Elected officials have powerful incentives to spend, and the administrators of government agencies — always seeking to increase their budgets — are happy to oblige. But the federal budget is finite.
There are equally-powerful incentives to create more programs, as politicians are driven to make more citizens dependent upon government.
So elected officials paradoxically have incentives to limit spending by any given agency so that dollars can be spread across more programs. The upshot? A drive to reduce outlays by hiding spending or shifting costs onto states or the private sector.
Consider federal health programs procuring drugs and medical technologies. Pressures for lower prices are unrelenting, but lower prices reduce incentives for investment in research and development.
These adverse effects — fewer cures — are felt by future patients who don’t currently vote and so aren’t relevant for government officials. One government policy — the new process for “comparative effectiveness reviews” — will yield sizable reductions in research and development costs and a resulting decline in benefits for patients.
Obamacare established the Patient-Centered Outcomes Research Institute, charged with “conduct[ing] research to provide information about the best available evidence to help patients and their health care providers make more informed decisions.”
Such statistical CER analysis may seem straightforward, but the inherent difficulties are illustrated by a 1994-2002 analysis of four hypertension drugs and lipid medications.
More than 42,000 patients were involved in that study, from which emerged disagreement over the trial’s design, the interpretation of the data, and the importance of side effects.
Subsequent analyses suggested different conclusions, and the ongoing evolution of medical technology — in particular, statin drugs — reduced the findings’ usefulness. There is little evidence that this comparative analysis had an effect on medical practice.
In short, the new top-down CER process may not yield information useful for physicians and hospitals. But that doesn’t mean it will have no effect.
Expanding federal involvement in CER creates the possibility that findings, however uncertain, will influence policies on coverage, reimbursement, and incentives in Medicare, Medicaid, and other programs.
Firms investing in medical technologies will have to conduct their own CER analyses to gain insights about the future reaction of policymakers to innovations, thus increasing costs and delays.
Government CER analysis will increase the likelihood that pricing concessions will be required to obtain favorable decisions. Government CER raises the possibility of non-approval or limited approval for government programs.
And the CER process is likely to shorten effective patent periods. All these effects will reduce expected returns and thus incentives to invest. At about $75 billion annually, U.S. private-sector investment in medical technology is substantial, and the economic returns to these investments are enormous.
New research from the Pacific Research Institute shows that the CER process now being implemented will reduce research and development investment by $10 billion per year. This would yield a loss of 5 million life-years annually.
If we assume $100,000 to be the value of an expected life-year, the economic cost of this reduced medical innovation would be $500 billion per year, a figure substantially greater than the U.S. market for pharmaceuticals, devices and equipment.
The federal government does not have patients. It has interest groups, a reality that allows it to trade patient well-being against larger subsidies for other constituencies.
Moreover, the time horizons of policymakers are short, while the technological fruits of investment in medical innovation lie years in the future. Accordingly, the adverse effects of current policies will emerge during the tenures of future officials.
This is one powerful reason that health care decisions should be made outside the Beltway.