Friday, February 26, 2010

Why do health costs go up? -- Research

I have previously pointed out that economic regulation will ineffective in holding down health costs. Before addressing how to contain costs, discourse should begin by exploring why costs are so high. I do not pretend to have all the answers. Nevertheless there are several obvious sources of high health costs that I will explore in this and other blogs. We will start with the impact of medical research.

Much is made of the shortfalls in our investment in science and technology. That cannot be said about medical research. I doubt the world has ever seen an explosion of medical advances like those which have occurred in my lifetime. I hear it said that the quality of care in this country is not superior to other countries. That may be true, but I find it hard to believe. Every day I see myself and others who have escaped the grim reaper because of leading edge medicine.

When I was young, my father suffered from a thyroid condition that the doctors could not diagnose for two years. He almost died because of the delay. Today standard blood tests routinely identify thyroid abnormalities. My mother died of breast cancer that would be picked up in a regularly scheduled mammogram today. My brother in law died of heart attack that would have been corrected by open heart surgery today. Two aunts were institutionalized for conditions that would now be controlled by drugs. On the other hand, my prostate operation came in time to spare me of the ravages of cancer because of the PSA test which is regularly administered on a yearly basis to middle aged males. My gall bladder operation that required a three and a half hour stay in the hospital and about a twelve hour recuperation was once a dreaded massive operation that could send the patient to bed for months with a scar that stretched across the torso..

These stories are not unique. Our life expectancies are expanded because of massive investments, public and private, into medical research over the previous decades. Nevertheless, inventions carry their costs. When a new medicine is developed, its inventor receives a legal monopoly for a specified period of time. The FDA must allow the pharmaceutical company to recover its research costs of developing that drug. These companies must also recoup the costs attributable to exploratory research that did not result in producing a marketable drug. Otherwise the enterprise cannot sustain itself.

Moreover when a drug, device or procedure is invented, the costs must often be recovered out sales in a relatively small market. An MRI machine for instance can only be sold to a handful of hospitals and other diagnostic centers. You cannot sell MRI machines like automobiles that fill up two car garages.

Some demagogues argue that those costs can be avoided by letting the government control all medical research thereby eliminating “excess profits.” Don’t believe it. The costs described above exist regardless of who may bear them. If the government does not receive enough return for its investment to cover the successful and unsuccessful research as well as the cost of raising the necessary capital, then it must absorb the costs and charge us to make up the loss costs either by taxing us or borrowing the money from somebody, probably the Chinese. We are getting a full dose nowadays of the dangers of that tactic.

The costs of research are vividly revealed when our favorite medicine becomes generic and the research costs are no longer a factor. Our insurance companies have educated us to the fact that generic drugs are the same medicine at drastically reduced prices, simply because the influence of research costs on the price of medicine has ended.

Under any circumstances, I doubt that our appetite for medical innovation is waning. I do not believe that we, the consumers, will tolerate a reduction in medical research, particularly with respect to the ailment that affects us or our families. Moreover, I would not be surprised if the recoverable costs actually increase as the drugs and devices brought onto the market become more specialized treating fewer patients a thereby creating ever smaller markets for the products.

In my next blog, I will discuss American medical education and how it contributes to higher costs.

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