Universal Health Care and Innovation

I'm a little late to this debate, but a number of people have used this thoughtful Jonathan Cohn article as a springboard to discuss the relationship between universal health care and medical innovation. Opponents of universal health care routinely assert that any move toward universality will stifle medical innovation by reducing the profit incentives that currently drive the private sector to develop new treatments and new drugs. As Cohn explains in his article, the factors that drive innovation are much more complex than opponents of universal health care would have you believe. Cohn concludes, correctly I believe, that "[y]ou don't have to choose between universal access and innovation. It's possible to have both--as long as you do it right."

Matt Yglesias goes a little further and observes:

May I note that I don't entirely understand this controversy? It often seems to me to take place in a hypothetical world in which we not only have a universal health care system, but we've also banned out-of-pocket medical expenditures, which I don't think anyone is proposing we do. Insofar as there might be some projects that aren't worth doing at the price the UHC system is prepared to pay, you could just try to get people to pay out of pocket for it. If the innovation's so great, why won't those with money be willing to pay for it? Obviously, the poor won't be able to afford it, but they're no worse off than they are today as un- or under-insured patients.

And of course if a significant quantity of medical innovations are coming onto the market that are inducing the rich and upper-middle class patients to pay out of pocket for these innovative treatments (thus signaling that the UHC system's budget has been set at a level that's too low to afford many newish useful technologies) then that'll create the political momentum for boosting the system's funding.

This argument provoked a cautionary response from Kevin Drum:

That seems true, but again we're faced with the empirical question of whether it really is true. Would there be enough rich people willing to go outside the system to provide the same returns for innovation that our current system provides? There's no way to know except by adopting UHC in America, waiting a few decades, and finding out.

Or maybe not. It seems to me that there's some scope here for a natural experiment. There's one specific demographic that has been covered by UHC both in Europe and the United States for the past four decades: elderly people. So here's the experiment: identify various areas of medicine, identify the extent to which they serve patients over the age of 65, and then create some metric to identify the rate of innovation in these areas. If UHC stifles innovation, then you'd expect that the more a particular medical specialty targets the elderly (and is therefore funded solely by UHC), the less innovative it's been over the past 40 years. And if a particular specialty exclusively targets those over 65, you'd expect progress to be almost nil.

After acknowledging some of the obstacles to conducting this type of study, Kevin concludes:

Still, there's considerable scope for some very useful research here, no? I'd venture to guess that most Alzheimer's therapies worldwide, for example, are paid for by UHC. Ditto for hip replacements and cataract surgeries. So how much innovation has there been in those areas, and how does it compare to innovation in, say, antibiotics or statins that are used by patients of all ages?

These are all good points, and I agree that this type of analysis would be useful for policy-making. But it seems to me that Cohn, Yglesias, and Drum are all conflating, to some extent, two very different areas of medical innovation. On the one hand, there is pharmaceutical innovation, and on the other there is innovation of medical techniques, procedures, and technology. Though there isn't much theoretical difference between these forms of innovation, most health care systems--including our own--pay for them in very different ways, which creates very different incentive structures.

Medicare provides the perfect example of this divergence. Under our system, decisions regarding what services, procedures, and medical technology Medicare will cover--and what the reimbursement rates will be--are made by the Center for Medicare and Medicaid Services (CMS). If you invent a new treatment or technology that is used primarily to treat elderly patients, the profitability of that invention will depend in large part on whether CMS decides to cover it and at what rate. Up until 2003, however, Medicare did not pay for drugs. And now, under Medicare Part D, the government pays for drugs, but through an elaborate statutory scheme that prevents CMS from having any say over what drugs are covered or how much the government will pay for them. And even under Medicaid, various elaborate statutory schemes limit the government's ability to arbitrarily set drug prices.

Though I happen to think many of these laws are poorly designed (particularly Medicare Part D), their very existence demonstrates that you can provide universal coverage, even single-payer coverage, without empowering the government to set prices or make coverage decisions. In other words, there is no necessary relationship between universal health care and medical industry profit incentives, and therefore no necessary relationship between universal health care and innovation.

Moreover, as Yglesias points out:

The arguments from innovation don't seem to me to be arguments properly directed at the universal health care proposals that are actually being put on the table. Instead, they seem to be arguments against hard price controls and bans on private insurance or out-of-pocket medical spending.

As I said, I don't think there is any necessary relationship between even single-payer health care and medical innovation. But that's really an academic discussion, because no one (save Dennis Kucinich) is even proposing that we adopt a single-payer system, much less a full-on socialized system like the NHS. The proposals currently on the table are largely patchwork systems that would attempt to provide coverage for the uninsured without upending our current system. It is very difficult to see how proposals such as those endorsed by Clinton, Obama, and Edwards, could possibly affect the underlying business incentives driving medical innovation.

And one final point. It would be relatively easy to keep track of the amount of private sector money being spent on research and development. And if health care reforms were to result in a noticeable drop in such spending, there are any number of steps that could be taken to boost incentives for innovation. Patent laws could be tweaked. Public research grants could be increased. And the laws could be changed to further limit the government's ability to bargain and set prices (we have many such laws on the books now). In other words, worrying about innovation at this point puts the cart WAY before the horse. Making sure everyone has access to basic health care should be our top priority. There's no compelling reason to believe that doing so would harm incentives to innovate. And even if it did, there are plenty of ways to fix that problem and boost such incentives, if necessary. Having a vast swath of the population uninsured is not a necessary tradeoff for having robust medical innovation.