How to Pay for the Next Sovaldi?



Imagine a pill that could cure cancer with one course of therapy or reverse an inherited, deadly disease. If it cost $1 million, could you access it?

This was the question asked at a recent panel discussion held by the American Enterprise Institute. The panel discussed a couple of new proposals to finance new medicines that come at a high price. Because these medicines address the needs of only a small number of patients, manufacturers contend that prices need to be high to make the investment worthwhile.

One proposal was put forward by Scott Gottlieb, MD, (of the American Enterprise Institute) and Tanisha Carino (of Avalere Health). They put forward a redefinition of spending on specialty drugs as capital investment rather than consumption spending. This is because, for example in the case of Sovaldi, the expensive upfront costs of the drug are more than paid for by dramatically reducing costs over the next twenty or thirty years for a patient who might otherwise require a liver transplant.

Gottlieb and Tarino’s paper is not technical, and one way to envision the outcome would be a mechanism whereby the patient or insurer would pay the (estimated) $84,000 cost of Sovaldi over twenty years in smaller pieces, rather than all in three months. (Gottlieb and Carino do not actually give an illustration, but I believe my example is an accurate representation of a potential version of what they describe.)

Another proposal was put forward by Professor Tomas J. Philipson and Andrew C. von Eschenbach, both of Precision Health Economics, LLC. Philipson and von Eschenbach are interested in using credit markets to reduce the immediate cost of paying for drugs. Their model suggests that government should incur a significant fraction of such debt, given that these specialty drugs will benefit future patients (so they should bear a share of the burden through an increase in public debt). READ MORE

Is Medicaid Crowd-Out the Only Effect of Obamacare?



MedicalSymbol2Medicaid “crowd-out” is the hypothesis that enrolling more people in Medicaid will cause some people to drop private coverage in favor of Medicaid. The rate of crowding out may reach 60 percent.

Now, courtesy of the Robert Wood Johnson Foundation (RWJF), we have evidence that the entire effect of Obamacare so far is to crowd out private coverage. RWJF’s new report (“First Observations Around the Affordable Care Act”) further confuses the consequences of Obamacare on coverage and access to care. This is not the RWJF’s fault: The emerging evidence on Obamacare is a jumble of contradictions. In this instance, the report insists that physicians saw no increase in patient demand after Obamacare, as demonstrated in Figure 2. More sophisticated metrics showed that the complexity of patients’ needs also did not increase after Obamacare.

However, there was a significant increase in Medicaid patients as a share of patients seen. In states that expanded Medicaid, this proportion increased by one-quarter, from 12.3 percent to 15.6 percent, and barely budged in states that did not expand Medicaid. Both of these findings contradict other evidence that Obamacare patients consume many more specialty drugs than non-Obamacare patients; and that many states that did not expand Medicaid also experienced a (smaller) increase in Medicaid dependency than states that expanded the program.

Nevertheless, if the RWJF report trumps this earlier evidence, we are left with an equally disturbing conclusion: Obamacare did not increase access to medical services at all, it merely replaced privately paying patients with taxpayer-funded patients. And need we remind you that at the beginning of June, almost three million Medicaid applications had not been processed?

* * *

For the pivotal alternative to Obamacare, please see the Independent Institute’s widely acclaimed book: Priceless: Curing the Healthcare Crisis, by John C. Goodman.

Obamacare’s Tax Credits in Jeopardy



Today, we received dueling circuit court decisions on Obamacare’s tax credit component. The D.C. Circuit held (2-1) that the tax credits do not apply to health insurance purchases through an exchange established by the federal government, whereas the Fourth Circuit held that they do. If the subsidies are not available for insurance purchased through exchanges established by the feds, then Obamacare could unravel. Because of this split in the circuits, this issue is almost guaranteed to be taken up by SCOTUS in the coming term.

Exchanges operate websites that allow individuals and employers to shop for and purchase approved health insurance. The president and Congress envisioned all the states scurrying to establish exchanges, but only 14 states and D.C. have done so. The Obamacare statute recognized that some states might not establish exchanges, and provided that the federal government could establish exchanges in states that refused to create an exchange for its citizens.

The individual mandate of Obamacare requires that folks purchase health insurance or suffer a monetary penalty. The penalty does not apply to individuals for whom the annual cost of coverage, less any tax credits, would exceed 8 percent of projected household income. If credits are unavailable in states with federally created exchanges, the number of people subject to penalties decreases dramatically without the substantial tax credits, they fall into the exempted category because the costs of health insurance will exceed 8 percent of household income. If the individual mandate is gutted, then Obamacare suffers a major setback.

The statutory language provides that the tax credits are available only when purchasing a “qualified health plan” purchased through “an Exchange established by the State under [section] 1311″ of the statute. There is no mention in the statute of tax credits applying to insurance purchased through federally established exchanges. Accordingly, the plain language dictates that tax credits do not apply in the federally established exchanges and thus millions of Americans will be exempt from the penalties of the individual mandate.

Unlike the D.C. Circuit, the Fourth Circuit avoided the clear language of the statute and held that the statute is “ambiguous” and thus allows for flexible agency interpretations about the applicability of the tax credits.

Chief Justice John Roberts worked hard to save Obamacare in the first go-round. It will be interesting to see if he chooses to yet again save Congress and the president via judicial legerdemain.

Your Tax Dollars at Work at the Ex-Im Bank



indexFollowing up on my nationally syndicated column on the pending re-authorization of the Export-Import Bank (“Let the Ex-Im Bank Fail”), the Financial Services Committee of the U.S. House of Representatives issued a press release on July 21, 2014, stating that

“Two of the four Russian firms targeted with new sanctions announced last week by the Obama administration have received more than $1 billion in U.S. taxpayer-financed subsidies from the Export-Import Bank.Vnesheconombank (VEB) and Gazprombank—two state-owned Russian banks—have together received more than $1 billion in Ex-Im financing since 2003.

“Here are the deal details: In 2003, Gazprombank received a five-year loan guarantee worth $22.6 million from Ex-Im. VEB alone has received over $1 billion in Ex-Im backed loan guarantees. This includes a $496 million loan guarantee in 2012 and a $703 million loan guarantee in 2014.

“The sanctions do not apply to these existing arrangements, ‘meaning Ex-Im is under no obligation to cancel previous deals it has with either company’, according to one report.”

So, in addition to financing the exports of Boeing, Merck, Caterpillar and other very large domestic corporations, which hardly need taxpayer subsidies to sell overseas, the Ex-Im Bank also is financing purchases of U.S. goods by buyers located in countries increasingly hostile to American interests.

Free and unfettered international trade is the path to peaceable relations with the rest of the world. (Can anyone think of a benefit from the longstanding embargo of Cuba that possibly offsets the harm suffered by U.S. cigar smokers?) But, the Ex-Im Bank should not be a subsidizer of Vladimir Putin’s Russian-centric geopolitical strategy to bring the Ukraine under his hegemony.

The Kremlin, it turns out, is funneling money to environmental activist groups in Europe to stop or delay the introduction of hydraulic fracturing (“fracking” is a U.S. technology) in order to keep Europeans dependent on Russian natural gas. In that respect, at least, the Ex-Im Bank and the KGB’s successors seem to be on the same page (see my column in Forbes here).

If a better reason exists for ending the crony capitalism of the Ex-Im Bank on or before the current fiscal year expires on September 30, I cannot think of one.

Gun Violence Is a Consequence of War



indexMy hometown of Tallahassee, Florida, has recently shown an increased concern about gun violence. Not only are Tallahasseans shooting each other, so far in 2014 the Tallahassee Police have shot four people, killing two. A related concern is that people seem to have little trust in the police.

The concern has been manifested in a town meeting chaired by the police chief, who wants to earn the people’s trust, and a series of articles in the local newspaper.

Much of Tallahassee’s gun violence is in the poorer sections of town, where in many cases, people’s drugs of choice are illegal. If your drug of choice is alcohol or nicotine or caffeine, government will tax it and protect your right to use it. But if your drug of choice is marijuana or cocaine, not only will government not protect you or your property, it has declared war against you.

We call it a war on drugs, but it is actually a war on drug buyers and sellers. The government seeks them out, and when it finds them, confiscates their property and sends them to prison.

If the government will not protect someone’s property, then the owners of that property will have to protect it themselves. That’s why they want guns. If someone steals your drugs, government police and courts will work against you, rather than helping you recover your property.

Of course, not everyone in these violence-prone neighborhoods buys or sells drugs, but many will have friends and neighbors who do, and it stands to reason that people will not have much trust in groups their friends and neighbors view as adversaries. And of course, they should view the police as adversaries, because the police are the front line in the war on drugs that has been openly declared against them.

This sets up a culture of violence, but why? It is because our government has openly declared war against a significant subset of the population. Is it realistic to expect to fight a war without violence? We saw the same type of violence in the 1920s when there was a war on alcohol.

The same local newspaper that decries violence also reports on a regular basis cases where police have made traffic stops, or answered domestic violence calls, and found drugs, leading to arrests on drug charges. The local police also set up sting operations to try to entice citizens to sell drugs to undercover police personnel.

The government is fighting a war against the buyers and sellers of drugs, and gun violence is a consequence of that war. Shouldn’t we expect that when a government declares war against a group, the group would try to arm themselves for their own protection? As for the police who want to earn citizen trust, is it realistic to hope that those you have declared war against will trust you?

Households Finance Only 70 Percent of Their Own Consumption, Down from 93 Percent in 1959



8842760_SThe leftish think tank Demos has published a very thorough criticism of how we measure Gross Domestic Product. Scholar Lew Daly argues that we give government too little credit for its spending, because government invests in goods and services that increase total GDP. For example, household incomes increased dramatically in the 20th century due to an increase in “human capital,” much of which resulted from government-funded education. Therefore, he concludes, government funding of education is good!

Interestingly, Mr. Daly’s evidence relating education to human-capital development and rising incomes is mostly from the 1950s. Needless to say, this was before public-sector-unions and the federal government got involved, and a period in which most people would agree that public schools did a better job than today.

Mr. Daly notes with concern that household incomes have been shrinking as a share of GDP for some years now. However, he does not connect this decline with the fact that households control less of their own consumption than they did in earlier decades. When third parties control so much of what we consume, and we believe those third parties are financed by others, it is unsurprising that those third parties will seize control of a greater share of GDP. Mr. Daly’s shows us that in 1959, households financed 92.8 percent of their own consumption. By 2009, that had fallen to 70.3 percent, with government and employers supplying the balance.

READ MORE

“Prize-Grants” or Patents for Pharmaceutical Innovation?



14119837_SOver at the American Enterprise Institute’s online magazine, Arnold Kling has proposed “prize-grants” in favor of patents for pharmaceutical research. Kling dislikes patents:

Patents have always been a problematic way to promote innovation. They raise prices of products far above marginal cost. They impose legal costs involved in obtaining, attacking, and defending patents. They provide an artificially high incentive to develop substitute products that devalue the patented invention. They create an artificial disincentive to develop complementary products, because the high price of the patented product limits its market penetration, adversely affecting would-be product complements.

These drawbacks are well recognized, and a better alternative would certainly be most welcome. The question is: Can there be a better alternative? Kling’s “prize-grant” has the features of both a prize and a patent:

 The prize-grant would differ from an ordinary prize in the following ways:

—The criteria for winning the prize would typically be first suggested by the researchers, with funding institutions then assigning a value for the prize, prior to the research.

—Prizes often would be for incremental achievements, not just for spectacular accomplishments.

—Large pharmaceutical companies and other private firms would be just as eligible as nonprofit researchers to receive prize-grants.

We can think of the current intellectual-property regime in medical research as a grant-prize approach in which the prize is a patent. However, prize-grants differ from patents in the following ways:

—The prize for a successful result is specified by the funding institution. With a patent, the value of the prize is determined in part by patient demand but also by the purchasing rules of insurance companies and governments, by legal jousting, and by gaming of the system.

—Useful research that does not result in a patentable product gets rewarded under prize-grants, whereas under the patent system such research does not get rewarded.

—Regardless of the outcome of the research undertaken in pursuit of a prize-grant, findings would be immediately placed in the public domain. In contrast, patents set a term of monopoly on the use of information, during which the prices of patented products can be set far above production cost.

It is a very interesting idea, which I hope Professor Kling continues to develop. By way of constructive criticism, here are some obstacles that need to be overcome: READ MORE

Tech Companies Work to Tame Patent Trolls without Government Help



patent_trolls_180x270In the wake of Congress failing to pass patent litigation reform this year, the private sector has gotten into gear and has taken matters into its own hands. Tech companies have formed LOTNet. This article from Motherboard sums up this new idea:

As they say, if you can’t go through, go around. Enter the License on Transfer Network, or LOTNet. It works sort of like a non-aggression pact for patent-owning companies. When a member of the network sells a patent to a non participating company, the company selling the patent will automatically extend a royalty-free license to all members.

Basically, it’s creating a legal force field for all the businesses in the group. If a LOTNet company sells a patent to a company that ends up being a patent troll, the troll can’t sue any of the LOTNet members, because of the way the terms of the deal would be written.

In other words, any company that joins the network is protected from any other company in the network—presuming the patent is actually sold. Canon can’t go about making Google Glass, for instance, because Google isn’t going to be selling the patents that make the technology work to anyone anytime soon.

LOTNet members estimate that had they formed this organization in 2005, they would have saved over $100 billion in costs of litigation.

While it is unfortunate that Congress did not pass reform legislation, how appropriate it is to see innovation in the war against trolls coming from the private sector. This is yet another lesson that if we are going to tame the trolls, don’t wait for the government to act, but instead come up with innovative ways cut into troll power.

Health Spending Grew Slower in U.S. than in Other Developed Countries, 2007-2011 (but the Trend Won’t Last)



medical-tourismIt is unlikely that Obamacare explains the slowing rate of growth in health spending. A new research paper by Luca Lorenzoni and colleagues, from the Organization for Economic Co-operation and Development, confirms not only that the slowdown occurred well before Obamacare, but that health spending has slowed more in the United States than in Canada, France, Germany , the Netherlands, and Switzerland.

The report shares some disturbing data:

  • Government-health spending as a share of all U.S. health spending increased by 4.8 percentage points, from 44.0 percent (2000) to 48.8 percent (2011), whereas it shrank somewhat in Canada, France, and Germany;
  • Despite the growth in consumer-driven health care, in the United States, the share of spending paid directly out-of-pocked dropped by 2.1 percentage points, from 14.2 percent (2003) to 12.1 percent (2011), whereas it increased somewhat in Canada and France;
  • Health administration and health-insurance share of government-health spending increased by 1.2 percentage points, from 5.1 percent (2000) to 6.3 percent (2011), whereas it shrank in Canada, France, Netherlands, and Switzerland.

The report also gives us more insight into a more important question: Do we spend too much on health as a share of Gross Domestic Product (GDP) versus other countries? The answer remains “no.”

READ MORE

Reining in the Fed



US Monetary Base

The Fed on Steroids

The House of Representatives is currently considering a variety of bills intended to reduce the power of the Federal Reserve System. (“House Republicans Resume Efforts to Reduce Fed’s Power,” New York Times, July 11, Business Section.)

Under the pretext of fighting high unemployment, the Fed has more than quadrupled its balance sheet since summer of 2008. It has acquired $1.7 trillion worth of mortgage-backed securities, and increased its holdings of US Treasury bonds, notes and bills by $1.9 trillion. At various points during this period, it has extended hundreds of billions to companies like Bear Stearns, AIG, Fannie Mae, Freddie Mac, and the risky corporate commercial paper market, and provided a special guarantee to over $300 billion of shaky assets held by Citigroup.

A hefty $442 billion of this massive aggrandizement of the Fed’s power has been financed by actually printing new currency, a 7.8% annual rate of growth. But most of the remainder has been paid for by creating new interest-bearing excess reserve deposits.

Prior to 2008, the Fed could not pay banks interest on reserve deposits, but in the 2008 TARP bill, Congress gave the Fed power to pay interest, at its discretion, on both required and excess reserves. Without interest on excess reserves, banks would rush to make new loans with them by creating new checking account balances. Some fraction of these new deposits (historically about 40%) would drain out as currency, until excess reserves fell to virtually zero. But since October of 2008, “all” the Fed has to do to prevent this is pay banks enough interest to make idle reserves an attractive investment relative to loans.

READ MORE