Posted on 08/24/2009 12:13:31 PM PDT by FromLori
A friend sends along a link to a commentary on the current healthcare debate by AQR's Cliff Asness, a hedge fund manager:
Ah … one of the holy myths of the “US health care sucks” crowd. This should be fun.
The general story is how you can buy many drugs in Canada cheaper than you can buy them in the US. This story is often, without specifically tying the logic together, taken as an obvious indictment of the US’s (relatively) free market system. This is grossly misguided.
Here’s what happens. We have a (relatively) free market in the US where drug companies spend a ton to develop new wonder drugs, a non-trivial amount of which is spent to satisfy regulatory requirements. The cost of this development is called a “fixed cost.” Once it’s developed it does not cost that much to make each pill. That’s called a “variable cost.” If people only paid the variable cost (or a bit more) for each pill the whole thing would not work. You see, the company would never get back the massive fixed cost of creating the drug in the first place, and so no company would try to develop one. Thus, companies have to, and do, charge more than the variable cost of making each pill.[2] Some look at this system and say to the drug companies “gee, it doesn’t cost you much to make one more pill, so it’s unfair that you charge much more than your cost.” They are completely wrong and not looking at all the costs.
So, let’s bring this back to our good natured friends to the North (good natured barring hockey when they’ll kill you as soon as look at you[3]). They have socialized medicine and they bargain as the only Canadian buyer for drugs, paying well below normal costs. Drug companies that spent the enormous fixed costs to create new miracles are charging a relatively high cost in the free and still largely competitive world (the US) to recoup their fixed cost and to make a profit. But socialist societies like Canada limit the price they are allowed to charge. The US-based company is then faced with a dilemma. What Canada will pay is not enough to ever have justified creating the miracle pill. But, once created, perhaps Canada is paying more than the variable cost of each pill. Thus, the company can make some money by also selling to Canada at a lower price as it’s still more than it costs them to make that last pill.
However, this is an accident of Canada being a less-free country than the US, able to bargain as one nation, much smaller, and next door. If we all tried to be Canada it’s a non-working perpetual motion machine and no miracle pills ever get made because there will be nobody to pay the fixed costs. I’m a big fan of Canadians in general (particularly Wayne Gretzky and Mario Lemieux, who if healthy probably would have eclipsed Gretzky – but I digress), but when it comes to pharmaceuticals they are lucky parasitic hosers. Drug companies in general sell their products to Canada at low prices, making a little profit, and reducing slightly the amount they need to charge other North Americans. This does create the silly illusion that the Canadian system is somehow better than ours because our own drugs are cheaper there. They are only cheaper to the extent we are subsidizing them by paying their portion of drug development costs and, unfortunately, we cannot subsidize ourselves (or we go blind).
So, what is the purpose behind those who tell tales of these cheap Canadian drugs? Obviously they seek to ridicule our freer system by putting the parasitic and socialist system on a pedestal. They seek to imply that our system is broken, and delivers only expensive drugs, when the socialist Canadian system delivers the goods for its people. Thus, they implicitly argue that we need to have socialism here. It’s not complicated.
So, repeat after me. We could go with the Canadian system and have super cheap drugs, if only we can find a much bigger, much more medically advanced, much freer country right next to us to make miracle drugs for themselves, and then we insist that we pay them only a bit above their variable cost for our share, and then they in turn agree to let us be their parasite. Mexico, would you mind helping us out?
Socialized Medicine Works In Some Places
This is a corollary to the “Canada as parasite” parable above. The funny part is socialized medicine has never been truly tested. Those touting socialism’s success have never seen a world without a relatively (for now) free US to make their new drugs, surgical techniques, and other medical advancements for them. When (and I hope this doesn’t happen) the US joins in the insanity of socialized medicine we will see that when you remove the brain from the body, the engine from a car, the candy from the striper, it just does not work.
So, please, stop pointing to all those “successes” that even while living off the US still kill hard-working people who could afford their own health care while they stand in line for the government’s version (people’s cancers growing while waiting 10 weeks for a routine scan, which these people could often afford on their own if allowed, is a human tragedy). Even the successes you gin up for them would not be possible without the last best hope of humankind (the US) on the front lines again making the miracles for the world.
Specifically, let’s also stop citing the Nordic countries as examples. The temporary success of (comparatively speaking) twelve herring-eating homogenous people is not an example that applies to anything outside of perhaps Minnesota, and they elected Stuart Smalley, so under any system they need serious free anti-psychotic medication immediately. Anyway, the Nordic country’s touted “success” is going to go the way of the Soviet Union’s plan to bury us, as their changing demographics (far more economic diversity and an aging population) change their culture and show the cracks in their utopian fantasy. As Milton Friedman (paraphrasing) said to a Swede bragging about how little poverty there was in his country "well, yes, I too have observed that among Swedes in America, there's also very little poverty."
To put it simply, right now the US’s free system massively intellectually subsidizes the world’s unfree (socialized) ones. That sucks. The only thing that would suck worse is joining them without anyone to subsidize us all. It should also be noted that the high fixed costs in the United States are to a significant degree the result of the mostly absurd testing protocols required by the FDA before a drug is approved. In a truly free market, multiple testing protocols would be developed for different drugs and different situations(say a drug for a dying patient versus a drug for a minor irritant). A one size fits all bureaucratic mentality at the FDA has probably killed more people than the deaths caused by the U.S. bombs dropped on Nagasaki and Hiroshima.
The fact that they get the drugs cheaper than us is still a moral crime, even if it looks like good business to the companies.
It’s something you can never explain to the public. If Canada wants them cheaper than us let them use their taxes for it. Add to it that our military protects them, and our debt is exploding.
Let Obama explain it to his Marxist friends.
In places where it ‘works’ there is a very low bar for success.
Basic treatments are available but don’t expect high quality anything or quick treatment by specialists.
Unless you are part of the ‘more equal’ than others group.
I not buying into the author’s analysis. Selling at variable cost on an ad hoc basis for overruns is OK. When it is part of the permanent pricing plan, it is discriminatory. Do I hear predatory pricing against the US citizens? Stop selling to Canadians unless they pick a good share of the development costs. If Canada doesn’t like it, let Canada develop their own drug industry and recoup the development costs from their own citizens.
The drug companies could do the same thing here in the United States as they are doing in Canada, they could sell the drugs at the variable cost to state welfare agencies, Medicaid and Medicare.
Speaking of more equal please check this out and go to the congressmans website
http://bluelori.blogspot.com/2009/08/are-some-animals-more-equal-then-others.html
Why would, or should, Americans pay more just because the Canadians want to pay less? The reason we pay more is because our political "leaders" have passed laws to allow it. Do away with silly importation laws and the problem will self- correct.
It rips our moral senses. This is case where the federal government is legitimately needed, unfortunately they always do the wrong thing. The US should tax the exports to Canada at a level that makes the two prices equal. Just my gut reaction anyway, not claiming to be an expert.
The Nordic countries are actually a great example of socialized medicine. Norway actually develops some cancer treatments. But those are not actually used to treat patients here because of the expense. The rationing of health services mean that cancer death rates are higher than in the US. One generally has to wait weeks for a doctor’s appointment and if one needs to see a specialist after that it will take another few weeks. Then if you need to be examined in an MRI or something it will take another couple of weeks. If a tumor is found you need to wait in line for treatment and so on.
When funding is provided through the government hospitals and doctors seek to keep the buraucracy happy rather than the patients. Rationing is the inevitable result. In addition treatment for any condition is decided by a cost/benefit analysis. If you’re old it will reduce your chance of getting treatment. If you’re dying the bureaucracy will not care to pay to extend your life for a year. Palin’s death panel statement is actually pretty accurate except it is all decided by a faceless paper-pushing bureaucracy.
Another factor I never see mentioned is how the cost-cutting bureaucracy substitutes one medication for another. If your doctor writes you a prescription for a medicine, the local pharmacy will generally hand out an entirely different medicine that the paper-pushers deem to be equal to what the doctor ordered. The genuine article is only handed out if it turns out you have a bad reaction to the replacement drug. Of course, if you have a truly bad reaction it may well be too late for that...
And their taxes? Over 50%
Yup. 50% is the norm for people with a full-time job. In reality it is far higher. There is a 25% (or so) sales tax on just about anything you buy. Except for luxuries which are taxed higher - for cars it’s about 100%...
Free healthcare is anything but free.
I have a relative who purchases a specific medication in Canada because there is no generic yet available in the US. The so-called Canadian generic is made in India and in fact violates the drug company’s patent. I guess that’s not illegal in India? They don’t recognize our patents? Obviously the Canadians do not.
I'm not either simply because he doesn't know what he's talking about.
What makes Americans think that pharmaceutical companies are American? Pharmaceuticals are multinationals who seek the best tax breaks , the best grants , the best University research in every country . The best deal .
Canadian drug purchases are limited to the average of the prices for the same drugs charged in 5 countries . France, Germany, Italy, Sweden, Switzerland, U.K. and the U.S . There is also a R&D factor based on R&D done in Canada and the granting of 20 year Canadian patents.
Unlike the US , Canada does not have drug advertising in the media . The budget for drug advertising in the US is larger than the R&D budget in the US. Americans are paying the highest prices and are the largest users of drugs in the world .
Canada has a single payer system . Governments do not own hospitals nor do they employ doctors or their staff. Thirty three million Canadians benefit from Canada health care. Over 50 million Americans from Medicare and Medicaid. Americans excuse Medicare and Medicaid and call them a welfare program . Some how , in the American world , a welfare program isn't socialism . Amazing.
You are so wrong. When the doctor thought I had cancer, I had an MRI the following day. I saw him the same day I called. I don’t know where you get your information.
Sorry, I re-read your post. You are right about Norway.
bookmark
In detail, here is a piece on TNs’ public-option’ history of Tenn Care...a debacle model for the Dem plan:
http://canadafreepress.com/index.php/article/14057
That was very interesting, thanks.
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