Some readers have wondered why this blog from time to time runs posts on the US health care system. Aside from the fact that it’s a major public policy problem in America, it is also a prime example of bad incentives, information asymmetry, and corporate predatory behavior. It thus makes for an important object lesson.
Reader Francois T pointed to an example, a commentary on a paper presented by Donald Light at the annual meeting of the American Sociological Association, “Pharmaceuticals: A Two-Tiered Market for Producing ‘Lemons’ and Serious Harm.” It still appears to be embargoed, but Howard Brody provides an extensive summary on his blog.
Light uses George Akerlof “market for lemons” as a point of departure. For those not familiar with the famed Akerlof paper, a “market for lemons” can occur when consumers are unable to distinguish product quality. The used car market is the paradigm, since the dealer has a much better idea than the buyer of whether a particular car is any good. Unscrupulous operators can stick a lot of hapless chump customers with overpriced clunkers. However, as crooked vendors become more common, buyers wise up a tad and are not longer to pay as much for cars they cannot evaluate. So while the prices buyers are now willing to pay are probably still too high for rattletraps, they are too low for decent cars. People with good merchandise start to look for other channels. Akerlof posits that the market eventually falls apart.
Note that used cars dealers did not set out to create lemons; the cars were bad deals by being overpriced (presumably, if they had been presented, warts and all, they still would have found purchasers, presumably people who thought they could repair them and those who wanted them for parts and scrap). Light contends, by contrast, that major pharmaceutical companies create bad products:
[T]he pharmaceutical market for ‘lemons,’ differs from other markets for lemons in that companies develop and produce the lemons. Evidence in this paper indicates that the production of lemon-drugs with hidden dangers is widespread and results from the systematic exploitation of monopoly rights and the production of partial, biased information about the efficacy and safety of new drugs…Companies will design and run their clinical trials to minimize evidence that their drugs cause adverse reactions and maximize evidence that they are not inferior to or [are] better than a placebo for the target indication. And companies will also learn from the regulatory body how to game accelerated approvals and condition[al] approvals with post-market studies by cutting corners and submitting partial evidence in order to get drugs on the market faster and put the regulator under pressure to approve and not to later rescind.
Yves here. The reason we have an FDA was unsafe food, such as adulterated meat products and unsanitary slaughterhouses, and toxic medicines (such as radium drinks that produced some particularly horrid deaths). And the impetus for the FDA is being proven correct: producers, left to their own devices, value their own profits over their customers’ well being.
Pharma defender will contend this picture is distorted; the industry is highly innovative. Really? Its innovativeness of late is on par with Wall Street’s. The Financial Times reported that of the so-called “new drug applications” to the FDA, 88% were not in fact new drugs at all. They were either slightly different formulations (say, a time released version, so patients might need to take a pill only once a day rather than morning and evening), or were simply getting “off label”uses approved so that that the drug company could market that application (pharmaceuticals can be marketed only for uses approved by the FDA, but doctor are free to prescribe a drug as they see fit). Light has read a broad range of studies and has similar findings, that only 10% to 15% of the drugs approved by the FDA are new compounds. Thus, per Light, “[C]ompany R&D goes largely to a marketing strategy that does not meet societal needs or the needs of patients.”
Brody draws some implications from Light’s study:
Extrapolating from the best available figures, the US suffers about 111,000 deaths annually from adverse drug reactions (that is, drugs prescribed and administered correctly, and leaving aside deaths from medical errors), or more than twice as many fatalities as from auto accidents. This puts adverse drug reactions as the 4th leading cause of death, and besides, adverse reactions lead to about 1.5M hospitalizations per year (the total damage toll being underestimated because we lack good data for nonhospital settings).
If the industry produced drugs, many of which offer no real advantage over existing drugs, and then urged the maximum possible caution in their use, we could perhaps avoid some of this swath of death and destruction. But such, of course, would hardly suit the company bottom line; so instead we have what Light calls the “risk proliferation syndrome.” Company-sponsored research talks up the efficacy and the safety of the drug. Marketing then tries to get physicians to prescribe the drug to as many patients as possible, including those (such as the elderly) inherently at higher risk for adverse reactions, and those who have less and less chance of actually benefiting (because their disease is mild, or for whom nondrug therapy would work better, etc.) The industry does everything possible to speed up FDA approvals of new drugs and to slow down any threatened FDA action to remove an unsafe drug from the market or to restrict its use. The end result is that as many patients as possible are put at risk, while revenues go steadily up.
The financial power of the drug industry allows it to “colonize” medicine in the same way that it has effectively taken over the FDA. This means that more and more of medicine turns into a commercial enterprise placed at the service of industry profits. New diseases are “discovered” that require drugs to treat them. The medical literature becomes indistinguishable from the industry marketing juggernau
Yves here. In one sense, we do have evidence of a market for lemons: the rising popularity of alternative medicine. Some of its appeal is that certain treatments do work (for instance, acupuncture does reduce inflammation) and that alternative practitioners are interested in ailments often deemed as sub-clinical by MDs. one impetus is that some consumers are reluctant to take drugs. Light’s analysis says their concern is not unfounded.