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April 16, 2007

Cato Afterthoughts

Went alright, though the bards won't be singing of my performance in the generations to come. The Swedish guy is really into us becoming Estonia,, folks at Cato really don't like relative measures of poverty, and according to some of the folks in the audience, I talk too fast. My grandmother, it should be said, has long agreed with this critique.

Towards the close of the event, someone in the audience argued that moving towards a national system would hugely retard medical innovation. I never understand the evidence for this claim. A huge amount of the tech advances come from public institutions and grants even now. The Veteran Administration's development and integration of the medical information software VISTA is one of the great delivery advances in recent decades. Medical development only increased as Medicare has expanded, in large part because bringing more seniors into the pool increased the potential profits to be made. Indeed, you could create a national system and plow the savings directly into NIH grants, hugely accelerating innovation. There's just no evidence on the other side of this innovation question -- and there's quite a bit that the current system encourages a lot of wasted R&D, like into molecularly dissimilar but functionally identical copycats of patented blockbuster drugs.

April 16, 2007 | Permalink


I suspect the person who argued that moving towards a national health care system could stifle innovation was on autopilot. I have heard that arguement from high school debaters, and its basically goes like this: the free market is more efficient at delivering innovation than the government. Different health care treatments compete and consumers pick which ones they favor. If all health care is determined by the government, then innovation will grind to a halt.

Unless you assume that Hillary (or whoever) is going to determine exactly what kind of medical treatments will be provided in the USA, and that it will be illegal to get health care outside of these treatments, it is a pretty stupid arguement. I'm not sure if opponents of expanded health care understand that there are different ways to make sure everyone has health coverage beyond having the government nationalize all the hostpitals and doctors offices.

Posted by: William | Apr 16, 2007 5:02:33 PM

the free market is more efficient at delivering innovation than the government. - autopilot free-marketeer argument as paraphrased by William

That is indeed, as you point out, a bizarre argument. Why should people pay for an untested product? Why should a company go out on a limb when the tried and true works just fine?

OTOH, from where do a lot of innovations in health care come? The free market or government funded research hospitals and institutes?

Posted by: DAS | Apr 16, 2007 5:08:07 PM

Just out of curiosity: what's the Estonia reference?

Posted by: DAS | Apr 16, 2007 5:08:50 PM

Just out of curiosity: what's the Estonia reference?

Posted by: DAS | Apr 16, 2007 5:09:36 PM

Sorry about the double post -- my computer was acting like I didn't click on something I must have already clicked on ...

Posted by: DAS | Apr 16, 2007 5:10:31 PM

I'd like to hear some specific examples of "molecularly dissimilar but functionally identical.." drugs that would count as wasted R&D.

Posted by: FoolsMate | Apr 16, 2007 5:40:07 PM

foolsmate: I think Ezra might have said it more clearly by saying that the so-called copycat drugs take a tested molecular structure, make a few changes (some atoms changed, added or moved around) that make it 'new', but still having similar or identical medical effects. They call this R&D in the drug industry, but it really is patent-infringement avoidance.

On the broader CATO-forum issue: I can't quite understand how the libertarians have such a vivid presence in national policy debates and such small actual political backing. Since they don't have a party to drag around that is trying to win elections they can engage in all sorts of less than fully honest discourse and nobody really cares.

Perhaps Ezra believes that he can somehow reform them or 'win' against them, and therefore participates. I'm not so sanguine on that. People wo don't have to be politically sensitive at least occasionally are not subject to any rules at all, so they make their own up as they go along.

I guess there is value in getting the experience of speaking in a competitive forum, so all is not lost.

Posted by: JimPortlandOR | Apr 16, 2007 6:11:42 PM

I would also like to hear how Ezra defines "molecularly dissimilar but functionally identical copycats". Do Paxil, Zoloft and Prozac count?

One example that comes to mind is Levitra versus Viagra as a classic "make some changes"; it's different by 1 or 2 atoms or so. It is my understanding that there is very little difference between the two in terms of overall effect. (Cialis is molecularly dissimilar, but I believe that it is longer lasting by quite a bit.) A company does its best to prevent these sorts of things through a combination of smart chemistry and smart lawyers. I think it should be noted that it's not super-easy to do. I also note that the really egregious examples things like Clarinex and Claritin, but I think that companies don't have to spend a lot of money on the research end. (Also, I'd like to know if anyone is actually falling for Clarinex.)

Posted by: Klug | Apr 16, 2007 6:26:13 PM

Let's also note the dark secret of NIH innovation. Most of the grants go to universities, which lower their labor costs by employing vast numbers of graduate students who work 60-90 hours a week for <$25K. That's not something that scales well.

Posted by: Klug | Apr 16, 2007 6:34:11 PM

Considering the medium that we are communicating through, can anyone point to a major technological breakthrough in the last 50 years that doesn't have its roots in Government action or funding?

Posted by: W.B. Reeves | Apr 16, 2007 6:45:27 PM

Considering the medium that we are communicating through, can anyone point to a major technological breakthrough in the last 50 years that doesn't have its roots in Government action or funding?

Depends what you mean by "breakthrough." The microprocessor was an innovation pioneered by Intel in the early 70s. Before that, computers looked a lot different. (granted, though, all innovations in microprocessor design for the next 25 years involved simply implementing innovations already done in mainframes during the pre-microprocessor age onto microprocessors)

I understand your point, and I agree with it, but technological breakthroughs exist on a smaller scale than simply "computers" and "the internet" and "rockets."

My next guess of independently-invented technologies was going to be "quartz watches," but those were actually invented as part of a contest sponsored by a publicly-funded Swiss observatory.

Posted by: Constantine | Apr 16, 2007 7:00:52 PM

I was asking because "small" changes in molecular structure can make all the difference biochemically and medically. I am skeptical of the claim made about copycat drugs being 'wasted'. Even if they were exactly identical, consumers could benefit economically through price competition. I'm open-minded if someone can cite a specific example, but is it fair to ask here if Ezra is just handwaving?

WB -- the (visible spectrum) laser was invented in 1957 at Bell Labs (50 years exactly!). The transistor is right up there with the wheel, the lever, written language, the printing press etc... but was invented in 1947 so doesn't meet your timespan, but I wanted to mention it because it's my favorite.

Posted by: FoolsMate | Apr 16, 2007 7:46:04 PM

WB -- the (visible spectrum) laser was invented in 1957 at Bell Labs (50 years exactly!). The transistor is right up there with the wheel, the lever, written language, the printing press etc... but was invented in 1947 so doesn't meet your timespan, but I wanted to mention it because it's my favorite.

Stuff at Bell Labs doesn't count because the entire existence of Bell Labs is owed to the government giving a protected monopoly to AT&T and telling it that it was guaranteed a certain level of profit, and no more. Thus, AT&T poured its federally-guaranteed income into Bell Labs to reduce its profits.

It acted as effectively a federally subsidized laboratory, even though its funding did not come directly from the federal government. It was too much of a tough call to claim that Bell Labs' inventions were not the product of government action which is why I named Intel's development of the microprocessor.

Posted by: Constantine | Apr 16, 2007 8:05:51 PM

It's not a "small change in molecular structure," but Nexium (esomeprazole) is one of the optical isomers found in omeprazole (Prilosec), which came out of patent. The "statistically significant" differences in outcome between Nexium and similar drugs was about 4%, i.e. statistically significant (a large enough clinical trial can do that) but of dubious clinical significance.

The marketing campaign, on the other hand, has been awesome.

Posted by: James Killus | Apr 16, 2007 8:44:51 PM

How many degrees of separation are required in order to count as "Government funded"?

Posted by: Klug | Apr 16, 2007 8:45:21 PM

"vast numbers of graduate students who work 60-90 hours a week for <$25K."

It's not a dark secret. I believe it works because these young scientists are driven by the joy of discovery rather than a hope of a Lexus.

Posted by: kelly | Apr 16, 2007 11:33:02 PM

Ezra, you do talk way too fast, but it's kinda endearing.

Posted by: loki | Apr 16, 2007 11:41:44 PM

"vast numbers of graduate students who work 60-90 hours a week for <$25K."

It's not a dark secret. I believe it works because these young scientists are driven by the joy of discovery rather than a hope of a Lexus.

Well, graduate school is actually a good deal because you get paid for the degree rather than having to shell out tuition $$$ every year. However, as one of those former graduate students, let me remark that Klug is right that the system is not, in fact, scalable. When professors use their research grant money to hire more graduate students, that puts more PhD students on the job market, while the number of open professorships has not increased that much. This doesn't scale. In the basic sciences, this leads to PhDs going from postdoc to postdoc making very little money in the hopes that he will be one of the chosen few to get a tenure track faculty position by his mid-to-late 30s.

At its most basic level, it's a working system, but it's not a sustainable system. A lot of government funding of science is very valuable, but the career track and amount of funding used to train new graduate students needs to be rethought. For a rather blunt take on this, check out "Don't Become a Scientist!", written by a tenured physics professor.

Posted by: Constantine | Apr 17, 2007 12:08:46 AM


I'm a retired software guy, got a BS in Comp Sci in the 70's when they were still working out what a Comp Sci degree was. I went for the Lexus, yeah Lexus was just
Toyota back then but anyway a very economic decision. I couldn't see at the time any way grad school paid off. I still can't see anyway it pays off. Like wanting to be an artist or musician you need different drives to push our envelope of knowledge. I believe we need to let those people driven by a joy of discovery go for it. The few scientists I know know this. Even when they agonize over paying the bills (artists, musicians and scientists) they treasure the time they spent following their dreams.

Posted by: kelly | Apr 17, 2007 12:32:31 AM

As a former pharmaceutical research chemist who has just started working as a patent lawyer, here are my thoughts regarding the copycat drug issue:

(1) The most egregious type of market-gaming by pharmaceutical companies occurs when a patent on a successful drug expires, and a successor drug which is incrementally different is launched by the same company. Clarinex/Claritin and Prilosec/Nexium are good examples examples of this. By itself, this is not a problem, because the original will have gone generic, but aggresive marketing practices will lead some doctors to push the new version, and some patients will always demand the new-and-improved version. However, this is not really a problem of "wasted R&D," but of an seemingly undeserved windfall to pharma. From a patent policy standpoint, these improvements could be easily treated as non-obvious and therefore unpatentable. Of course, development and regulatory costs are so high in pharma that it is questionable whether such improvements would make it to market in the absence of patents. A compromise might be to grant certain types of drug improvements patents having shorter-than-usual terms.

(2) A tougher issue is what former FDA head David Kessler called me-too drugs - chemically distinct drugs with the same biochemical mechanism of action. Here, the objection is that there are too many entrants in big-dollar therapeutic classes where the medical need has already been met, and that the development costs for the later entrants is incurred with little benefit to consumers, who would have been better off if the late entrants had pursued some other un-met medical need. However, it is a debateable proposition whether me-too drugs have had a negative net effect. There is data showing that competition in name-brand drugs has an effect on prices, and there are also examples where patients have benefitted from having a selection of drugs available with slightly different efficacy and side effect profiles. It is also speculative to say that pursuing other targets would have led to drugs in new therepeutic areas.

Furthermore, while this critique may have been accurate during a specific period in the late 80's and early 90's, when lots of companies were heavily pursuing a few notable therapeutic classes, it is not clear whether this is the still the case. In my experience, industry emphasis has shifted more towards developing drugs to meet un-met medical need. This is in some part due to public scolding by the FDA, but also in large part due to the fact that the me-too drugs were not very sucessful. It turns out that there is a huge first-mover advantage in drug marketing, and experience has shown that unless they demonstrate significantly improved efficacy or side effect profiles, late-comers to a given therapeutic class don't sell very well. Now, the recieved wisdom is that the way to make a lot of money is to be the first entrant in a new class.

In addition to the fact that the problem of me-too drugs may not actually be a problem, and that to the extent it is, it may have somewhat corrected itself, things get pretty thorny when you try to come up with patent or regulatory policies to solve it.

The first problem is that the long time-scale of drug development, the significant possibility of failure in late-stage development, the number of competitors in the R&D market, and the relative paucity of new biological targets create a circumstance where there may be a dozen companies or so which have development program in a particular area where there is unmet medical need, each of which has no idea who is going to be the first to market or are going to make it at all. As some of these competitors are successful, those who complete R&D later may come to be called me-too entrants, but it can't really be said that they intended to be, and it can't accurately be predicted what research or launched drug is wasteful. Also, to the extent that some of the follow-on companies have already expended a significant fraction of the total development cost of their me-too drug by the time it becomes apparent that it is in fact a me-too drug, the cost-benefit ratio may shift towards completing development of the me-too drug, even from the perspective of the consumer. To me, at least, it seems that the inherent problem in regulating me-too activity is that it is impossible to identify the parties you want to be researching something else, and by the time you know who they are, you may be better off just letting them finishing development.

Also, because of the advantages of having at least some alternatives in a given therapeutic class, there is going to be an optimal number of alternative drugs in each class. If you want to regulate me-too drugs, you are going to have to come up with a better allocative strategy than having markets, and I really doubt that there is one.

While I realize that this is an obnoxiously long comment that nonetheless fails to even begin to give a complete picture of this issue, it bothers me to hear otherwise ideologically simpatico such as Ezra drop seemingly ill-informed references to the problem of "wasted R&D" due to the proliferation of "copycat drugs."

Posted by: Mike S. | Apr 17, 2007 12:39:05 AM

My sister, who was a director of biochemical research for a major independent research group said that, in fact, pharmaceutical research doesn't actually develop cures. They carefully calculate their research to develop treatments that require lifelong use, despite often serious side effects, and thereby increase profits. Or they research slightly altered forms of pharmaceuticals for which they already have patents in order to prolong patent life. I can probably get you details if this kind of information would help you persuade the Cato folks that profit seeking is not identical with public welfare.

Also, apparently "pure" research has a higher return on investment for the economy as a whole because it seeks a profound understanding of the problem which then bring often surprising seminal changes. Or if this were still the eighties, you would say it brings about a paradigm shift. That applies to all branches of science. No profit seeking organization will absorb the risk of that kind of research, even if for the economy as a whole, the per dollar return is much higher than more specific developmental researcher. Right now, almost the only pure research still done is associated with the Defense Department. That's where the money is. Other research funds pretty much dried up in the eighties. I can also get numbers on that, I think. I hope you can see how that undercuts the pharmaceutical industry's attempt to justify "the magic of the marketplace." There is reason to believe that patent law in the U.S. is currently slowing research as much as promoting it, although I am not opposed to patents. The devil is in the details, as they say.

Posted by: Paula | Apr 17, 2007 6:27:13 AM

Sorry, I posted before I read everything. You've got it covered.

Posted by: Paula | Apr 17, 2007 6:40:43 AM

A variety of "pay a lot more" versions of full coverage could well encourage innovation. But take a look at Matt's post from a day or two ago, the one where he praised indiscriminately cutting off the medical supply chain. The Cato guy wasn't crazy to make the claim he did. NIH supports innovation, to be sure, but bargaining down health care prices through government is something quite different.

Posted by: Tyler Cowen | Apr 17, 2007 9:39:45 AM

The echo chamber can get loud in here at times...

Ezra, if you're actually interested in non-ideological, fact-based answers to your questions in this post (and others)-- send me an e-mail at wisewon.comments at gmail.com

Happy to clear up a few misconceptions:

1. Differences between NIH-sponsored research and industry R&D

2. Concerns on single payer re:innovation

3. Innovation at VA?

4. A number of differences of opinion between a "progressive" solution and a more "DLC-type" solution

Feel free to take a look at my past posts, which show my perspective on a few issues as well.

Posted by: Wisewon | Apr 17, 2007 10:45:33 AM

I haven't been up to anything. My mind is like an empty room, but such is life. Maybe tomorrow. Today was a loss, but eh.

Posted by: leukeran for dogs | Jun 27, 2007 12:59:10 PM

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