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October 10, 2004

Too Much of a Good Thing

Michelle Malkin has a couple of posts on pharmaceuticals that are worth your time to read. In the first, she explains the negotiating approach taken by the Veterans Administration, which John Kerry wants to emulate for Medicare. In essence, the VA makes its purchases all-or-nothing in each submarket of medicine; companies compete for particular slots and become, effectively, the sole providers in their therapeutic classes. The problem with extending this, as Malkin puts it, is as follows:

The picture changes when we're talking about Medicare--a program that covers virtually all 40 million elderly people in the U.S. Medicare is a huge program. No other payer in the U.S. is even close in terms of size. Suppose there were only one Medicare formulary. If a drug company's product were to be excluded from that formulary, it would be a huge blow to the company. There's no question that drug companies would fight desperately to get their products included. It is difficult to overstate the importance of the Medicare market to drug companies. How low would prices go? 20 cents per statin tablet? 10 cents? 5 cents?

As attractive as this might sound, the effect that it produces relates to Malkin's second post:

Why on earth does the U.S. get virtually all of its flu vaccine supply from just two manufacturers? Because only a handful of companies make vaccines for the U.S. market. And why is that? Because federal bulk purchase of vaccines at government-controlled prices has made the U.S. vaccine market a market that few drug companies want to be in.

If there were a single economic principle that I wish more people understood enough to respect in the face of immediate self-interest — especially on the topic of healthcare — this would probably be it: The benefits of collective bargaining and unified administration only outweigh the costs as long as the group is reasonably small compared with the total market. The federal government can administer healthcare for its own employees with relatively little cost or disruption, but Rep. Jim Langevin (D-RI) is dreaming to suggest that the system can just be expanded to cover everybody.

Langevin can talk about health insurance providers' shouldering their "fair share of the burden," but having to take a more free, creative, and mature approach to medical policy is one of the burdens of being the United States of America. Socialist healthcare in smaller nations is inadvisable for its own reasons, but the practice avoids being globally catastrophic only because of U.S. resistance to it. The smaller nations are akin to the VA or to the Federal Employee Health Benefits Program, only on the larger scale of the worldwide market.

Medical care is an easy issue on which politicians can stretch their demagoguery legs, but it would be an historic mistake for too many citizens to be taken in by it. Those of us who fear that the lure will prove too powerful can only argue against it and pray that deadly experience is not the only teacher that Americans will follow. The entire world would suffer for our lunge after a mirage.

Posted by Justin Katz at October 10, 2004 9:03 PM