April 2007

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Against Intellectual Property: Pharmaceuticals

April 30, 2007 in Books, Pharmaceuticals, Public Policy | 5 comments

“…in a similar way, the slow growth of the coloring industry in the U.S. before the First World War was largely due to patent protection: most patents were held by the large German companies, such as Bayer, BASF, Hoechst and IG Farben. The chemical industry in the US was so underdeveloped, that during the First World War the U.S. was forced to import dies from Germany via submarines to bypass the British blockade.”

There is a very interesting book titled Against Intellectual Monopoly by Michele Boldrin and David K. Levine which was brought to my attention by the author of the Behavioral Trader blog. In the book, the authors build their argument that patent protection is either wholly unnecessary or at the least too broad. Chapter 9 of the book review the pharmaceutical industry and today I will review of few of the authors main points.

The beginning portion of the chapter shows that there has been large cross-country variation in patent protection over time, and that the evidence shows that countries with patent protection are not more innovative than those without patent protection. For instance, Italy had limited or no patent protection for pharmaceuticals until 1978, and before that time was considered the leading manufacturer of generics. Between 1961-1980, Italy discovered 9.3% of the world’s new active chemical compounds, but between 1980-1983, Italy had only discovered 7.5% of the world’s new chemical compounds, despite the fact that Italian scientist now operated in a patent protection system. In recent years, India has claimed the title of the leading manufacturer of generics. In the “Prizes or patents” post, I mention the Chaudhuri, Goldberger and Jai article which finds that instituting mechanisms to enforce foreign patents in the Indian market would reduce welfare in the anti-bacterials segment by $305 million.

Innovation Chains

Innovation chains is a concept that patents prevent innovation by disallowing other firms from building on the work of others. For instance, a patent can be good for one pharmaceutical company, but not for others. While patents confer monopoly rights to the inventor, they preclude other companies from developing new drugs. For instance, the chief scientific officer at Bristol Myers Squib told the New York Times that:

“there were ‘more than 50 proteins possibly involved in cancer that the company was not working on because the patent holders either would not allow it or were demanding unreasonable royalties.’”

Corruption

Because patents create rent-seeking behavior, corruption , lobbying and bribery are common in the pharmaceutical industry. Many pharmaceutical firms have pleaded guilty to criminal charges of fraud for inducing physicians to bill the government for some drugs that the company gave the doctors for free. For those who do not believe that rent-seeking is rampant in the pharmaceutical industry, just listen to Sharon Levine:

“[Pharmaceutical] Companies today have found that the return on investment for legal tactics is a lot higher than the return on investment for R&D,” says Sharon Levine, the associate executive director of the HMO Kaiser Permanente. “Consumers today are paying an inordinate premium under the guise of the creating the stream of innovation in the future. But it’s actually funding lawyers.”

Where do useful drugs come from?

When the British Medical Journal revealed its list of the top 15 medical innovations, only 2 were obtained during a research project motivated by the desire for a patent. None of the CDC’s list of top 10 medical achievements of the past century had been patented when it was introduced. The authors note that private industry only pays for about 1/3 of biomedical R&D, while government institutions such as the NIH fund much of the rest. Boldrin and Levine propose the following solution so that pharmaceutical companies can recoup their large expense to preform clinical trials:

“Clinical trials are the step in the process of developing a new drug during which information is produced about the effect of a given chemical compound on a large sample of humans. The cost of distributing and absorbing this information being low, and the cost of acquiring it being high, it has a strong public good component. There is also no reason, either of by way of economic efficiency or equity, why this should be paid for by the pharmaceutical firms developing the new drug – indeed, as they will be first to market they have a strong conflict of interest. The cost of clinical trials cost would better paid from the public purse, for example, by competitive and peer-reviewed NIH grants. At which point patents on drugs would no longer have any reason to exist.”

Health Plan Report Cards

April 27, 2007 in Academic Articles, Information | Permalink

The National Committee for Quality Assurance (NCQA) is a “not-for-profit organization dedicated to improving health care quality.” One of their major initiatives is the Health Plan Employer Data and Information Set (HEDIS) which aims to evaluate the quality of care offered by various health plans.

In a 2001 NBER working paper (“Learning…“), researchers Michael Chernew, Gautam Gowrisankaran and Dennis Scanlon look at employee data from General Motors and see whether or not the HEDIS health plan report cards affects plan choice. GM is a large national employer so authors are able to look at data for about 70,000 employees in many different markets over two years. Between years one and two, health plan report cards information was disseminated to non-union employees. GM employees use flex dollars to pay from health insurance plans categorized into 4 types: fee-for-service basic (FFSB), fee-for-service enhanced (FFSE), HMOs and PPOs.

Econometrics

The authors use a Bayesian learning model to evaluate the impact of the introduction of the health plan report cards to the employees. A person’s utility is assumed to depend on perceived health plan quality, price, other plan attributes and other unobserved factors. Using a nested logit model, the authors estimate the conditional distribution of quality at time 0 (i.e.: the prior) and the conditional distribution of quality at time 1 (i.e.: the posterior). The prior is a function of plan reputation and experience while the posterior is a function of the prior and the signal (i.e.: the HEDIS report card value). The authors also include plan-market fixed affects as well as plan type-time interactions.

The authors note: “Since we include a fixed effect for the prior quality of each plan in each market, endogeneity would occur only if particular ratings or changes in prices are correlated with changes in unobservable plan characteristics that might change market shares even in the absence of the changes in price or ratings.” The authors do not believe this to be the case, but it is very possible that health plans will shift resources from procedures which are included in the HEDIS quality measure and away from medical care whose quality level will not be captured in the HEDIS report card.

Results

The authors find that $100 increase in the price of a health plan will cause a 2.7% decrease in market share. Plans receiving a superior or average rating increased market share, but plans with below average or no data had reduced market share. The ‘no data’ category had the largest decrease in market share. The estimated value of the HEDIS information is about $20 for all people but $488 ex-post for the people who switched. The average value is small because only 12.4% of people switched plans in the sample after the HEDIS introduction and only about 3.9% switched plans due to the quality ratings. The authors conclude that “plan priors are more important than either ratings or prices,” which is likely due to 1) plan switching costs employees incur and 2) patient loyalty to their doctor.

Wal-Clinics

April 26, 2007 in Current Events, Nonphysician Clinicians | Permalink

“Can you imagine if a Wal-Mart store operated like America’s health care system? You would walk into the store and there would be a huge array of merchandise. But you would not be able to tell the products apart. You would not know how much they cost. And in the end, you would not know the total bill — just a predetermined fraction of itâ€?

This quotation is from a speech by Wal-Mart CEO Lee Scott at the World Health Care Congress (full text available here). In the speech Mr. Scott gave his vision of how to improve health care going forward.

$4 Generics

Wal-Mart offers many generic drugs for $4. Mr. Scott has claimed that this pricing strategy has saved Wal-Mart customers millions of dollars. I myself was wondering how Wal-Mart could offer the pharmaceuticals at such low prices. Here’s how:

  • Wal-Mart is a huge company and can use its buying power to reduce the price it pays for most of the pharmaceuticals.
  • Having $4 prescription drugs is good public relations for Wal-Mart. It is possible that they would lose a small amount of money in exchange for the good PR.
  • Most importantly, I believe, is that people with high drug costs will shop around to buy their prescriptions at the lowest cost. Wal-Mart may be using $4 generics as a ‘loss leader.’ The low price on pharmaceuticals will draw more people into the store, who will purchase more non-pharmaceutical products. Further, the low price of prescription drugs will also build customer brand loyalty. For instance, discounted toothpaste does not engender the same consumer loyalty as offering life-saving drugs at low prices.

Wal-Clinics

According to the speech and a Reuters article, Wal-Mart will open 400 in-store clinics in the next 2-3 years. This news gives more evidence that the trend towards convenience clinics–which I documented earlier in the month–is here to stay. Mr. Scott gives some more details regarding the Wal-Mart in-store clinic model:

“The providers running the clinics will determine what services to offer, which will generally include preventive and routine care for conditions such as allergies and sinus infections, as well as basic services such as cholesterol screenings and school physicals at affordable prices. They will be staffed by either certified nurse practitioners or physicians.”

Getting Doctors to Compete

April 25, 2007 in Managed Care, Nonphysician Clinicians | Permalink

There is an interesting post at GoozNews (“Getting Doctors to Compete“) in which Merrill Goozner comments on Harvard Business School professor Michael Porter’s belief that competition and integrated care are the solutions to the nation’s health care woes.

“Where we need to go is an integrated practice model,” he said. His model entails patient-focused practice groups that knit together every specialty needed to treat an individual’s medical condition. It’s not that physicians will no longer specialize; it’s that they’re no longer going to practice in specialty silos divorced or only marginally connected to all the other people providing that particular patient’s care.

Competition enters this new system by giving individuals information about the relative performance of these integrated practices.

Cavalcade of Risk #24

April 25, 2007 in Carnivals | Permalink

The Cavalcade of Risk is up at The Digerati Life blog.  Not only do I really like the format of this Carnival, but there is a great picture that will make any surfer shake in their wetsuit.

Government Expenditures and Health Outcomes

April 25, 2007 in Economics - General, Medicaid/Medicare, Public Policy | Permalink

Do increases in government spending affect health outcomes? While this seems like a simple question, proving whether or not spending impacts outcomes is difficult. There are questions of reverse causality: the governments of countries or regions with more serious health problems ceteris paribus may decide to increase their allocation of health spending; thus one may erroneously conclude that government spending worsens health outcomes. Also, whenever one examines different regions or countries, a researcher must take into account heterogeneity across these geographical units. For instance, observing that Florida has higher Medicare spending and a higher death rate may not imply that government spending increases mortality, but simply that Florida has a higher percentage of elderly patients. Further, raising spending levels may increase the amount of unnecessary procedures preformed, and thus worsen health outcome measures.

Two studies which analyze government spending and health outcomes are papers by Bokhari, Gai, and Gottret (2007) and Byrne et al. (2007), both published in the Health Economics journal. The first paper analyzes cross-country government spending variation and the second looks at regional disparities in Veterans Affairs (VA) spending across U.S. regions.

Bokhari, Gai and Gottret (2007)

To control for the problems above, the Bokhari paper controls for income level (GDP), the level of donor funding, the deviation in donor funding from its historic average, and some infrastructure variables such as literacy levels, miles of roads in the country and measures of access to improved water sources and sanitation. The authors also use an instrumental variables approach to control for endogeneity in income and government health expenditures. The instrument for income is the consumption-investment ratio since the authors claim that it is correlated with GDP per capita, but not with infant mortality (the dependent variable). The authors use the military expenditures of a nation’s neighboring countries as an instrument for the proportion of spending on health. This is a decent instrument–better than using a country’s own military expenditures–but if there was a war it would be likely that another country’s military expenditures would be correlated with infant mortality measures.

While cross-country regressions should always be viewed with some skepticism, the authors do find that increasing government health expenditures decreases infant mortality as well as maternal mortality. According to the authors, “[t]he elasticity of under-five mortality with respect to government expenditures ranges from -0.25 to -0.42 with a mean value of -0.33. For maternal mortality the elasticity ranges from -.042 to -0.52 with a mean value of -.050. For developing countries, [the] results imply that while economic growth is certainly an important contributor to health outcomes, government pending on health is just as important a factor.” In developing countries where many of the top health problems come from contagious diseases, one would expect public health efforts to be particularly effective in reducing mortality rates.

The authors do wisely qualify their claims by stating that increased government health spending in countries with corrupt government can reduce health outcomes. Also, one may worry that increased government health spending may decrease government spending in other areas important to health (e.g.: water works, utilities, network of roads, and education) . For instance, having poor roads may prevent the population from easily accessing care in a hospital or outpatient facility.

Byrne, Pietz, Woodard and Petersen (2007)

The Byrne et al. paper looks at health care funding and risk-adjusted mortality in 22 VA geographical networks over a six year period. The risk-adjustment is accomplished by controlling for Diagnostic Cost Groups (DCG).

The authors conclude the following: “in cross sectional regressions that VA Networks with higher funding have lower risk-adjusted mortality when all male veterans were analyzed. However, when we analyzed a multi-year data set consisting of six years, using a hierarchical linear regression with clustering on Network, funding levels are no longer significantly associated with mortality, but Network was highly significant. This indicates that some characteristics of the Networks themselves are driving this result.” The authors, however, found a positive correlation between spending and poor health outcomes for the sickest patients in the sample. One can not be sure if this is due to increased spending leading to unnecessary procedures or because unobserved sickness levels are correlated with mortality.

Overall, it seems that in developed countries, government health care spending is not strongly correlated with health outcomes. In developing countries, however, government spending has a positive association with health outcomes likely due to public health efforts to control infectious diseases.

Public Health Interventions during the 1918 influenza pandemic

April 24, 2007 in International Health Care Systems, Public Policy | 1 comment

In the Proceedings of the National Academy of Sciences (PNAS), there is an interesting article about public health interventions to combat influenza epidemics. These nonpharmaceutical interventions (NPIs) include closure of schools, churches, and theaters. The authors find the following results:

“…cities in which multiple interventions were implemented at an early phase of the epidemic had peak death rates {approx}50% lower than those that did not and had less-steep epidemic curves. Cities in which multiple interventions were implemented at an early phase of the epidemic also showed a trend toward lower cumulative excess mortality, but the difference was smaller ({approx}20%) and less statistically significant than that for peak death rates…These findings support the hypothesis that rapid implementation of multiple NPIs can significantly reduce influenza transmission, but that viral spread will be renewed upon relaxation of such measures.”

One issue to note is that the influenza epidemic hit first in East Coast cities such as Philadelphia. These cities were often slow to adopt NPIs. On the other hand, Midwestern cities such as St. Louis were hit with the epidemic weeks later. The Midwestern cities were able to learn from the experiences cities on the eastern seaboard and thus adopt more stringent interventions.

Explaining U.S. Wage Differentials: 1890 to 2005

April 23, 2007 in Academic Articles, Labor Economics | Permalink

America has been characterized as “the best poor man’s country.” In the nineteenth century land was cheap and available and farming provided relatively high living standards. During the twentieth century, however, change has come. By 1920, income equality had risen to all-time highs. Over the next century, income inequality and the returns to skill (i.e.: schooling) have displayed a few broad trends. The chart below explains these trends.

Era Inequality Return to Schooling
1890-1920 Increasing Increasing
1920-early 1950s Decreasing Decreasing
Mid 1950s-mid 1970s Stable Stable
Late 1970s-today Increasing Increasing
     

A working paper (“The Race…“) by Claudia Goldin and Lawrence Katz seeks to explain these empirical findings using a structural model to estimate both relative labor supply and labor demand. One of the focuses on the paper is the wage premium individuals with higher schooling receive. In the short-run, year-to-year variation in the wage premium is almost entirely explained by the supply of college workers relative to other workers.

In the long-run, the authors find that the college wage premium and high school wage premium roses together between 1890 and 1920, but then “collapsed” between 1915 and 1950. In the period beginning in the late 1970s, the college wage premium began to rise, while the high school wage premium was anemic. There are a few explanations for this. The first is that in the early part of the century, high school graduates were considered skilled workers, workers much more qualified than high school dropouts. In the 21st century, high school graduates and dropouts have much more substitutability between them and only college graduates are now seen as skilled workers.  The authors note that the pace of the increase in the number of college graduates slowed after 1980. Since firms need more and more skilled workers to be able to take advantages of technological advances in their field, the wage premium for college graduates has increased.

Another similar explanation is skill biased technological change (see Berman, Bound and Machin QJE 1998 for more on this topic). Between 1920 and 1950, technological advancements—particularly in manufacturing—decreased the need for skilled labor since a machine took the place of craftsmen. Technological advance in the later part of the 20th century—such as personal computers—required skilled workers in order to be able to maximize the technology’s marginal product. Thus, the wage premium for individuals who could work with technologies such as computers (i.e.: college graduates) increased and wages of those without these skills (i.e.: high school graduates and dropouts) decreased.

Goldin and Katz also look at whether immigration has played a role in the changing wage premium. “[I]mmigration had but a minor impact on the growth in the relative supply of the college educated and a moderate effect on the supply of high school graduate workers relative to dropouts for the 1980 to 2005 period. Consequently immigration played only a modest role in the surge in the skill premium during those years.” Immigration restrictions, such as the National Origins Act of 1924, were also found to have little impact on inequality or skill premia. “In 2005 17 percent of the foreign born population had fewer than nine years of education whereas less than 1 percent of native-born Americans did,” but were also more likely to have a post-graduate degree.  Thus, it is possible that immigration did reduce the wages of individuals on the lowest end of the skill/earnings spectrum.

Goldin and Katz’s conclusion is worth repeating:

“Technological change is the engine of economic growth. Yet, it also has a potentially dark side…technological change creates winners and losers and can sometimes have adverse distributional consequences that may foment social tension. Such distributional problems are more likely when technological change is skill biased, that is when new technologies increase the relative demand for more skilled and more advantaged workers.

A nation’s economy will grow more as technology advances, but the earnings of some may advance considerably more than the earnings of others. If workers have flexible skills and if the educational infrastructure expands sufficiently, then the supply of skills will increase as demand increases for them. Growth and the premium to skill will be balanced and the race between technology and education will not be won by either side and prosperity will be widely shared.”

European Science Days

April 22, 2007 in Economics - General | Permalink

I have recently been selected to attend the European Science Days in Steyr, Austria.  This year, the subject matter to be discussed at this prestigious summer school is Health Economics.  I am greatly looking forward to visiting some of my European colleagues in mid-July.

Health Wonk Review

April 19, 2007 in Carnivals | 11 comments

Is Massachusetts’ Universal Coverage plan working? Is it better to compensate physicians on a fee-for-service or capitation basis? What happened to the £72 million the UK intended to use to fund the NHS University and what is the history of capitation payments? Expert answers to all these questions and more are just a few clicks away in this edition of the Health Wonk Review. Let’s begin…

INSURANCE, MANAGED CARE, and HSAs

In the Health Affairs blog, Princeton economist Uwe Reinhardt takes A closer look at HSAs. Reinhardt writes that HSAs coupled with high-deductible insurance plans amount to “rationing by income class.â€?

Joe Paduda of Managed Care Matters comes out in favor of United Healthcare’s decision to penalize contracted docs who don’t refer to UHC’s lab partner, LabCorp in his post Hooray for United Healthcare. His point? Physicians should be thinking about costs when they order tests.

Henry Stern, LUTCF of InsureBlog presents Sauce for Goose, Gander and Other… The article investigates how insurance companies treat domestic partnerships—both homosexual and heterosexual.

While health plans and physicians have traditionally had adversarial relationships, according to Vince Kuratis, it’s time to lay down arms. In his post Doctors and Health Plans: Can Care Management Opportunities Reconcile the Hatfields and the McCoys?, Kruatis’s e-Care Management blog states that Health plans need to rethink financial management practices that damage opportunities for collaboration.

PROVIDING EFFECTIVE MEDICAL CARE

In Two kinds of value: Revolution Health, what people want and what people need David Harlow of HealthBlawg is skeptical that social networking websites, such as Revolution Health, will create much health care information improvement.

Rita Schwab of MSSPNexus Blog presents a post about HCQIA Immunity for an Iowa Hospital posted.

GrrlScientist authors Insect Cells Can Grow Influenza Vaccine at Living the Scientific Life, saying, “One of the biggest challenges to producing flu vaccine lies in the fact that so far, scientists have had to grow it in hens’ eggs.”

MASSACHUSETTS and MORE

The bloggers from the Cato-at-Liberty have contributed a number of articles to this edition of the health Wonk Review. Sigrid Fry-Revere speaks about the possibility of federal stem cell funding, Michael F. Cannon wonders whether expanding health insurance will affect health and David Boaz presents Romney Embarrassed about His Health Plan?

Leif Wellington Haase of The Century Foundation sees the Massachusetts Universal Coverage Plan as a success story.

On the other hand, Robert Laszewski of Health Care Policy and Marketplace Review claims that “the only place there are more victories being declared than in Iraq these days is in Massachusetts.â€? This is due to the fact that new rules were established to exempt an estimated 20% of the uninsured from a state legal requirement to purchase health insurance.

At The Health Care Blog Mathew Holt is concerned that the arguments over US vs. European health care systems are stuck on the wrong issue. He asks Insurance–Huh! What is it good for? Holt’s comments on single payer systems continue on the TPM Cafe Book Club with his post Social insurance is the key–but it can handle competition, just not the type you’re used to!

In Increased Demand = Better Health, Louise Norris of Colorado Health Insurance Insider believes increasing the ranks of the insureds will lead to overall better health and a lower long term burden on the healthcare system.

What happened to the £72 million the UK’s NHS spent to fund the NHS University? The Informaticopia blog from Rod Ward quotes a government report stating that “the Department of Health is exposed to significant embarrassment if the value for money delivered by the NHSU were to be probed.â€?

David Williams of the Health Business Blog believes that we should regulate the prices of biotech drugs once their patents expire.

WORKER MEMORIAL DAY

Among other news items, Julie Ferguson of Workers Comp Insider reminds us that Worker Memorial Day will be observed on April 28. This is a day of commemoration and mourning for workers who suffered on-the-job fatalities.

PHYSICIAN FINANCIAL INCENTIVES

There is a supremely interesting post from Richard Eskow of The Sentinel Effect which gives A Brief History of Capitation, From Medieval Days to 21st Century Reform.

In Medical Schools to Faculty: “Show Me the Money,” Roy Poses of Health Care Renewal blog notes how the main criterion for judging faculty is their production of “external” money, that is, money from clinical practice or external research grants.

What’s Happening? blog investigates a Health System Run Down By Doctors. The post claims that “The surgeons are using the public health system as a feeder into their private practice.â€?

Jason Shafrin (that’s me) of reveals his latest working paper “Operating on Commission.â€? The research examines how financial incentives affect the level of specialist service provision by comparing surgery rates between specialists compensated on a fee-for-service and capitation/salaried basis.

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