An interesting point from Ezra as an afterthought on his recent appearance at Cato:
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.
First, the argument that Medicare had a positive effect on innovation is at least contestable. But supposing that it did, it seems a little odd to, on the one hand, suggest that this boost to innovation was the result of having “increased the potential profits to be made,” while on the other hand professing befuddlement at how proposing to lower costs by “squeezing the providers” might be thought to put a damper on innovation.
Ez proposes plowing the savings realized by government bargaining into the NIH, but for this to achieve net savings, you’ve got to believe that the NIH grant process is going to be more efficient at the margin than market incentives. This isn’t my issue, so I don’t know how likely that is to be true, but it does seem reasonable to expect diminishing returns to budget expansion here. That is, the first dollar of NIH grant money presumably goes to the easiest call, the most obviously worthy effort to conduct unpatentable basic research with broad benefits, etc., but progressively less so for the subsequent dollars.
Anyway, what I found particularly interesting was the point about duplicative research. On the one hand, stronger patents provide more research for R&D. But if they’re too long, many companies may determine that if a drug is going to be profitably under patent for a while to come, it makes sense for them to devote time and resources to tweaking a few molecules and developing a functional equivalent. That’s not only wasteful in itself, it dilutes the additional profits longer terms are supposed to provide, since the makers of the original drug now have to compete with the copycat. So you might imagine conditions under which shorter terms actually yield a triple benefit: Consumers get cheap generics sooner; pharmaceutical companies don’t invest as heavily in creating unnecessary copycat drugs; and the returns to the original drug maker are only slightly diminished, because the shorter term is offset by the uncontested monopoly they enjoy for the whole of the term. The trick, of course, is figuring out just what those conditions are, and what the optimal term is.