Monday, August 24, 2009

The Myth that Socialized Medicine Works in Some Places

A friend sends along a link to a commentary on the current healthcare debate by AQR's Cliff Asness, a hedge fund manager:

Ah … one of the holy myths of the “US health care sucks” crowd. This should be fun.

The general story is how you can buy many drugs in Canada cheaper than you can buy them in the US. This story is often, without specifically tying the logic together, taken as an obvious indictment of the US’s (relatively) free market system. This is grossly misguided.

Here’s what happens. We have a (relatively) free market in the US where drug companies spend a ton to develop new wonder drugs, a non-trivial amount of which is spent to satisfy regulatory requirements. The cost of this development is called a “fixed cost.” Once it’s developed it does not cost that much to make each pill. That’s called a “variable cost.” If people only paid the variable cost (or a bit more) for each pill the whole thing would not work. You see, the company would never get back the massive fixed cost of creating the drug in the first place, and so no company would try to develop one. Thus, companies have to, and do, charge more than the variable cost of making each pill.[2] Some look at this system and say to the drug companies “gee, it doesn’t cost you much to make one more pill, so it’s unfair that you charge much more than your cost.” They are completely wrong and not looking at all the costs.

So, let’s bring this back to our good natured friends to the North (good natured barring hockey when they’ll kill you as soon as look at you[3]). They have socialized medicine and they bargain as the only Canadian buyer for drugs, paying well below normal costs. Drug companies that spent the enormous fixed costs to create new miracles are charging a relatively high cost in the free and still largely competitive world (the US) to recoup their fixed cost and to make a profit. But socialist societies like Canada limit the price they are allowed to charge. The US-based company is then faced with a dilemma. What Canada will pay is not enough to ever have justified creating the miracle pill. But, once created, perhaps Canada is paying more than the variable cost of each pill. Thus, the company can make some money by also selling to Canada at a lower price as it’s still more than it costs them to make that last pill.

However, this is an accident of Canada being a less-free country than the US, able to bargain as one nation, much smaller, and next door. If we all tried to be Canada it’s a non-working perpetual motion machine and no miracle pills ever get made because there will be nobody to pay the fixed costs. I’m a big fan of Canadians in general (particularly Wayne Gretzky and Mario Lemieux, who if healthy probably would have eclipsed Gretzky – but I digress), but when it comes to pharmaceuticals they are lucky parasitic hosers. Drug companies in general sell their products to Canada at low prices, making a little profit, and reducing slightly the amount they need to charge other North Americans. This does create the silly illusion that the Canadian system is somehow better than ours because our own drugs are cheaper there. They are only cheaper to the extent we are subsidizing them by paying their portion of drug development costs and, unfortunately, we cannot subsidize ourselves (or we go blind).

So, what is the purpose behind those who tell tales of these cheap Canadian drugs? Obviously they seek to ridicule our freer system by putting the parasitic and socialist system on a pedestal. They seek to imply that our system is broken, and delivers only expensive drugs, when the socialist Canadian system delivers the goods for its people. Thus, they implicitly argue that we need to have socialism here. It’s not complicated.

So, repeat after me. We could go with the Canadian system and have super cheap drugs, if only we can find a much bigger, much more medically advanced, much freer country right next to us to make miracle drugs for themselves, and then we insist that we pay them only a bit above their variable cost for our share, and then they in turn agree to let us be their parasite. Mexico, would you mind helping us out?

Socialized Medicine Works In Some Places

This is a corollary to the “Canada as parasite” parable above. The funny part is socialized medicine has never been truly tested. Those touting socialism’s success have never seen a world without a relatively (for now) free US to make their new drugs, surgical techniques, and other medical advancements for them. When (and I hope this doesn’t happen) the US joins in the insanity of socialized medicine we will see that when you remove the brain from the body, the engine from a car, the candy from the striper, it just does not work.

So, please, stop pointing to all those “successes” that even while living off the US still kill hard-working people who could afford their own health care while they stand in line for the government’s version (people’s cancers growing while waiting 10 weeks for a routine scan, which these people could often afford on their own if allowed, is a human tragedy). Even the successes you gin up for them would not be possible without the last best hope of humankind (the US) on the front lines again making the miracles for the world.

Specifically, let’s also stop citing the Nordic countries as examples. The temporary success of (comparatively speaking) twelve herring-eating homogenous people is not an example that applies to anything outside of perhaps Minnesota, and they elected Stuart Smalley, so under any system they need serious free anti-psychotic medication immediately. Anyway, the Nordic country’s touted “success” is going to go the way of the Soviet Union’s plan to bury us, as their changing demographics (far more economic diversity and an aging population) change their culture and show the cracks in their utopian fantasy. As Milton Friedman (paraphrasing) said to a Swede bragging about how little poverty there was in his country "well, yes, I too have observed that among Swedes in America, there's also very little poverty."

To put it simply, right now the US’s free system massively intellectually subsidizes the world’s unfree (socialized) ones. That sucks. The only thing that would suck worse is joining them without anyone to subsidize us all.
It should also be noted that the high fixed costs in the United States are to a significant degree the result of the mostly absurd testing protocols required by the FDA before a drug is approved. In a truly free market, multiple testing protocols would be developed for different drugs and different situations(say a drug for a dying patient versus a drug for a minor irritant). A one size fits all bureaucratic mentality at the FDA has probably killed more people than the deaths caused by the U.S. bombs dropped on Nagasaki and Hiroshima.


  1. No one should be forced to sell their house as a result of illness. No one should be paralyzed by debt because they're unlucky enough to get sick.

    It's great that you picked a single issue to contend with, like medication. You forgot to mention that part of the reason those medications are cheap is because they're subsidized by the government to keep it that way. the companies themselves still get close to top dollar when selling it, naturally a portion of each persons taxes goes to keeping it that way, but no individual has to shoulder the cost of expensive drugs themselves. Johnson&Johnson still gets it's money.

    there is no room left in the world for this kind of backward dark ages thinking. the US is the only country without "socialized" Healthcare and it's unfortunate. Anyone who has universal healthcare would never give it up, It's too great a system.

  2. If we were to allow "socialized" medicine in this country, tens of thousands of profiteers would have to tighten their belts. Check out the health care systems in Germany, Switzerland, Thailand, Taiwan and Japan to get your campaign smashed forever. Universal health care works in Germany since Bismarck introduced it around 1885. You are playing games with it the way you procrastinated with giving women the right to vote. In other countries health care is considered a basic human right. In this country it bankrupts patients. I was denied ER care shortly after my discharge from the Air Force. I was unable to satisfy their greed.

  3. @Ceb: Good job no-one has to sell their home under socialised health care. Oh wait.

    I'd be delighted to trade the NHS for a truly free health market i.e. not one with a ~$1bn cost for approving a drug and worse.

  4. Whoa, the comments on this post are great!

    "there is no room left in the world for this kind of backward dark ages thinking"

    LMAO!! Well, to a degree I agree. The system has been messed up by government intervention. Let the free market deal with it. It WILL be dealt with. But the taxpayer will not have to pay. I can only imagine that people that want this did either not live in NHC country or for some reason just love 45% tax rate?

    People forget that there is little "free" about free markets in US. They have been mucked with way too much. Who messed with it? Guess what - same government buerocracy that now wants to grab it all. Is there anything wrong with this picture?

  5. How about some of these "socialized medicine" driven countries assisting the US with the "real" costs of technology advances and the many medical options we are blessed with?? Everybody wants a free lunch and they love it when they get it!! Let's not break the component that does work here in the US while fixing other areas of the healthcare system that need attention (catastrophic coverage for example).

  6. Ceb,

    Come on, at least read and comprehend the post before commenting.