If you want more, you need less

The Financial Express of India reports that private equity firms are increasingly unwilling to invest in pharmaceutical research and development because the risks of investing the large sums of money required are too high.

The potential rewards for an investment into a new molecule are high -- but so are the risks. The vast majority of drugs studied in the laboratory never make it to market: They may not work as well in humans as they do in test tubes and animals, or they may have unforeseen side effects, or government bureaucrats might change the rules for what data must be collected when a company has already begun its clinical trials, forcing the company to abandon its earlier research.

If the amount of money at stake is small, individuals and venture capital firms are more likely to consider a high-risk investment -- in fact, a firm could diversify its investment among several R&D targets, since if one or more of them paid off, those wins would cover the losses from drugs that failed. But the amount of money is not small. The price of bringing a drug to market has been estimated at $800 million to $1 billion -- thanks mostly to government regulations that dictate what and how many trials must be conducted, how many patients must be included, and how long the trials must run before the drug can be approved. All this costs beaucoup bucks, not to mention the time that is eaten away from the drug's patent life because patent life begins at the time of discovery, not at the time the drug is permitted to be sold. Is it any wonder investors prefer lower-risk, but non-innovative, areas like manufacturing?

Venture capitalists do not invest in businesses out of charity. They do it because they want to make money -- and the greater their chance of losing money, the less money they will be willing to invest in any given venture. That's why government regulation of the pharmaceutical industry is so destructive -- because it raises the stakes so high that many investors are scared off. The result is less innovation and fewer lifesaving drugs that will be invented.

If what we want is more innovation in medicine, we need less -- less government regulation.

Yay!

I finished revising my article for The Objective Standard over the weekend, and I just sent it off for the editor to look at.

Thanks very much to Paul Hsieh for reading an early draft and providing some excellent suggestions, and thanks to Craig Biddle for asking me to write the article. I've been thinking about writing such an article for quite a while, but didn't know where or how I would get it published. Then Craig asked, and I was motivated to carve out the time to do it. I'm proud of the article, and I can't wait to see it in print!

A bleak future

As the New York Times reports, state governments are barring hospitals from building expensive new treatment facilities, citing the need for cost containment. The proposed facilities would provide a new form of radiation treatment for cancer that state officials say is not proven to justify its cost, which is far higher than the X-rays it is meant to replace.

So, in the name of cost containment, both for the government (which, if the new treatment were included as a Medicare and/or Medicaid offering, would have to foot the bill for some treatments) and for employers and unions who don't want to pay the higher insurance premiums that would result from having a new treatment available, no one is to be allowed to have the treatment at all -- because the facilities to provide it are not to exist.

This is a clear warning as to how socialized medicine works, and what we are all in for should universal health care be mandated.

In a free market, hospitals would be able to build such facilities if they wanted to -- and treatment would be available to those who can afford it. Investors in hospitals would have to figure out whether new facilities would be able to generate enough income to justify their construction -- this, not bureaucrats, would decide whether new treatments are made available. Hospital administrators who chose wisely and offered new treatments that many people want and are willing to pay for, would be rewarded with profits; those who chose poorly and built expensive facilities that could not recoup their costs, would fail.

Instead, treatment is to be denied to everyone, regardless of ability to pay, because government bureaucrats don't want to pay for those individuals who fall under their purview. Is it really better for everyone to have no treatment than for some people to be able to afford an available treatment while others cannot?

The answer to the problem of rising costs of care is not to ban innovation. It's to get the government out of healthcare.

Whose right is it anyway?

Yahoo! News reports that the Senate is expected to pass a bill barring discrimination by insurers and employers on the basis of genetic testing results. In the name of anti-discrimination "rights," Congress will violate the real rights of individuals to make hiring, firing, and insurance decisions based on their own judgment.

Compare genetic-testing discrimination to racial discrimination: Unless one's job performance depends largely on one's appearance (such as acting or modeling), race is an irrelevant characteristic on which to base hiring decisions, and thus racial discrimination is irrational. Yet even though it is irrational, racial and other forms of discrimination ought to be legal. Why? Because no one suffers from discrimination on the basis of irrelevant characteristics except the person who exercises it -- the employer who only hires people of his own race so he can "feel comfortable" will lose out on being able to hire the most productive people available to him. What about those he discriminates against? No one has a right to a job, only the right to accept one if offered -- so the discriminated-against have lost nothing. The failure to gain a thing is not a loss; the discriminated-against are perfectly free to find more rational employers, and the discriminator must be left free to suffer the consequences of his own actions.

The results of genetic testing, unlike race, are not irrelevant to employers in the current legal environment. Employers are required or strongly incentivized by the government to provide health insurance. Since the employer is forced to insure his employees as a group, neither raising the cost for employees at high risk of health problems nor lowering it for those at low risk, it is in the employer's best interest to hire healthy employees who are likely to stay that way. So it is that a job candidate with a positive test for a gene that causes, say, Parkinson's disease, is less desirable than another candidate with no such test results, all other things being equal. (And, obviously, the results of genetic testing are of interest to insurers in setting rates, whether or not employers are required to provide insurance.)

Employers are already constrained from acting on their judgment by not being able to decide for themselves whether they would like to provide insurance to their employees (nor to which employees they'd like to offer it). The new law will constrain their judgment even more, by saying that employers cannot even use knowledge of an employee or potential employee's health risks to control costs.

What this will mean is higher costs for everyone: more money paid by employers to insure a higher-risk pool, and lower salaries as employers need to find a way to save the money spent on insurance. What we really need is a fully free market in healthcare -- but in the meantime, the use of genetic testing results in employment and insurance decisions should be left out of the purview of the government. If an employer wants to know the results of genetic tests, he should be able to ask his employees to show them (the employee can always refuse, but he is not free to demand that his boss continue to employ him if he does). It's unfortunate that the results of such tests are in fact relevant considerations for employers, but even if they were not (ie, if a free market existed in healthcare), it would be a violation of individual rights not to allow them to be considered.

The way to keep people from being discriminated against based on their health risks -- not always a relevant consideration for job performance -- is not to ban discrimination. It's to ban the government regulations that made such factors "relevant" to hiring decisions in the first place.

The real price of pills

A common criticism leveled at pharmaceutical companies is that they fleece consumers by marking up the price of their drugs far above what it costs to make them. Perhaps Pill X costs 25 cents to manufacture -- and the manufacturer wants $20.00 a dose. Sounds like highway robbery by Big Bad Pharma, huh?

The problem with this point of view is that it blithely ignores what it cost to get to Pill X.

The cost of manufacturing a drug that someone else has already discovered might, in fact, be 25 cents a pill. That's why generic manufacturers can sell their drugs so cheaply. Not so for the innovator, the manufacturer who seeks to create a therapy no one has ever used before. The cost of developing a drug, from the time the molecule is first discovered in a test tube to animal trials to clinical trials first in small and then in large numbers of people, has been estimated at $800 million. Eight hundred million dollars -- and that estimate is several years old! (That number would be much lower if not for excessive governmental regulation of the pharmaceutical industry, by the way.) The generic company doesn't have to pay this cost -- it only has to show the FDA that its product contains at least a certain percentage of the active ingredient originally developed by another company. But the innovator does.

If the innovating company bases prices only what it costs to manufacture its drugs, and not what it cost to develop them, it will quickly go bankrupt. If, as many industry critics would like, manufacturers were forced to price drugs according to the manufacturing costs alone, then existing therapies might be cheap for a while -- but there surely wouldn't be any new ones.

Remember, it's not just about the pill. It's about what it took to get to that pill.

Going quiet for a while

Just a note to say that I won't be posting much in April, if at all, because I'm focusing my writing energies (outside of work, anyway) on an article about the FDA for The Objective Standard. I'm thrilled to be writing for a journal I respect, and I can't wait to show off the results!

A revealing attitude about the human condition

Janet Maslin's New York Times review of Melody Petersen's book Our Daily Meds is as full of vitriol for the pharmaceutical industry as Ms. Petersen's book appears to be, citing a number of "dirty tactics." I'll focus on one criticism that the book levels at the industry, and which Ms. Maslin happily parrots: that Big Pharma "medicalizes" normal conditions, causing people to take drugs for diseases that aren't really diseases, and that everyone should just live with. Says the review: "[T]here are the business strategies that have created illnesses out of what used to be facts of life, labeled them as syndromes, and have hooked customers into long-term use of medication to cure them."

I used to carry this sort of cynicism around with me myself. Seeing drugs like Detrol (is having to go to the bathroom often really a condition?) and now Mirapex (for "restless legs syndrome") obtain approval and get advertised endlessly, I wondered if this was indeed an insidious tactic of Big Pharma to get us all to take drugs we don't need.

Then I realized the attitude that underlies this criticism: that some amount of suffering is inherent to the human condition.

Think about it: Maybe it's within the scope of normalcy to have to go to the bathroom once an hour, but is it desirable? What if I have an all-day meeting with a client? Is it any comfort as I constantly excuse myself that what I am doing is "normal"? Even if my condition is "normal," might I be willing to spend the money to make things better than normal? What's wrong with that? We might as well ban makeup because it's "normal" for women to look plain, or ban luxury foods because it's "normal" to scratch food from the ground like our ancestors did.

In a free market, each of us would be free to decide whether the risks and price of a drug are worth the benefits, whether the drug treats overactive bladder or ovarian cancer. There is no need for the paternalistic implication that some drugs are not worth it to anyone and, worse, the implication that to be human is to put up with suffering.