We Can't Lose Our Global Leadership In Medical Innovation

The health care reforms President Obama recently signed into law have been put forward as the culmination of the U.S.’s moral obligation to provide health care for those who cannot afford it. Advocates of this view embrace the European vision of social insurance, or “solidarity,” in which government-financed health care is the cornerstone of a civilized society.

As a European with dual U.S. citizenship, I’m skeptical about whether European social policies truly benefit those they are intended to help. And I’m deeply concerned that America’s embrace of the European solidarity model will come at the expense of another, ultimately a more valuable brand of solidarity: solidarity with the young and with future generations, who depend on continued medical innovations. If the U.S., in the name of funding a new universal health care entitlement, abandons its global leadership in medical innovation, we’ll be selling our future short.

European nations have set price controls or other restrictions on new drugs, diagnostics, and medical devices that limit patient access to those technologies – and limit profits for the companies that make them. Partly due to these government controls, Europe manages to spend significantly less than the U.S. does while still maintaining fairly advanced medical systems.

Has Europe found some new way to have their cake and eat it too – enjoying both lower costs and high levels of innovation?

In a word, no. Solidarity is cheap in Europe, but only because it is expensive in the U.S. The United States generates the lion’s share of global profits for medical innovators, because so far U.S. policymakers have rejected explicit price controls on private markets. For example, more than half the world’s sales of drugs occur in the U.S., even though the U.S. represents only about one-fifth of the world economy. Profits generated in the United States allow innovators across the world to fund the expensive R&D efforts that are critical for bringing innovative new medicines to market.

Countries like the United Kingdom, with just 3% of world drug sales, face very different incentives. In fact, it is in their self-interest to provide solidarity through government-controlled prices, because such a policy does not significantly affect the flow of new medicines into Britain. As long as the U.S. underwrites world innovation, E.U. member countries can “free ride” on the new flow of treatments largely paid for by American free-market policies.

However, if the U.S. were to start acting like a European country – as seems likely in the wake of health care reform and the resulting fiscal pressures to come–innovation would lessen world-wide, reducing the flow of new and valuable products both to Americans and Europeans. The U.S. faces real innovation tradeoffs in creating new health care entitlements; European countries don’t.

Proponents of American reform may still claim that it merely aims to eliminate wasteful spending. However, the consensus in the research community is that new technologies are the main source of cost-growth in the U.S., but they also generate far larger health benefits than increased spending. Waste does need to be eliminated, particularly in public programs, but it is not the primary factor driving health care inflation. Put differently, insurance plans offering 1980s technologies with the corresponding lower premiums would not survive today.

Because of the economic value of innovation, by moving toward the European government-based model of care the U.S. faces a choice between two forms of solidarity. One is the most commonly articulated version of solidarity with those who currently cannot afford care: universal coverage. It’s all about the present and the near term. The other version is solidarity towards the younger population and future generations, who will inevitably suffer from U.S.-based reforms that reduce medical innovation. It’s about the long term. In effect, American solidarity with the less affluent today risks shortchanging the young tomorrow.

This does not have to be the case. Not all consumers require equal help in accessing affordable health care. By focusing taxpayer subsidies on the poorest and sickest patients (called “means testing”), innovation can be stimulated while still offering effective care for those who cannot afford it. Government subsidies for poor people will even raise innovative returns by stimulating demand for non-existent markets, as has been the case for innovation in new treatments for HIV, largely paid for by Medicaid.

Unfortunately, the recently enacted health care reforms are taking the U.S. in the opposite direction, offering large subsidies (starting in 2014) to uninsured middle class families making up to $90,000. The subsidies will cover both private insurance premiums and out-of-pocket costs. In addition, the reforms impose more price controls by making cuts in the Medicare Advantage program that allows private insurance companies to set prices freely. These new, European-style, open-ended commitments will become unsustainable in the long run, just as some predicted (correctly) would be the case for Medicare. More importantly, the stifling of innovation will make for massive amounts of increased mortality and morbidity in the younger population as they age.

Because the most significant components of Obamacare do not take effect for several years, there is still time to reshape it, both to expand affordable safety-net coverage and encourage innovation. But first we must reject the common assumption that the only form of solidarity worth pursuing is universal coverage – the “right” for all citizens, regardless of their means, to access low-cost medical care. Instead, we must emphasize our solidarity with future generations. Whatever short-term benefits in coverage reforms might bring, our children and grandchildren will inevitably pay the price if the U.S. adopts European-style price controls at the cost of the medical innovations that have done so much for the world.

Tomas J. Philipson, Ph.D., is the Daniel Levin Professor of Public Policy at The University of Chicago and The Chairman of Project FDA of The Manhattan Institute. In 2003-04, he served as the Senior Economic Advisor to the Commissioner of the FDA.

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