Obamacare 5 years later. Crow, anyone?

[sunmaster14]

Quite. It makes them systematic.

Of course they do. You mean that they can be quite properly priced. So can the systematic risk in financial markets.

The "random" (I would say non-systematic) risks are the ones that can be diversified away by pooling them. And with typical universal insurance they are diversified away in respect of the policy holders (IE everyone) too. The systematic risk is paid for (via tax).

Yes, I agree that the random expenses associated with health insurance can be diversified away (aside from the heretofore mentioned pandemics and cataclysms). But the predictable costs are not the same as systematic risks like correlation with the broader stock market (e.g. beta). You cannot predict the broader stock market.

The analogy I would make is between an insured subscriber and a portfolio of individual stocks plus one-year Treasury bills. The subscriber's predictable costs are the annual checkup and the scheduled screenings, plus medication for seasonal allergies, high cholesterol, and whatnot. Those are similar to the yield on a one-year T-bill (or rather the part of the premium assigned to those costs, minus those costs, is the equivalent to the yield on a T-bill). The unanticipated costs - injuries, diseases, or luckily having no problems at all - are similar to the basket of individual stocks. Except that one insured subscriber's basket of stocks is not correlated at all with another insured subscriber's basket of stocks.

Now, if you look at the correlation of two subscribers' portfolios, the correlation will be high, but only because of the presence of the T-bills in the portfolios. If you only look at the interesting part - the stocks - which is the only part which represents risk to the insurer (T-bills are not risky), then that part is uncorrelated.

 

[Francesca R]

I don't know what the volatility of typical health care costs is. Maybe lower than the vol of capital market returns (which is usually something around 10% but of course volatility is itself volatile). But health care costs are, I believe, quite highly positively correlated.

 

[Nihilianth]

There's some of that in this thread, sure... but I don't know that "How is ACA performing?" is exactly American Exceptionalism...

Nah, wasn't talking about that. The ACA is good. Not perfect, but it's better than what we did not have before.

I was talking about how "America is subsidizing the entire world for all of the great drugs we produce!!"

 

[Border Reiver]

Nah, wasn't talking about that. The ACA is good. Not perfect, but it's better than what we did not have before.

I was talking about how "America is subsidizing the entire world for all of the great drugs we produce!!"

America's not subsidizing the entire world for all the great pharmacuticals they produce. They SELL them to the entire world for whatever they think they can get away with - which is a free market thing. Given that those of us in countries with tax payer funded systems still pay for said systems, I'm wondering how those folk who believe that we're not paying for whatever wonder drug we're using(or paying enough for) think we get those drugs?

It's like arguing that the roads in Canada are subsidzed by the US because we drive American designed vehicles.

 

[Emily's Cat]

I don't know what the volatility of typical health care costs is. Maybe lower than the vol of capital market returns (which is usually something around 10% but of course volatility is itself volatile). But health care costs are, I believe, quite highly positively correlated.

It's a matter of what you think they're correlated with.

Costs are correlated with age, they're correlated with geography, with certain conditions.

But one person's costs aren't correlated with another person's, for the most part. That is to say - If Bob has high relative costs in a given period, Joe is NOT more likely to have higher relative costs in that same year. Nor is Joe more likely to have lower relative costs in that same year. Joe's relative cost level is independent of Bob's relative cost level. The change in one person's health costs has no impact on the change in another person's health costs.

 

[Emily's Cat]

America's not subsidizing the entire world for all the great pharmacuticals they produce. They SELL them to the entire world for whatever they think they can get away with - which is a free market thing.

A large number of pharmaceutical companies are European, so I don't think it's exactly America selling you the drugs.

 

[Nihilianth]

America's not subsidizing the entire world for all the great pharmacuticals they produce. They SELL them to the entire world for whatever they think they can get away with - which is a free market thing. Given that those of us in countries with tax payer funded systems still pay for said systems, I'm wondering how those folk who believe that we're not paying for whatever wonder drug we're using(or paying enough for) think we get those drugs?

It's like arguing that the roads in Canada are subsidzed by the US because we drive American designed vehicles.

Right. Hence: my sarcastic response of "american exceptionalism." Plus, a hell of a lot of those drugs are not even produced in the us.

 

[sunmaster14]

America's not subsidizing the entire world for all the great pharmacuticals they produce. They SELL them to the entire world for whatever they think they can get away with - which is a free market thing. Given that those of us in countries with tax payer funded systems still pay for said systems, I'm wondering how those folk who believe that we're not paying for whatever wonder drug we're using(or paying enough for) think we get those drugs?

It's like arguing that the roads in Canada are subsidzed by the US because we drive American designed vehicles.

As discussed in detail over the last four or five pages here (see post 611 to start you off), the US does indeed subsidize R&D in the pharmaceutical industry through the high prices Americans pay for new drugs. And, no, there really isn't a free market for new drugs in countries with government run health care systems. Those governments set take-it-or-leave-it prices, which drug companies eventually accept, after a lag, when they get their marginal cost of production down and when conditions arise where the cannibalization of their sales in the US is minimized. Inevitably, this means that Americans are early adopters of new drugs, but they pay through the nose for them. The lucrative US market is what drives drug makers to develop new drugs. If the US did what, say, Canada does, pharmaceutical innovation would decrease substantially. It's sort of a truism that not everybody in the world can freeride.

 

[sunmaster14]

Right. Hence: my sarcastic response of "american exceptionalism." Plus, a hell of a lot of those drugs are not even produced in the us.

If, after all this discussion, you still don't understand that it makes no difference where the drugs are produced, then I fear that you are immune to education.

 

[Nihilianth]

If, after all this discussion, you still don't understand that it makes no difference where the drugs are produced, then I fear that you are immune to education.

I notice that you have not responded to me last comment in this thread before my sarcastic remark. From that point, it was all tl;dr.

Again, for the second time, other countries are NATIONALLY, COLLECTIVELY, negotiating for better prices.

Here in the US, you have competing insurance companies that are "collectively" (within each individual insurance company), negotiating for the best deals they can find.

If you were an individual trying to negotiate, you can't.

This point has not been replied to.

"American Exceptionalism" my ass! We are "subsidizing the rest of the world"* with our astronomical drug prices, because are absolute MORONS!

Germany, the UK, Canada, and I am sure more than a dozen other western democratic countries have come up with a system where the NATIONAL government negotiates for prices!

*I put that in quotes, because drug companies are STILL making pretty damned good profit in those other countries. They are just making an absolute killing here in the US, because of our backward mindedness. Single-payor beats the ACA, hands down. The ACA beats pre-ACA hands down. Sad state of affairs, when we get to improve upon going from "losers" on a third tier, to "losers" on a second.

 

[Francesca R]

It's a matter of what you think they're correlated with.

With each other (like I said in post 794). One person's health costs are (I think) positively correlated with someone else's, and someone else's. A whole bunch of time series of health costs have (I think) a positive correlation with each other.

But one person's costs aren't correlated with another person's

Like I said I haven't seen any data. If you have, perhaps there is a way of showing it. But it is pretty implausible to me that these costs are not positively correlated, persistently.

If Bob has high relative costs in a given period, Joe is NOT more likely to have higher relative costs in that same year.

But the health costs of both have common drivers, it is not that they drive each other. Same with financial assets. You just said what two of them are (age and geography)

The change in one person's health costs has no impact on the change in another person's health costs.

Again not necessary. Flip-side of correlation isn't causation. A can be correlated with B if both A and B are driven by C, there is no requirement for A to drive B (and throw in that neither A or B can be less than zero).

 

[Francesca R]

As discussed in detail over the last four or five pages here (see post 611 to start you off), the US does indeed subsidize R&D in the pharmaceutical industry through the high prices Americans pay for new drugs.

I don't think anybody accepted that this could be happening except me actually. And I suspect it is probably a small effect. And I think you are using terms "subsidy" and "freeload" to make it look like something it is not. More correct is--as above--a positive externality that benefits other countries and is fully voluntary on the part of the US as a side effect of transactions made by the US in the US's own interests.

 

[Aber]

Those governments set take-it-or-leave-it prices, which drug companies eventually accept, after a lag, when they get their marginal cost of production down and when conditions arise where the cannibalization of their sales in the US is minimized.

There really isn't much link between the production costs of new drugs and their selling prices. Due to patents and so lack of competition, pharmaceutical companies charge what the market will bear. In the US there may be more focus on marketing new drugs to drive up demand, which may be more relevant to costs than production cost.

In generic drugs (ie out of patent) then production cost may become relevant as different pharmaceutical companies compete to sell effectively the same drug.

 

[theprestige]

There really isn't much link between the production costs of new drugs and their selling prices. Due to patents and so lack of competition, pharmaceutical companies charge what the market will bear. In the US there may be more focus on marketing new drugs to drive up demand, which may be more relevant to costs than production cost.

In generic drugs (ie out of patent) then production cost may become relevant as different pharmaceutical companies compete to sell effectively the same drug.

When you say 'production costs', do you mean manufacturing costs or R&D costs?

 

[sunmaster14]

I notice that you have not responded to me last comment in this thread before my sarcastic remark. From that point, it was all tl;dr.

Again, for the second time, other countries are NATIONALLY, COLLECTIVELY, negotiating for better prices.

Here in the US, you have competing insurance companies that are "collectively" (within each individual insurance company), negotiating for the best deals they can find.

If you were an individual trying to negotiate, you can't.

This point has not been replied to.

"American Exceptionalism" my ass! We are "subsidizing the rest of the world"* with our astronomical drug prices, because are absolute MORONS!

We're not morons. I'd still prefer more medical progress rather than less, even if the US has to pay most of the cost. The paper I cited claimed that life expectancy would fall short by 0.7 years of where it could be in 50 years, if the US adopted the European model. And that's just the effect for pharmaceuticals. There are probably similar effects for other types of medical procedures and diagnostic equipment for which Americans pay the lion's share of the R&D costs. Yes, the US would save money if we moved towards socialized health care. But we would lose out on some medical progress, and the rest of the world would too. I would rather that the rest of the world moved towards a more free market health care system and shared more of the R&D burden. Not only would costs be lower in the US, but there would be even more medical progress than there is.

Germany, the UK, Canada, and I am sure more than a dozen other western democratic countries have come up with a system where the NATIONAL government negotiates for prices!

Yes, and their strategy of price-fixing doesn't work out as badly for them as it would if the US joined them. Advocates of socialized medicine in those countries should be careful what they wish for.

*I put that in quotes, because drug companies are STILL making pretty damned good profit in those other countries. They are just making an absolute killing here in the US, because of our backward mindedness. Single-payor beats the ACA, hands down. The ACA beats pre-ACA hands down. Sad state of affairs, when we get to improve upon going from "losers" on a third tier, to "losers" on a second.

I'd like to see some numbers for this claim. Or at least something more quantitative. Megan McArdle claimed here that the US market accounted for 80-90% of drug company profits, and she backed it up with some analysis:

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.

 

[sunmaster14]

I don't think anybody accepted that this could be happening except me actually.

Well, the people who demanded I present evidence disappeared from the discussion immediately after I presented it (e.g. 3point14, RandFan, anduin, and now Architect, and we'll see about Border Reiver). Whether they accept my argument or not, they don't seem to have a rebuttal.

And I suspect it is probably a small effect. And I think you are using terms "subsidy" and "freeload" to make it look like something it is not. More correct is--as above--a positive externality that benefits other countries and is fully voluntary on the part of the US as a side effect of transactions made by the US in the US's own interests.

You seem very focused on whether or not the US is acting of its own volition. Of course it is acting of its own volition (at least at the level of government, if not quite at the level of individual residents), but I don't see what that has to do with this discussion, or anything for that matter. The words subsidy and freeride (that's the word I used recently, and I think it is less derogatory) don't have anything to do with volition. As I've stated before, my point isn't to disparage Europeans and Canadians, or brag about the US (I can hardly take credit for the US's successes or failures anyway), but to show that the differences in cost between health care systems in the US and in other developed countries is not something that can be bridged by adopting those other systems. No matter what we do, we will not be able to capture the benefit of freeriding off of a profligate market for drugs like everybody else in the world does.

Also, whether or not you suspect the effect is small, there have been attempts to quantify the effect. The Rand analysis, in particular, came up with 0.7 years of life expectancy over a time period which is similar to that which has already transpired (during which the US paid vastly more for prescription drugs). I think that's rather significant, but I suppose it's a matter of opinion.

I'll note that when I talk to my doctor friends, they point on that there has been phenomenal progress in the treatment of cancer and heart disease over the last 30-40 years. It is not generally appreciated by the public because death rates have declined only modestly. However, the population has aged, and the onset of these diseases rises exponentially with age, so in fact a stable death rate actually required a huge advance in treatment. Much of this progress has been made in tiny steps, from one drug to the next. Each new one might only have increased longevity by a month or two, or it might have had only a few % higher probability of success, or it might have had fewer bad side effects. And each new one might have cost an arm and a leg, such that a bean counter at the NHS would have denied it until the price dropped by an order of magnitude. But the cumulative effect of these incremental, expensive steps has transformed the medical field.

 

[sunmaster14]

There really isn't much link between the production costs of new drugs and their selling prices. Due to patents and so lack of competition, pharmaceutical companies charge what the market will bear. In the US there may be more focus on marketing new drugs to drive up demand, which may be more relevant to costs than production cost.

I'm sure there's a lot of game theory optimization going on, but ultimately, given a choice between selling drugs to Europe at a markup to marginal production costs, and not selling the drugs at all, it makes sense to sell the drugs to Europe. Of course, the drug companies have to be careful about undercutting or cannibalizing the lucrative market in the US, so that might cause them to delay or set a higher floor on their price. Regardless, however, the amortized R&D costs, which usually dwarf the marginal cost of production, are sunk costs. They really don't enter into the calculus for how to price drugs that have already been developed. They do, however, enter into the calculus for whether or not to pursue a new drug.

 

[Francesca R]

I would rather that the rest of the world moved towards a more free market health care system and shared more of the R&D burden.

"Free market" doesn't have much to do with willingness to spend on drugs.

But as I already said, not everyone can early-adopt just like not everyone can late-adopt. If for example all countries suddenly paid more then this would likely simply be captured by producers as inflation as there would be no incentive to innovate. I would have thought you knew that.

The rest of the world is subsidising the US's capture of innovation and the US is freeloading off other countries' willingness to adopt tech later.

 

[sunmaster14]

"Free market" doesn't have much to do with willingness to spend on drugs.

Sure it does. Some bean counter at the NHS is making a cost-benefit decision for millions of people. That's not a free market, by any stretch of the imagination. His incentives aren't the same as somebody who was just diagnosed with cancer, and the result is that he bids too little for new drugs. Which is not to say that the US has a free market either. We seem to go the other way and end up bidding too much for new drugs. I think if we both had free markets, then we would end up with prices somewhere between those two bids.

But as I already said, not everyone can early-adopt just like not everyone can late-adopt.

Why can't everybody early-adopt? There's nothing stopping people from being tied for first in a race. But it's impossible for nobody to be first. Virtually the entire population of the US are early adopters when it comes to drugs. If the rest of the world was transported to the moon, very little would change in terms of drug consumption or pricing in the US, and everyone would be early adopters.

If for example all countries suddenly paid more then this would likely simply be captured by producers as inflation as there would be no incentive to innovate. I would have thought you knew that.

Yes, the drug industry would earn greater profits currently, although I see no reason why US prices would be higher. Probably they would be lower. It's not like drugs are a scarce resource once they've been developed. The marginal cost of manufacture is usually peanuts. What would happen, however, is that there would be more investment in new drug development. The pace of innovation would increase, and more people would enter the field as researchers. Now, of course that could be too much of a good thing. You could have too much investment in drug development, since, in a world of finite resources, extra investment in one area probably means less investment in another area. I'm not actually advocating that other countries follow the US model which is most definitely not a free market either and errs in the direction of too much demand.

The rest of the world is subsidising the US's capture of innovation and the US is freeloading off other countries' willingness to adopt tech later.

As I've pointed out, that argument doesn't work for drugs. It might work for markets in which there are manufacturing bottlenecks, however (e.g. new-fangled MRIs or radiation treatments).

 

[Francesca R]

That's not a free market, by any stretch of the imagination.

Never said it was I said this has little to do with paying up for drugs. Indeed most free market fans usually think that in the absence of market testing, buyers typically overpay (waste money) not underpay as you seem to be arguing. I contend that it is market forces in huge part that is driving the bargain non-US countries spend on drugs. The decision not to be first in line for new innovations isn't necessarily a market one. It is not without merit though IMO.

Why can't everybody early-adopt?

Because then it isn't early any more.

But it's impossible for nobody to be first.

Also it is virtually impossible to force another to be first. Thus the US pretty much always has the option to not be first if it ever considered the trade to be poor value. Similarly other countries could step up if they thought that was a good trade.

If the rest of the world was transported to the moon, very little would change in terms of drug consumption or pricing in the US, and everyone would be early adopters.

Unprovable. I doubt that. (It would no longer be the case that the US was paying a premium, the US would not have any means to differentially attract the "best R&D")