How Capitalism Will Save Us

by Steve Forbes

  In 2008 the New York Times recounted the story of Robin Steinwand, a fifty-three-year-old Maryland woman who suddenly discovered that she would have to pay $325 a month for Copaxone, the drug she took to control her multiple sclerosis. The drug was so expensive that her insurance company could no longer afford to charge her the usual $20 copayment. Steinwand was devastated. She would have to pay $325 a month—or $3,900 a year—for the rest of her life.

  Steinwand told the paper that upon receiving that first bill from her pharmacist, “I charged it, then got into my car and burst into tears.”24 Things would have been far worse, however, if she wasn’t insured. She would have had to pay the entire $1,900-a-month cost of the prescription—or $22,800 a year.

  Today’s new drugs work medical miracles—that is, when people can afford them. In the words of the New York Times, even insured patients can end up “[having] to spend more for a drug than they pay for their mortgages, more, in some cases, than their monthly incomes.”25

  And prices keep going up. When Erbitux, a new, highly sophisticated therapy for colon cancer, reached the market, it was one of the most expensive cancer drugs ever—costing seventeen thousand dollars a month. Amazingly, medical journalist Robert Bazell reported in Slate, Erbitux isn’t the most expensive medication. “That distinction is currently held by Zevalin, a $24,000-a-month treatment for a relatively rare type of lymphoma.” Patients taking Zevalin have to somehow pay some $288,000 a year.26

  What’s going on? Many blame “rapacious” drug companies. Bazell, who has a degree in biochemistry, points out that, after all, drugs like Erbitux are not really that expensive to make: “True, these antibodies are more expensive to produce than most pills, but only slightly—the technology can be replicated in any college biology lab. Production costs amount to few dollars a dose at most.”27

  Even members of the medical establishment believe that drug companies are “gouging” consumers. Marcia Angell, former editor of the New England Journal of Medicine, caused a public furor when she wrote a book charging that a common tactic companies use to boost prices is reinventing slightly altered versions of the same medication. This way, she asserts, they’re able to extend a drug’s period of patent protection, which permits a legal monopoly—avoiding competition from generics makers and keeping prices up. Angell insists that one of the biggest drugs of the decade, Nexium, was actually a slightly altered version of Prilosec, a cheaper, older drug.

  Angell’s claims were widely echoed by politicians. But her allegations, when you think about them, don’t make sense in the Real World. Is it really in the interest of drug companies to gouge consumers? Companies in a normal market usually price their products so that they can get more customers, not fewer. In industries like electronics, for example, prices of new technologies come down fairly quickly. But like everything else in health care, the pharmaceutical industry is not a normal market.

  One reason drugs are nearly unaffordable by individuals is that, as we’ve explained earlier, individuals are not usually the ones paying for them. Robert Bazell, for one, acknowledges this: “Few individuals purchase these drugs as they would a head of lettuce, say, or a refrigerator. In the case of cancer drugs, health-insurance companies are the consumers.”28

  But drugs are not exactly like those four-hundred-dollar hammers or seven-hundred-dollar toilet seats purchased by the Pentagon. They’re genuinely costly to develop. Bazell, however, is right when he says that making the actual drug may not be all that expensive. It’s not the manufacturing process itself but the rest of what’s involved—developing and bringing a new medicine to market.

  America’s drug-approval process is the most stringent in the world. Only about one in a hundred potential new drugs end up in drugstores and doctors’ offices. That tiny handful of successful drugs must throw off enough revenue to enable companies to recover the costs of the countless also-rans that never made it to market—as well as generate the capital to invest in developing the lifesaving drugs of the future.

  As a result, experts estimate that the direct and indirect costs of bringing a single drug to market can be as high as $1.5 billion. Also driving up prices is the inability of drug companies to recover their costs from selling drugs in countries like Canada and Britain, where staterun healthcare systems insist on artificially low prices. Drug makers are forced to shift costs to the only segment of the global market that will enable them to recoup expenses—the American market and you, the consumer. Americans end up subsidizing the staterun health care of other nations.

  American patent laws add yet another layer of costs. A drug company has a patent for seventeen to twenty years on a new drug. After that, any company is free to jump in and produce a generic version. In other words, drug manufacturers have only a limited window to make the profits they need to cover their expenses.

  What about Angell’s claims that pharmaceutical makers seek to boost profits by subverting patent laws? New Yorker writer Malcolm Gladwell says the accusations by Angell and others are overblown. They ignore the Real World factors driving up the cost of drug production. New drugs in this country may be expensive. But the generic and over-the-counter drugs taken by millions of Americans are actually cheaper than in other countries:

  Because there are so many companies in the United States that step in to make drugs once their patents expire, and because the price competition among those firms is so fierce, generic drugs here are among the cheapest in the world. And …when prescription drugs are converted to over-the-counter status no other country even comes close to having prices as low as the United States.29

  Detroit journalist Thomas Bray confirms this. Writing in the Wall Street Journal, he recounts visiting a Canadian pharmacy just over the U.S. border, only to discover that “aspirin and similar products like Tylenol and Advil were much more expensive than in the United States—up to 30% more expensive, in fact.”30 Why? Bray explains that Canadian price controls on prescription drugs force companies to recoup their costs from over-the-counter medications.

  Those pushing Canadian-and British-style price controls forget a fundamental Real World economic principle: when you pay less for something, you end up with less of it. Price any product or service too cheaply, and you will end up with runaway demand and shortages. That’s why in nations like Britain, where prices of medications are under strict control, drugs are often in short supply. British newspapers periodically carry headlines like “Cancer patients hit by shortage of drugs”—that we almost never see in the United States.

  As in any market, overly low prices prevent producers—in this case, drug developers—from generating the capital for research and development. Pressure from state-controlled healthcare systems is why European drug makers now lag behind American drug makers, which are still able to charge enough to make a profit. Günter Verheugen, vice president of the European Commission responsible for enterprise and industry, acknowledged this in a speech to the Pharmaceutical Forum in 2006.

  Over the last 15 years investment in pharmaceutical R&D has been growing in the US significantly and consistently faster than in Europe. … In the past, Europe was leading in developing the most successful breakthrough pharmaceuticals. This trend has reversed. In 2004, two thirds of the 30 top selling medicines in the world were developed in the USA.31

  In state-controlled systems, drugs may be “cheap.” But people who get fewer medications are paying a higher price—sometimes with their lives.

  REAL WORLD LESSON

  Accusations of “price gouging” by the pharmaceutical industry ignore the importance of profit as a vital regulator of demand and a source of critical investment capital.

  Q BUT CAN A FREE MARKET WORK IN ALL AREAS OF HEALTH CARE? FOR EXAMPLE, ISN’T IT WRONG TO BUY AND SELL TRANSPLANT ORGANS?

  A NOT NECESSARILY. TODAY’S “ALTRUISTIC” SYSTEM, WHERE PEOPLE DIE WAITING FOR DONOR ORGANS, DOESN’T WORK.

  Even the most ardent supporters of free markets may feel squeamish about allowing peo
ple to buy and sell transplant organs. Won’t this lead to unethical practices and exploitation?

  Dr. Sally Satel says that we can’t afford to be queasy. She believes that today’s “altruistic” organ donation policy, which forbids the acquisition of organs in exchange for money, is killing people.

  There are about 78,000 people in queue for a kidney from a deceased donor. In places like California, the wait can be up to eight years. And unless a friend or relative gives a kidney to a loved one, he will weaken on dialysis. Four thousand people die each year because they cannot survive the wait.32

  Satel speaks from experience as a physician, and a transplant recipient. She experienced the harsh reality of “altruism” firsthand in 2004 when she learned she had end-stage kidney disease.

  At the time, my prospects for a donation from family or friends looked bleak, and I would soon have to begin dialysis. I would be hooked up to a machine three days a week for four hours at a time. This would continue for at least five years—the time it would take for a kidney from a deceased donor to become available. Even with dialysis, the kidneys of many sick people deteriorate so quickly that time runs out. An average of 11 Americans die each day waiting for a renal transplant.

  Waiting for a kidney from a deceased donor is such a risky business that some people try publicly to convince strangers to give them live organs. Some put up billboards (“I NEED A KIDNEY, CAN YOU HELP? Call…”), start websites (GordyNeedsAKidney.org, whose opening page carries the plaintive headline, “Please Help Our Dad”), or go overseas to become “transplant tourists” on the Chinese black market with the frightful knowledge that the organ they get will almost surely come from an executed political prisoner….33

  Satel writes that there was slim chance of getting a kidney from the United Network for Organ Sharing, which has a monopoly contract with the federal government. She found “60,000 other people ahead of me.” After searching online, she finally found one prospective donor. But he soon changed his mind. Eventually she received a kidney from a friend. Had she not been so lucky, “I could have languished on dialysis for years.”34

  Satel is not alone in advocating a market for transplant organs. Other experts have proposed market-based approaches that incorporate financial incentives, while being designed to minimize potential abuses. Among the ideas: government paying potential donors to join a registry, with the promise of a larger payment to their estates if organs are used upon their death. Such a plan spares the family the discomfort of making a financial transaction when a loved one dies. Other proposals include having states waive driver’s license fees if a person agrees to be an organ donor.

  Allowing private contracts between individuals has also been proposed, though some fear this would end up creating a market where the poor sell organs to the sick people with the most money. Wouldn’t this encourage abuse of poor people? Advocates answer that there would be rules and regulations in these market-based programs to protect donors, ensuring safety procedures, consent, and fair value. Organ donation could only take place in an accredited hospital, so that donors would be protected with top-notch care.

  Satel and others believe that private, market-based exchanges would also help kill today’s black-market demand for transplant organs from countries like India, where impoverished people sell their organs—or from China, which takes them from prisoners who have been executed.

  One thing is certain, Satel says. Today’s system doesn’t work.

  Don’t get me wrong. Altruism is a beautiful thing—it’s the reason I have a new kidney—but altruism alone cannot resolve the organ shortage. … One doesn’t need to be Milton Friedman to know that a price of zero for anything virtually guarantees its shortage.

  REAL WORLD LESSON

  “Altruistic” organ donation may sound moral, but it ultimately takes lives by ignoring Real World economic principles.

  Q WHAT’S WRONG WITH MEDICAID AND MEDICARE?

  A WHILE WELL INTENTIONED, THESE MAMMOTH GOVERNMENT INSURANCE BUREAUCRACIES HAVE DRIVEN UP COSTS AND UNDERMINED INNOVATION AND THE QUALITY OF CARE—NOT ONLY FOR THEIR PARTICIPANTS, BUT INDIRECTLY FOR EVERYONE IN THE U.S. HEALTHCARE ECONOMY.

  Low-income and elderly people need health care. But the answer is not Medicare and Medicaid. Most of today’s problems with health care are in fact market imbalances created by these two mammoth government insurers. As we’ve mentioned, they are the Fannie and Freddie of the healthcare economy.

  The problem was not the intent of these programs, but their fundamental structure. Take Medicare. Years ago, a person’s so-called golden years could be a time of intense anxiety because of the difficulty of getting health insurance. Retirees didn’t have employer-paid health care. Trying to get insurance in your sixties could be prohibitively expensive. In the 1950s and ’60s, millions of Americans who were self-employed or worked for small and medium-sized companies did not have corporate pension plans. And Social Security payments were proportionately lower than they are today.

  Medicare was supposed to do for health insurance what Social Security had done for retirement income—provide a backstop. The problem, however, is that this government system is also third-party pay. The patient does not directly control healthcare dollars. You go to a doctor or hospital and the bill is sent to the federal government.

  With government footing the bills, not only did usage soar but so did fraud. Doctors, clinics, home-health-care companies, and medical equipment makers have all been known to rip off the system—billing for services not performed, overcharging for treatment and medical equipment. One notable example: motorized wheelchairs. A recent study by the Department of Health and Human Services found that Medicare paid $5,297 for power wheelchairs that cost non-Medicare patients about $1,500 to $3,800.35

  Instead, the government responded by imposing draconian Medicare reimbursement rates. One specialist with a New York City practice recently complained he gets only $18 from Medicare for a patient visit that costs $112. One would be hard put to find any place in America where a doctor can make ends meet with those kinds of fees.

  A 2007 AMA survey of nearly nine thousand U.S. physicians found that 60 percent of doctors intended to limit the number of new Medicare patients and 40 percent of doctors said they’d cut down on treating even established Medicare patients if already-low reimbursement rates were reduced. An earlier study by the Association of American Physicians and Surgeons found that 66 percent of physicians said that they were considering retiring at an earlier age than expected because of increased bureaucratic hassle from government insurers. 36

  The problem is especially severe with Medicaid. Almost a third of U.S. doctors refuse to treat Medicaid patients because of inadequate reimbursements. With access to practitioners limited, studies have shown “health outcomes” for Medicaid patients to be far worse than for patients with private insurance and even Medicare.

  Not only are many physicians refusing to see government-insured patients, but an increasing number are folding up shop because they can’t make ends meet. A study in the Journal of General Internal Medicine concluded that the inadequacy of government reimbursements has helped produce a shortage of primary-care physicians and “unbalances the health care system and ultimately puts patients at risk.”37

  Doctors in the U.S. may not be government employees, as they are in Britain’s government-administered National Health Service. But they have lost control of their self-determination. In the magazine New American, writer-physician Jane Orient describes the widespread demoralization within the profession:

  In the past decade, the number of U.S. medical graduates entering family medicine and internal medicine has fallen by half. And it’s not just the money. Time pressures and increased demands for administrative work contribute to burnout.38

  “I felt like I was becoming a guideline-following automaton and a documentation drone,” said general internist Christine Sinsky, quoted in a November 27, 2008, article in the New England Journal of Medicine.39 Medic
are and Medicaid’s paltry reimbursements are also a primary reason for the wild prices and shortfalls of today’s healthcare crisis. That’s because, as we’ve mentioned, the privately insured end up footing the bill when doctors and hospitals are underpaid by government insurance—to the tune of $90 billion a year.

  Like all underfunded government bureaucracies, Medicare and Medicaid have an institutional bias against innovation. Coverage decisions are made based on budgets and political pressures—not the needs of patients. Both programs take decades to cover newer procedures and medicines. In an article for the National Center for Public Policy Research, Edmund F. Haislmaier reports that Medicare did not cover sophisticated pacemakers known as implantable cardioverter defibrillators (ICDs) until nearly twenty years after they first became available. The reason, he says, goes beyond the usual foot-dragging to something more ominous:

  The hard truth is that, like national health systems abroad, Medicare saves money by limiting the availability of lifesaving care. This deadly delay is the program’s default response to advances in medical technology. … The inevitable political calculus of any government health program, even one for the elderly, is that at a relatively modest cost per person it can provide “free” care to the vast majority of its beneficiaries. The savings come from spending less on the few who need substantial or expensive treatment—and dead patients are a two-fer. Not treating them means the program not only saves money today, but also doesn’t spend money on them in the future.40

  In other words, without anyone’s being explicit, the implied attitude is: why bother treating the sickest people?

  Medicare’s paltry reimbursements have also encouraged inefficiency. John Goodman of the National Center for Policy Analysis points out that Medicare’s refusal to reimburse doctors for e-mail and telephone consultations is one reason they’re so seldom used. Medicare also refuses to reimburse doctors for educating patients on how to self-administer some care at home—for example, the treatment of diabetes. Patients are forced to go to the doctor’s office or to the hospital, experiencing greater inconvenience and adding unnecessary costs to the nation’s healthcare bills.