343,en_2649_33929_41000996_1_1_1_37407,00.html for those who also have some sort of institutional access.)
But you had not problem at all quoting it's purported conclusions as a sound bite, did you?
Iow, no, you can't do this either. Do I really have to explain this to you? Let's see.
[break]
Okay. I've checked the book out and looked through it, and it says nothing like what you say it does. In fact, it says that profits in the U.S. market account for less than 30% of the total.
So is it okay if we lose 30% of the profits? Or is that still too high?
Can I get a page number on that, SoV?
Because I just did a reference check on 30%, and you're confusing price with profit.
You are talking about what in many cases was said then against her argument then and presenting it as if it was being said against her arguments in their current form.
Well, my recollection may not be as good as yours. I recall it going something like this:
MM: US price controls will cripple innovation
Other guy: But plenty of drugs are developed overseas/by overseas companies!
MM: But the vast majority of their profits come from the US market.
I still don't see how the location of drug development, or the HQ of a drug company, is anything but totally irrelevant to the question of the role the US market plays in stimulating innovation.
Note also that I called the Japanese MRI experience "interesting and very relevant." I'd like to know more about it. If you're right that US prices are caused by proprietary code, then I'd like to know where the Japanese code came from: government grants? Some public-spirited programmer who doesn't want to be paid for his work? Theft of US code? That sort of thing doesn't just write itself.
We'll have to agree to disagree on recollections. As for the other thing: Are you familiar with the technique of solving linear equations by row-reduction of augmented matrices?
You divide the first equation by the leading coefficient so that the leading coefficient is one, and then eliminate the leading variables of the other equations by multiplying the first equation by the negative of the other equations leading coefficients and adding. So, for example, a_11, the first coefficient in the first equation becomes 1. now the leading coefficient of the second equation is a_21, so we multiply the first equation by -a_21 and add it to the second so that a_21 becomes 0. After the leading terms are canceled off, we repeat the process with the second coefficient of the second equation, then the third coefficient from the third equation, etc. You may have learned this in high school or college, and the technique is called Gaussian elimination.
Now, it turns out, roughly speaking, that all such methods of solving equations like this are variants of Gaussian elimination. So if some company had patented this as an algorithm, that would have seriously undercut their competitors when it came to any code that was dependent on solving large numbers of linear equations.
That is, roughly - at least according to Maxim - is the case with NMR machines.
Are you familiar with the technique of solving linear equations by row-reduction of augmented matrices?
I was at one time. It's been more than a decade.
So if some company had patented this as an algorithm, that would have seriously undercut their competitors when it came to any code that was dependent on solving large numbers of linear equations.
Aha! Well, I am very familiar with patent law, and no such thing is remotely patentable (which, in fairness, does not mean that no patent has ever issued on it). However, the particular source code could be protected either by copyright or as a trade secret, and of course MRI machines might contain innumerable other patentable features.
Great post. As usual, some weird comments. Megan makes a claim on her best understanding of a subject. Others disagree. She then posts a very detailed explanation of where her claim came from. So now she needs "proof"? Why, otherwise you won't accept her claim? Don't. I, who have no time nor ability to study these things in that much detail, find her explanation helpful.
In the meantime, please stop heaping scorn on her because she didn't convince you; IMHO you were never available to be convinced in the first place.
Sorry, no. That's me doing the research, combing through all the material, etc.
But trust me, even if I can't post the page numbers, that's just what it says. You're free to go through the numbers yourself, but that is indeed the conclusion.
Sorry, no. You're making a basic mistake here that just because two figures happen to work out the same it must mean they are really the same thing. Sometimes when two different things have the same numerical value, it's just a coincidence; no one thinks, for example, there is any deep significance to the fact that the Sun and the Moon just happen to be the same apparent size in Earth's sky.
So, would reducing profits by 30% stifle innovation "too much"?
Sure. That's your bailiwick and I won't pretend to know more than you on the subject. All I'm giving you is an analogy, and based upon what someone else told me about the nature of the proprietary code. You'll recall I mentioned this some time ago, so stonetools link suggests that this is not an unreasonable claim on the face of it.
You'll recall I mentioned this some time ago, so stonetools link suggests that this is not an unreasonable claim on the face of it.
I don't think it's unreasonable, but what I'm getting at is: how do the Japanese produce such cheap MRIs, really? If what they've done is, essentially, have the government do the expensive work of developing the necessary code and then give it away for free, the price of the procedure is simply the marginal cost with no need to cover the large fixed cost. The larger US price then reflects the fact that the government isn't doing code development (or, apparently, swiping the Japanese code).
Either system is perfectly fine, but the Japanese system (in my hypothetical; I don't know how it actually works) not an example of cost-cutting innovation, it's an example of cost-shifting public subsidy.
An alternative explanation might be that Japanese MRI budget doesn't include a radiologist to read the films; that's just different accounting, not savings. I really don't know.
On the other hand, maybe the Japanese really have developed some kind of amazing cost-cutting innovation, in which case they should probably start exporting it here and making big money on low-cost MRIs.
Does anyone actually know the answer?
Revenue is what we're looking for, since profits is completely dependent on how accountants choose to allocate various costs, especially when you have a giant fixed cost like R&D. Something that brings 10 percent of your revenues can bring 100 percent (or more!) of your profits.
Also, it's perfectly possible to substantially cut profit margins without necessarily affecting behavior or social welfare at all. It's incredibly dependent on the costs and benefits of different drugs to be developed. If there are lots of socially useful drugs with costs of private sector development just below the max profits granted under a patent system, there's a big negative impact. If most socially useful drugs have costs of (private!) development well under the max profits created by the patent system, then all you've done is redistribute lots of money from pharma company execs and shareholders to taxpayers.
It's not at all unreasonable to suppose that a 25-30 percent cut in pharma company profits, which is what we're likely talking about here, wouldn't have much negative impact on innovation. Truth to tell, we can't know right now, but the recent record of pharma innovation under the patent system is not too impressive. Any observed negative effect on innovation could easily be counterbalanced by simply giving invention prizes for popular/useful drugs.
It always entertains me when libertarians get all vociferous defending the government price-setting mechanism we call patents. If you want to give rewards for drug development there are all kinds of different ways to do it, all equally artificial. The patent system has some good qualities but lots of bad ones, and demonstrably leads to a ton of economic waste.