Why Europeans really do need American healthcare

Psychiatrist and blogger Scott Alexander has been on a tear lately about the price of pharmaceuticals in America, in particular the EpiPen, a common device used to treat people who have had severe allergic reactions. The EpiPen’s price has been hiked by about 400% since 2007, which left-wing website Vox blames America’s lack of price controls for but Scott blames on America’s cronyish regulation:

Let me ask Vox a question: when was the last time that America’s chair industry hiked the price of chairs 400% and suddenly nobody in the country could afford to sit down? When was the last time that the mug industry decided to charge $300 per cup, and everyone had to drink coffee straight from the pot or face bankruptcy? When was the last time greedy shoe executives forced most Americans to go barefoot? And why do you think that is?

It’s a fascinating piece and worth reading in full.

But what I’m really interested in is a part of his follow-up piece where he looks at rates of pharmaceutical innovation in the US, compared to countries with price controls:

1. Golec & Vernon (2006) say that as a result of European drug price regulation, “EU consumers enjoyed much lower pharmaceutical price inflation, however, at a cost of 46 fewer new medicines introduced by EU firms [over a 19 year period].”
2. Eger and Mahlich (2014) find that among pharmaceutical companies, “a higher presence in Europe is associated with lower R&D investments. The results can be interpreted as further evidence of the deteriorating effect of regulation on firm’s incentives to invest in R&D.”
So by my count, there are eight-and-a-half studies concluding that price regulation would hurt new drug innovation, and one-half of a study concluding that it wouldn’t. I’ve tried to eliminate all the studies sponsored by the pharmaceutical industry from this list, but I might have missed some.

Scott also cites an impressive-looking RAND Corporation paper which tries to project the consequences of government price-caps in healthcare.

In the short-term, things get better – drugs are cheaper. Great! But in the longer-term, things get worse. Much worse. Innovation declines and life expectancies fall in both the US and Europe.

Which makes me think that, as bad as the US system is in many ways, there’s a very important silver lining. All that money and intellectual property protection create much, much bigger incentives for healthcare innovation in the US than in Europe.

And that allows those of us in price-controlled countries to get something like the best of both worlds: cheap(er) drugs, but lots of research for new drugs, funded by our less fortunate friends in the United States. In a very important sense, it looks as if we’re free riding on American healthcare spending.

None of which is to say that the US system isn’t a dog’s dinner. Read Scott’s posts to get a flavour of that. But it does make smug posts and charts like the one above, which laugh at the nutty Americans and their wild, wasteful overspending, look quite silly. Without Americans spending all that money on healthcare, those of us living in price-controlled European systems would be living shorter lives, too.