Wednesday, May 4, 2005

May NBER Studies on Healthcare

Two interesting studies from NBER on healthcare:
  • The first study looks at the impact of cutting pharmaceutical prices in the U.S. Will this lead to less R&D investment and longer-term harm to social welfare?

    Previous economic studies have shown that price controls (by reducing the return pharma companies receive on the sale of drugs) would reduce the number of drugs being brought to market.

    Will a short-term beneft (lower prices) result in a long-run negative? Its hard to know, since the drug development cycle is so long.

    "Their basic finding is that cutting prices by 40 to 50 percent in the United States will lead to between 30 and 60 percent fewer R and D projects being undertaken in the early stage of developing a new drug. Relatively modest price changes, such as 5 or 10 percent, are estimated to have relatively little impact on the incentives for product development - perhaps a negative 5 percent.


    Developing viable drugs is a pretty tough thing to do. Supposedly, only 3 out of every 10 products generate after-tax returns after R&D costs. Most projects fail due to "safety, efficacy, or commercial viability." For products that do make it, the whole cycle can take 15 years.

    "This uncertainty factor may explain what critics say is a tendency of the pharmaceutical industry to focus on only minor innovations (me-too products) because of their greater probability of success, at the expense of conducting more revolutionary research that carries a higher risk of failure but also may yield greater health improvements."


    Fortunately or not, pharmaceutical companies are in business to make money... In order to survive as organizations, they need to be self-sustaining and cash-flow positive. Otherwise, we as a nation would just have to subsidize the research through other means.

    However, it does seem that the U.S. is subsidizing the pharmaceutical development costs of the rest of the world. Since most other nations (including Canada) have implemented price controls, the cost of drugs in other places is far lower than the cost in the U.S.

    Read the rest of the study summary.

  • The second study looks at whether or not the care of accident victims in hospitals is affected by whether or not the victim is insured.

    "The finding that uninsured accident victims are 1.5 percentage points more likely to die than privately insured ones implies a 0.45 percentage point increase in the lifetime risk that an uninsured person will die in a severe automobile accident."


    In addition, the study also found that lengths of stay and facility charges for Medicaid recipients was 4.7% higher than that of the uninsured. The study states that one explanation is that Medicaid recipients as "a group are in poorer health than the uninsured."

    For some reason, I doubt that, since the primary recipients of Medicaid are children and women. The research that I've read seems to indicate that medical loss ratios are lower for Medicaid plans sponsored by big HMO's.

    So that would indicate that Medicaid reimbursement rules might result in most costly treatment. Hospitals may be incented to provide more costly treatment that provides more certainty of a positive outcome than with Medicaid patients and more willing to try less certain, less costly treatment on uninsured patients.

    Or they might just be trying to make more money! :)

    Read the rest of the study summary here.

If these article were interesting to you, you might want to consider subscribing to the NBER Digest.

The digest sends monthly updates with findings from the latest research at NBER. Gosh, I wonder if they have an RSS feed?