The DBCFT; Construction productivity and regulation; Rationality and complexity; U.S. productivity growth; Demand-side inflation; Health care monopsony and innovation
One thing to always keep front of mind when looking at medical innovation in countries with public health systems and price controls: whether or not the medical companies in those markets are selling into the US markets. I don't know the specifics about Japanese and Korean medical companies, but many European drug and medical device companies are essentially recouping all their fixed costs by selling into the US market, allowing them to sell at prices only slightly above their marginal cost in their home markets. US consumers wind up subsidizing much of the R&D for the entire world as a result, and if we imposed price controls on our markets, it would likely have catastrophic impacts for innovation in countries around the globe.
This is not necessarily an argument that US consumers _should_ keep subsidizing the rest of the world, mind you. But people have gotten so used to free-riding on the US medical system that I tend to think that they'd let innovation collapse before other countries would start picking up their share of the tab. As always, it's a lot easier to see money leaving your bank account right now than foresee the things that will never be developed because they could never be made profitable.
Please see my comment below. The gaming system is that Insurance companies pocket the cash difference between lower negotiated rates with both doctors and hospitals.
Every doctor and hospital accepts Original Medicare. They never deny.
Only insurance denies claims. And has in and out of network providers.
Insurance pays doc $75.00. Medicare pays Insurance $150.
This makes no sense
Why don't we all use Original Medicare we all on Medicare pay for?
Because Congress let's Insurance cap out of pocket maximums. But they disallow Original Medicare this as they don't allow Original Medicare to be a Part D drug provider.
And we get lower outcomes for 2x in no added value
Yep. I think there should be strong diplomatic pressure on our European allies to pay their fair share, both for defense and for health care innovation. If they don't want to, they can deal with Russia by themselves.
Unfortunately, Trump has taken the populist stance that the companies that are giving us new life-saving treatments every year are the villain, so that isn't going to happen. And Democrats have had that position for decades. So, we're probably stuck with handcuffs on medical innovations for the foreseeable future.
EU Defense: Imagine managing a military with 24 official languages. Imagine getting consensus among 27 countries where the "right to veto" is still in effect. Imagine working with Hungary that does not think having Russia on its border is a security risk.
1) The authors are ignoring a big facet of the world spending on health, the fact that the US has 4.23% of the world's population but accounts for about half of global health spending. The US shouldn't be doing this. We are a big market. Drug companies and Medical Device companies still launch products in the UK and Japan and Germany. We would still get innovative medicines even if we weren't paying out the nose for them.
The authors even acknowledge this on page 4, "The cost-conscious environment also altered market structure. The number of new entrants decreased by 40%, driven by a 72% decline in U.S. manufacturers’ entry, with NO SIGNIFICANT CHANGE among foreign manufacturers, perhaps reflecting their relative cost advantage."
Why do foreign manufacturers have a cost advantage? Because they are used to justifying the cost of their devices to national Health Technology Assessment agencies. Other countries have medical device companies that can innovate without a massive subsidy from the US taxpayer.
This is like your explainer on how important it is to make an industry that can compete internationally rather than relying on local government subsidies and captive market.
2) Let them eat R&D dollars!
Their "Our calculations suggest the value of lost innovation may fully offset the direct cost savings from the price cuts." is very misleadingly worded and framed. They are very strongly implying that the the "value of lost innovation, measured by reduced R&D expenditures, amounting to $2.9 billion annually following the price reform" (page 27) is comparable to "Medicare saved$ 3.8 billion annually in DME spending, adjusting for inflation." (page 28).
The "Value of lost innovation" is company spending on R&D. If Merck spends 10 million$ less on R&D in 2024 than it did in 2023, some people might lose their jobs and the medical research sector would shrink. There may be some long term effects on new drugs/devices but this is ultimately a kind of industrial R&D spending.
Conversely, if Medicare has 10 million$ more to spend, that's medical procedures, that's medicines, that is patient care, that is lives saved directly and immediately.
The authors word their comparison to make it seem like a dollar of lost R&D is doing the same thing as a dollar of lost Medicare spending, but it really, really is not.
There is also the question of whether innovating a Me-Too stent or a slightly better hip prosthesis is much of an innovation that is actually worth much of anything as healthcare innovation.
I feel the same way about cars. Think of how much money is wasted on all these multiple brands, the advertising, the marketing, the unnecessary leather interiors and walnut inlays.
The government should make everyone drive a Robin Reliant. Three wheels are cheaper and it gets anyone from place to place
The savings from the elimination of all that wasteful consumption and competition would be immense. The government could seize that money or maybe allow people to spend some of it on products the government approves of.
There would, in fact, be many fewer car companies the world over without government intervention. So I don’t think your counter example is actually very good.
How many commercial airliner companies are there now? How many did there used to be? Same situation with cars.
I thought you we arguing for government preventing “me too” products, hence my hypothetical example using cars. Apologies if I misunderstood.
That governments have kept alive failing airlines and car companies (eg preventing Spirit merger in US) just as they have allowed “me too” products, has no bearing on what would happen if they banned “me too products”, whether in Pharma or cars.
Let’s say the government decides that transportation is a human right and cars are so terribly expensive and filled with so many unnecessary frills. And just imagine all of the ridiculous marketing and advertising expenses and all of the management overhead associated with these competing car companies. Wouldn’t it be much better if the government chose one car - bare bones - and one company? No marketing expenses. Don’t need to pay ten CEOs, CFOs, etc. Increased sales and scale for that one vehicle would allow for cost savings. Instead of allowing some rich clowns to waste money on a BMW, just give them the car the government negotiated for and take the rest of the money they were going to spend to give the government car to poor people. Much more equitable and the chosen car gets you from place to place same as a BMW does.
This is what the government choosing one drug or device supplier at a knock down rate does.
In the above example, the bad news is that the year is 1976 and the government chose the Ford Pinto.
What would that mean 50 years later in that system? Would there be anti-lock brakes, air bags, cameras and sensors for self-driving and safety?
Sure, if only our government chose the Pinto (of course regulating pricing and profits) and the rest of the world allowed competition, innovation and profiteering then maybe we’d get the benefit of their innovation over the years. But what if every government chose the Pinto at the same time? That is what you are suggesting.
Given global demographics over the next 30 years I want as many drugs and devices discovered now so that they might be generic in 30 years. Now is exactly not the time to reduce innovation and have the government pick a winner in every category.
There are ways we can reduce free-riding and increase competition without the US resorting to more statism, though I accept that statism is what we might get in the end, with medicine looking even more like the defense industry.
You do know that state financed healthcare exists in 30+ other advanced countries and it's fine?
The Dutch system is different from the UK system which is different from the German system which is different from the Korean system which is different from the Israeli system which is different from...
We know what price regulation in health looks like.
All of these countries have more price regulation than the US does.
The only reason you are inventing some transportation strawman is because the actual examples in health like Japan and Korea actually exist... And they are better on both costs and outcomes.
Medicare and Medicaid are huge and regulate prices for in-hospital services….and yet hospital charges in the US are 3x what they are in Europe.
Just as with defense contractors the industry captures the pols.
So much focus on Pharma when it is 15 percent of healthcare spending and easily addressed by the US penalizing pricing above levels in Europe, Canada and Mexico. Meanwhile, hospitals fleece Americans like nobodies business and medicate uses outdated pricing methodologies that leads to a surplus of orthopaedists and a deficit in poorly-paid neurologists, etc
Unfortunately Trump appointed Peter Navarro to a senior trade advisor role in his new admin - based on that and....everything else that's transpired I have the unfortunate feeling that DBCFT will not be on the table. I'm optimistic we might see it after Trump if we make it through all this.
I think a major cause of the lack of productivity growth in construction is the Baumol effect (https://en.wikipedia.org/wiki/Baumol_effect). Construction seems to have been pretty much impervious to innovation over the course of my lifetime. A construction site today looks pretty much identical to one in 1990 (and likely even further back, but I wouldn't know) whereas most jobs are insanely more efficient today.
I think that explains why productivity hasn't increased, but not why it has decreased. That's where I think the cost of the additional bureaucracy and permitting around land usage, and the associated litigation comes in. Cutting the red tape is definitely a good thing, but investing in technology to automate the construction industry is better.
I would say that concrete/foundation work and things like pre-fab trusses and beams (laminate or steel) have been innovative- better and cheaper to install than prior methods. Same with some of the cladding products replacing plywood (better, not cheaper) or some of the drywall techniques (spray texture rather than mud/soackle reduces skill needed and speeds installation- these are cheaper but not necessarily better). PVC has made plumbing much easier and HVAC (flexible connections to vents) uses cheaper materials with less labor.
Overall, materials have gotten better or cheaper than todays price of what we used to use, though labor processes look a lot like it used to. Where there are efficiencies are in projects with scale.
In my condo development I see the concrete guys pouring four foundations in a day, teams of framers coming out and framing those four units, etc. They have cranes on site to move trusses and place beams, etc. But those are nearly identical and contiguous. I’m sure the mass home builders (Toll bros, KB, etc) have the same efficiencies. A builder doing a custom home or a renovation doesn’t have that. Especially in states like CA where the volume of construction is so low there are not roving framing teams with cranes and concrete teams with several mixers either those gangly pipes. More likely to find two guys and a circular saw.
Clearly you know more about this than me. How much of this innovation was recent (let's say last 50 years)? PVC has been around for longer than that, but I don't know about the rest.
How long would that foundation that now takes a day take 50 years ago? And overall what would you estimate the efficiency impact of all this is? Is it a few percent here and there, or is it a dramatic change?
3. I very much appreciate the idea that median human beings are very poor at making complex calculations accurately. I think this has relevance to the issue we discussed a couple of days ago, whether the median survey respondent could accurately calculate whether they had a three-month rainy-day fund.
This was undoubtedly the first time that most had been asked this question in their entire life. The question demanded that they have a ready idea of what their monthly expenses were and be able to multiply that figure in their minds accurately. The complexity of that calculation would make the option of giving the socially acceptable answer more attractive: “Yes, I do have a rainy-day fund.“
Also, the fact that 50% of American credit card holders currently are carrying a balance, put some pressure on the idea that 56% of Americans have a three-month rainy-day fund.
If it includes balances over a month, popular cards have introduced planning features where you can split an expensive over a year without paying much higher interest.
Also, we don't see especially high leverage ratios (debt/income ratio) in FRED.
Re: The national healthcare innovation question: isn't this pretty easy to resolve with real-world examples of innovation in countries with public healthcare?
Perhaps the most disruptive innovation in medicine in recent years was the introduction of Ozempic to the marketplace as a weight-loss treatment under the Wegovy brand. Who invented Ozempic? Novo Nordisk. Where is Novo Nordisk located? Denmark! Who has the Social Democracy and public healthcare system par excellence? You get the idea.
Novo Nordisk last year was literally worth more than the entire country of Denmark in which it is headquartered (seriously, they have to break it out of GDP stats!). That's a weight-loss innovation punching WAY above its weight in one of the most robust Social Democracies and state-dominated economies in Europe.
And Ozempic's far from the only example of the European healthcare sector producing world-class innovations, recently, despite the cost-cutting monopsony power wielded by those states. There are 39 leading companies in the European Federation of Pharmaceutical Industries and Associations, for example, including Novo Nordisk, that are many of them household names and innovate plenty, including 80% of the vaccines used globally and a 1/5th of new medicines to market. European firms like Germany's BioNTech also independently developed the first authorized mRNA COVID vaccine. Watch that space for an immunotherapy-based cancer vaccine from BioNTech in a few years!
And it's not just in pharma you see major European medical innovation: Kheiron is a UK startup that developed the AI model Mia that famously beat experienced human doctors in diagnosing breast cancer. That's all the more impressive because IT is famously something that Europe has lagged the United States in for my whole life for reasons that have nothing to do with having national healthcare systems.
So, if it were true that European healthcare firms were stagnant but reliable producers of commodity healthcare goods and services for the skinflint public sector, this libertarian argument would land, but it's just not the case.
You think Novo Nordisk developed GLP-1 drugs with the Danish market in mind?
Novo began working on GLP-1 based ozempic predecessors in 1998, leading to ozempic development some years later with phase 2 clinical trials starting in 2008. Final phase 3 clinical trials concluded in 2016-2017, with FDA approval for diabetes treatment.
Even going behind the crazy idea that Denmark’s health system had anything to do with Novo’s decision-making, do you think Novo backed that risky 20 year development venture in the hope that a state purchaser (let’s assume every country in the world was run like Canada or the UK) of new medicines would a) approve it as “the” preferred provider over the competitors also in process during that 20 year time period and b) allow it to be priced at a level that rewarded the 20 year investment (allowing for the possibility Novo stumbled and wouldn’t be first to market or as good as the competitors in the running to be chosen by the state as “the” preferred provider at concessional prices?
There are lots of “universal” models out there. Denmark’s is pretty good (hospitals are public while doctors are private-sector) and most drugs are available.
As a side note- Denmark has just prohibited Ozempic prescriptions for diabetics, forcing them to go with generic GLP-1 products unless those products are not available or don’t work well for the patient
But I’m not arguing that Denmark’s or anyone’s single-payer model is the *cause* of innovation… merely that it’s clearly not an impediment!
Denmark and other public healthcare countries are clearly host to innovation in the healthcare sector. In some select cases, they host healthcare innovation that is even outsize of their population and economy. That’s not to say that Europeans are better or worse than the United States, with its hybrid healthcare system.
The structure of the healthcare system just might not be really relevant either way, with other factors being more important?
I served as a Planning Commissioner in the city of Elk Grove, CA for about 9 years.
I saw first hand the use of CEQA (state version of NEMA) lawsuits to force builders into expensive and time consuming project labor agreements -- essentially a set of unions would come in and say, "Gee, nice little project you've got here... be a shame if you found an endangered snail on this land. Now we've got a union labor agreement for you to sign..."
How much of the decline in construction productivity it causes, I don't know. But it's a real thing and pretty common. It's especially devastating for smaller builders who lack the resources to fight it.
It makes sense to focus on OECD countries when evaluating whether greater fiscal stimulus leads to more inflation, as developing countries face different inflationary pressures, particularly currency depreciation. Many poorer nations, especially in Africa, rely heavily on imports for essentials like food, fuel, and fertilizer. Without sufficient foreign reserves to stabilize their exchange rates, a depreciating currency can spiral into a crash, making imports significantly more expensive. This often forces these countries to float their currencies, as seen with the massive inflation & falling currency values in Sri Lanka, Nigeria, Ghana, Egypt, Ethiopia, and more.
Original Medicare is accepted by every hospital and every doctor. 99.999%
So why have Health Insurance?
A. Original Medicare has NO out of pocket maximum.
B. So why did Congress (D+R) create Insurance but not provide a maximum cap for Original Medicare?
C. OM has no drug plan coverage. But Supplement and Advantage do. Why didn't Congress allow OM to cover drugs?
How do these Insurance companies then, actually make money to provide the free Rx and out of pocket maximum. These two benefits if allowed for Original Medicare would be fair.
But, Congress wanted to create an unnecessary business for lobbyists and umm kickbacks ie pac spending.
Medicare sets the fee for your doctor and hospital. If you use OM they get paid 100% of the set rate.
But Insurance creates "networks" where they negotiate fees that are 50% and lower than OM pays. Why do doctors and hospitals sign up with Network A and not B?
They get sold on the customer volume power that the Insurance companies offer. They drive business to them. And screw the providers!
The money algorithm is simple and stupid. Your doctor charges $150 a visit and your hospital stay example costs $50,000.
Insurance company pays doc and hospital their plan network negotiated rate. Doc only gets $75 and hospital gets $25k. But, because Insurance is managing your Medicare part A and B, Medicare pays Insurance the full amounts, $150 and $50k.
Insurance company takes the cash difference. And that funds the Rx and iut of profit maximum.
As I've long said, Insurance has a very negative pressure by reducing health outcomes vs single payer democracy. The lie is socializing medicine like M4A lets government choose and deny coverage. The truth: Original Medicare to my knowledge never denies your doctor or hospital. But Insurance hires disbarred and lousy doctors to deny your medical necessary coverage. Stupid.
Right. You're presented with the choice of 1) actually having choice in your treatment (original Medicare), or 2) having most choice removed, but with the incentive of a cap on out of pocket expenses. It's a bit of a Hobson's choice.
I think there are many reasons why most construction companies are generally small. One example is that the construction labor pool, both for skilled trades and for competent construction managers, is for the most part fixed in place and only willing to service the small region surrounding where they live (and do just fine, making good wages and enjoying life). You can't find many carpenters and electricians, for example, who will travel from state to state while their company chases the big projects. Those few that are willing to do that are already working for the very few large firms that service a larger area, so there's a limit to how many firms can do this.
I live in northern New England and work in the construction industry. Regional factors that keep our construction firms on the small side include:
--Geography - not a lot of wide-open land, hilly, and rocky, lots of wetlands, with most of the easy to build on sites already occupied
--Commuting times for the labor pool -- one hour of travel north and south gets you 60 to 70 miles, but east and west only 30 to 40 miles due to the mountain ranges
--Weather (trending milder by the way) -- construction in winter conditions is costly, affects willingness to commute, and so on...
--Smaller sized urban areas north of Boston's
--Small intuitions that order construction (schools, universities, hospitals, municipalities)
--Small companies ordering construction (ditto above)
--Lots of recreation areas, but these tend to be small, so hotel construction is on the smaller size.
I think our construction companies are about right sized for our region.
So maybe studies tend to find stagnate construction productivity because they focus on too large an area. The more helpful study would ask something like.... given northern New England's construction environment, what's the best our construction productivity could ever be? Are some of our companies already at that level? I suspect that many are.
Regarding the medical innovation paper, I was an executive for a private company selling into this market during the period discussed. The paper is very interesting, but the dynamic analyzed is subject to so many idiosyncratic dynamics that no macro lessons should be drawn from it. My company got ~50% of revenue from the home care/DME market they analyzed. We stopped all innovation into that market and shifted all investment into hospital products.
TLDR: profits were high mostly because Medicare was paying too much. They changed from setting rates by fiat to an auction system. Because of this, the profitability of the space cratered for DMEs and for device manufacturers. But, the impact was high for device categories with little differentiation, like in oxygen. For those where there was a real clinical benefit -- e.g. CPAP -- companies continued to invest and earn strong profits.
Here's what happened in home oxygen, the area I know best:
- Serving oxygen patients was historically very expensive because DMEs had to deliver oxygen tanks to patients every 2 weeks.
- Reimbursement rates set by Medicare not only covered these high costs, but were so high that it was easy for a small DME owner to get rich.
- There were very high rates of fraud in these categories, which CMS was well aware of based on multiple OIG analyses. The law enabling reimbursement changes and Medicare's implementation were also informed by a desire to reduce fraud.
- In many DME segments, the majority of patients are covered by Medicare. In most medical device categories, private insurers pay more than Medicare. But in the several DME categories, Medicare paid the most. Therefore, DMEs were incredibly exposed to changes in Medicare reimbursement rates.
- The industry was highly fragmented with many unsophisticated mom and pop providers. Barriers to entry were low and success came from providing physician prescribers with high levels of service.
- Oxygen concentrators became inexpensive enough that it could be much more profitable to switch from delivering tanks of oxygen to providing a patient with a concentrator that would last 3-5 years or more, but that required an up-front capital investment. Adoption of these lower-cost therapies was slow.
- Medicare imposed competitive bidding: basically an auction where providers would bid on servicing a region and access was awarded to a small number of providers purely based on cost.
- As a result, the DME industry went through substantial consolidation: our customer list went from ~6500 to less than 3000 over about 5 years.
- Due to all of this, manufacturers shifted R&D to reducing product costs instead of innovation.
- Finally, the incentives for manufacturers changed. There was no payoff for incremental innovation. We had many ideas, but shelved them all. But transformational innovation was still possible. I'd argue that society was better off by incentivizing manufacturers to spend more dollars on bigger improvements versus small things that justify keeping reimbursement high.
By contrast, competitive bidding also affected CPAP for obstructive sleep apnea, an area where private insurance plays a bigger role. These products have a great ROI for society and innovation has continued.
One of my all-time favorite career/political experiences was when the owner of a DME (home equipment provider) went on a rant about "Obama's socialist competitive bidding program": the program that changed top-down government pricing to a market-based auction system, created by a law passed by a Republican congress and signed by George W Bush.
> Note that the first of these challenges the progressive notion that companies have just been buying back their stock instead of investing.
This was always a fundamentally dumb idea. Firms in aggregate can't buy back stock without investors changing their overall portfolio composition. All buybacks from large companies do is reallocate capital from firms buying back stock to firms *selling* their stock. Which is to say, transferring capital from large established firms with a low marginal return to capital to small high return to capital firms.
This has the effect of reducing market concentration, which progressives should celebrate. Instead they get their brains twisted up by the fact that someone made money and they miss the actual flow of capital goods!
In both cases they either consume the return that or reinvest it in other firms. The net effect for retirees is to transfer capital from established firms to old people for consumption. Alternatively, for the rich (who mostly reinvest), the net effect is to transfer capital from established firms (net stock buyers) to new firms (net stock sellers, think IPOs).
Noah, there are some "giant Wal-Mart style construction companies that handle projects all over the country." They include DR Horton, Lennar, and Pulte. https://www.builderonline.com/builder-100/builder-100-list/2024/. See also Tim Jennings' comment below.
I agree that DBCF tax is better than a business income tax, but even better is neither. Just impute business income to owners personal incomes and tax those. Ideally of course, the personal tax would be a progressive tax of consumption, not income.
Have you tried investing in partnerships that send you a K-1 before? It's painful. My taxes haven't been correct the last two years because one startup just never sent them. And the others send them months after April.
Yes, but do it in relation to not taxing business income at all. Of if we do, credit the taxes paid to the owners' income taxes, raising the schedule of rates to maintain revenues.
There are some confounders in the innovation and monopsony argument. There is evidence of reduced innovation from European pharma companies, though it is difficult to unpack how much of this is an effect of, for example, the French or German government's rigorous product evaluation processes and how much is the comparatively less dynamic corporate sectors in those markets. Further, Switzerland, which does not have a centralized health purchasing entity and has only 8 million inhabitants nevertheless generates substantial medical innovation (though as someone notes, not merely for the Swiss population...).
Recent policy changes -- the HTA Regulation in the EU and the IRA in the US -- are effectively pushing towards a more rigorous standard of what good looks like, necessitating strong comparative evidence of incremental benefit to get approval or access. In Europe this has been the case in many countries, but for the US it will have a profound impact. The IRA -- sometimes angrily described as the "innovation reduction act" -- will reduce investment in marginal assets without a path to value. These assets -- line extensions, me-toos, or products approved on placebo data -- might previously have been successful in the US but are now seeing enormous GTN pressure and reduced access. In contrast, innovative products with real incremental benefit, as shown in rigorous trials, still consistently find a market everywhere, irrespective of whether the market is single payer or not.
One thing to always keep front of mind when looking at medical innovation in countries with public health systems and price controls: whether or not the medical companies in those markets are selling into the US markets. I don't know the specifics about Japanese and Korean medical companies, but many European drug and medical device companies are essentially recouping all their fixed costs by selling into the US market, allowing them to sell at prices only slightly above their marginal cost in their home markets. US consumers wind up subsidizing much of the R&D for the entire world as a result, and if we imposed price controls on our markets, it would likely have catastrophic impacts for innovation in countries around the globe.
This is not necessarily an argument that US consumers _should_ keep subsidizing the rest of the world, mind you. But people have gotten so used to free-riding on the US medical system that I tend to think that they'd let innovation collapse before other countries would start picking up their share of the tab. As always, it's a lot easier to see money leaving your bank account right now than foresee the things that will never be developed because they could never be made profitable.
Please see my comment below. The gaming system is that Insurance companies pocket the cash difference between lower negotiated rates with both doctors and hospitals.
Every doctor and hospital accepts Original Medicare. They never deny.
Only insurance denies claims. And has in and out of network providers.
Insurance pays doc $75.00. Medicare pays Insurance $150.
This makes no sense
Why don't we all use Original Medicare we all on Medicare pay for?
Because Congress let's Insurance cap out of pocket maximums. But they disallow Original Medicare this as they don't allow Original Medicare to be a Part D drug provider.
And we get lower outcomes for 2x in no added value
Private insurance normally has to reimburse more than Medicare. That is who is subsidizing Medicare patients.
Incorrect
Yep. I think there should be strong diplomatic pressure on our European allies to pay their fair share, both for defense and for health care innovation. If they don't want to, they can deal with Russia by themselves.
Unfortunately, Trump has taken the populist stance that the companies that are giving us new life-saving treatments every year are the villain, so that isn't going to happen. And Democrats have had that position for decades. So, we're probably stuck with handcuffs on medical innovations for the foreseeable future.
EU Defense: Imagine managing a military with 24 official languages. Imagine getting consensus among 27 countries where the "right to veto" is still in effect. Imagine working with Hungary that does not think having Russia on its border is a security risk.
On #6, your first instincts are right.
There are two ways this paper is wrong.
1) The authors are ignoring a big facet of the world spending on health, the fact that the US has 4.23% of the world's population but accounts for about half of global health spending. The US shouldn't be doing this. We are a big market. Drug companies and Medical Device companies still launch products in the UK and Japan and Germany. We would still get innovative medicines even if we weren't paying out the nose for them.
The authors even acknowledge this on page 4, "The cost-conscious environment also altered market structure. The number of new entrants decreased by 40%, driven by a 72% decline in U.S. manufacturers’ entry, with NO SIGNIFICANT CHANGE among foreign manufacturers, perhaps reflecting their relative cost advantage."
Why do foreign manufacturers have a cost advantage? Because they are used to justifying the cost of their devices to national Health Technology Assessment agencies. Other countries have medical device companies that can innovate without a massive subsidy from the US taxpayer.
This is like your explainer on how important it is to make an industry that can compete internationally rather than relying on local government subsidies and captive market.
2) Let them eat R&D dollars!
Their "Our calculations suggest the value of lost innovation may fully offset the direct cost savings from the price cuts." is very misleadingly worded and framed. They are very strongly implying that the the "value of lost innovation, measured by reduced R&D expenditures, amounting to $2.9 billion annually following the price reform" (page 27) is comparable to "Medicare saved$ 3.8 billion annually in DME spending, adjusting for inflation." (page 28).
The "Value of lost innovation" is company spending on R&D. If Merck spends 10 million$ less on R&D in 2024 than it did in 2023, some people might lose their jobs and the medical research sector would shrink. There may be some long term effects on new drugs/devices but this is ultimately a kind of industrial R&D spending.
Conversely, if Medicare has 10 million$ more to spend, that's medical procedures, that's medicines, that is patient care, that is lives saved directly and immediately.
The authors word their comparison to make it seem like a dollar of lost R&D is doing the same thing as a dollar of lost Medicare spending, but it really, really is not.
There is also the question of whether innovating a Me-Too stent or a slightly better hip prosthesis is much of an innovation that is actually worth much of anything as healthcare innovation.
I feel the same way about cars. Think of how much money is wasted on all these multiple brands, the advertising, the marketing, the unnecessary leather interiors and walnut inlays.
The government should make everyone drive a Robin Reliant. Three wheels are cheaper and it gets anyone from place to place
The savings from the elimination of all that wasteful consumption and competition would be immense. The government could seize that money or maybe allow people to spend some of it on products the government approves of.
There would, in fact, be many fewer car companies the world over without government intervention. So I don’t think your counter example is actually very good.
How many commercial airliner companies are there now? How many did there used to be? Same situation with cars.
I thought you we arguing for government preventing “me too” products, hence my hypothetical example using cars. Apologies if I misunderstood.
That governments have kept alive failing airlines and car companies (eg preventing Spirit merger in US) just as they have allowed “me too” products, has no bearing on what would happen if they banned “me too products”, whether in Pharma or cars.
Now do deodorants...
Let’s say the government decides that transportation is a human right and cars are so terribly expensive and filled with so many unnecessary frills. And just imagine all of the ridiculous marketing and advertising expenses and all of the management overhead associated with these competing car companies. Wouldn’t it be much better if the government chose one car - bare bones - and one company? No marketing expenses. Don’t need to pay ten CEOs, CFOs, etc. Increased sales and scale for that one vehicle would allow for cost savings. Instead of allowing some rich clowns to waste money on a BMW, just give them the car the government negotiated for and take the rest of the money they were going to spend to give the government car to poor people. Much more equitable and the chosen car gets you from place to place same as a BMW does.
This is what the government choosing one drug or device supplier at a knock down rate does.
In the above example, the bad news is that the year is 1976 and the government chose the Ford Pinto.
What would that mean 50 years later in that system? Would there be anti-lock brakes, air bags, cameras and sensors for self-driving and safety?
Sure, if only our government chose the Pinto (of course regulating pricing and profits) and the rest of the world allowed competition, innovation and profiteering then maybe we’d get the benefit of their innovation over the years. But what if every government chose the Pinto at the same time? That is what you are suggesting.
Given global demographics over the next 30 years I want as many drugs and devices discovered now so that they might be generic in 30 years. Now is exactly not the time to reduce innovation and have the government pick a winner in every category.
There are ways we can reduce free-riding and increase competition without the US resorting to more statism, though I accept that statism is what we might get in the end, with medicine looking even more like the defense industry.
You do know that state financed healthcare exists in 30+ other advanced countries and it's fine?
The Dutch system is different from the UK system which is different from the German system which is different from the Korean system which is different from the Israeli system which is different from...
We know what price regulation in health looks like.
All of these countries have more price regulation than the US does.
The only reason you are inventing some transportation strawman is because the actual examples in health like Japan and Korea actually exist... And they are better on both costs and outcomes.
Medicare and Medicaid are huge and regulate prices for in-hospital services….and yet hospital charges in the US are 3x what they are in Europe.
Just as with defense contractors the industry captures the pols.
So much focus on Pharma when it is 15 percent of healthcare spending and easily addressed by the US penalizing pricing above levels in Europe, Canada and Mexico. Meanwhile, hospitals fleece Americans like nobodies business and medicate uses outdated pricing methodologies that leads to a surplus of orthopaedists and a deficit in poorly-paid neurologists, etc
Unfortunately Trump appointed Peter Navarro to a senior trade advisor role in his new admin - based on that and....everything else that's transpired I have the unfortunate feeling that DBCFT will not be on the table. I'm optimistic we might see it after Trump if we make it through all this.
As Menze Chinn abo ut Peter. They did a paper together.
I think a major cause of the lack of productivity growth in construction is the Baumol effect (https://en.wikipedia.org/wiki/Baumol_effect). Construction seems to have been pretty much impervious to innovation over the course of my lifetime. A construction site today looks pretty much identical to one in 1990 (and likely even further back, but I wouldn't know) whereas most jobs are insanely more efficient today.
I think that explains why productivity hasn't increased, but not why it has decreased. That's where I think the cost of the additional bureaucracy and permitting around land usage, and the associated litigation comes in. Cutting the red tape is definitely a good thing, but investing in technology to automate the construction industry is better.
I would say that concrete/foundation work and things like pre-fab trusses and beams (laminate or steel) have been innovative- better and cheaper to install than prior methods. Same with some of the cladding products replacing plywood (better, not cheaper) or some of the drywall techniques (spray texture rather than mud/soackle reduces skill needed and speeds installation- these are cheaper but not necessarily better). PVC has made plumbing much easier and HVAC (flexible connections to vents) uses cheaper materials with less labor.
Overall, materials have gotten better or cheaper than todays price of what we used to use, though labor processes look a lot like it used to. Where there are efficiencies are in projects with scale.
In my condo development I see the concrete guys pouring four foundations in a day, teams of framers coming out and framing those four units, etc. They have cranes on site to move trusses and place beams, etc. But those are nearly identical and contiguous. I’m sure the mass home builders (Toll bros, KB, etc) have the same efficiencies. A builder doing a custom home or a renovation doesn’t have that. Especially in states like CA where the volume of construction is so low there are not roving framing teams with cranes and concrete teams with several mixers either those gangly pipes. More likely to find two guys and a circular saw.
Clearly you know more about this than me. How much of this innovation was recent (let's say last 50 years)? PVC has been around for longer than that, but I don't know about the rest.
How long would that foundation that now takes a day take 50 years ago? And overall what would you estimate the efficiency impact of all this is? Is it a few percent here and there, or is it a dramatic change?
Could increasingly complex and detailed building codes also be contributing to lack of construction productivity growth?
I think so. It decreases efficiency in the short term by making projects more complex and in the long term by slowing innovation.
The externality of injured and killed workers has also been internalized to an extent that matters I imagine?
3. I very much appreciate the idea that median human beings are very poor at making complex calculations accurately. I think this has relevance to the issue we discussed a couple of days ago, whether the median survey respondent could accurately calculate whether they had a three-month rainy-day fund.
This was undoubtedly the first time that most had been asked this question in their entire life. The question demanded that they have a ready idea of what their monthly expenses were and be able to multiply that figure in their minds accurately. The complexity of that calculation would make the option of giving the socially acceptable answer more attractive: “Yes, I do have a rainy-day fund.“
Also, the fact that 50% of American credit card holders currently are carrying a balance, put some pressure on the idea that 56% of Americans have a three-month rainy-day fund.
What does carrying a balance mean?
If it includes balances over a month, popular cards have introduced planning features where you can split an expensive over a year without paying much higher interest.
Also, we don't see especially high leverage ratios (debt/income ratio) in FRED.
Re: The national healthcare innovation question: isn't this pretty easy to resolve with real-world examples of innovation in countries with public healthcare?
Perhaps the most disruptive innovation in medicine in recent years was the introduction of Ozempic to the marketplace as a weight-loss treatment under the Wegovy brand. Who invented Ozempic? Novo Nordisk. Where is Novo Nordisk located? Denmark! Who has the Social Democracy and public healthcare system par excellence? You get the idea.
Novo Nordisk last year was literally worth more than the entire country of Denmark in which it is headquartered (seriously, they have to break it out of GDP stats!). That's a weight-loss innovation punching WAY above its weight in one of the most robust Social Democracies and state-dominated economies in Europe.
And Ozempic's far from the only example of the European healthcare sector producing world-class innovations, recently, despite the cost-cutting monopsony power wielded by those states. There are 39 leading companies in the European Federation of Pharmaceutical Industries and Associations, for example, including Novo Nordisk, that are many of them household names and innovate plenty, including 80% of the vaccines used globally and a 1/5th of new medicines to market. European firms like Germany's BioNTech also independently developed the first authorized mRNA COVID vaccine. Watch that space for an immunotherapy-based cancer vaccine from BioNTech in a few years!
And it's not just in pharma you see major European medical innovation: Kheiron is a UK startup that developed the AI model Mia that famously beat experienced human doctors in diagnosing breast cancer. That's all the more impressive because IT is famously something that Europe has lagged the United States in for my whole life for reasons that have nothing to do with having national healthcare systems.
So, if it were true that European healthcare firms were stagnant but reliable producers of commodity healthcare goods and services for the skinflint public sector, this libertarian argument would land, but it's just not the case.
???
You think Novo Nordisk developed GLP-1 drugs with the Danish market in mind?
Novo began working on GLP-1 based ozempic predecessors in 1998, leading to ozempic development some years later with phase 2 clinical trials starting in 2008. Final phase 3 clinical trials concluded in 2016-2017, with FDA approval for diabetes treatment.
Even going behind the crazy idea that Denmark’s health system had anything to do with Novo’s decision-making, do you think Novo backed that risky 20 year development venture in the hope that a state purchaser (let’s assume every country in the world was run like Canada or the UK) of new medicines would a) approve it as “the” preferred provider over the competitors also in process during that 20 year time period and b) allow it to be priced at a level that rewarded the 20 year investment (allowing for the possibility Novo stumbled and wouldn’t be first to market or as good as the competitors in the running to be chosen by the state as “the” preferred provider at concessional prices?
There are lots of “universal” models out there. Denmark’s is pretty good (hospitals are public while doctors are private-sector) and most drugs are available.
As a side note- Denmark has just prohibited Ozempic prescriptions for diabetics, forcing them to go with generic GLP-1 products unless those products are not available or don’t work well for the patient
https://www.reuters.com/business/healthcare-pharmaceuticals/denmark-restrict-ozempic-other-glp-1-drugs-treat-type-2-diabetes-2024-05-01/
But I’m not arguing that Denmark’s or anyone’s single-payer model is the *cause* of innovation… merely that it’s clearly not an impediment!
Denmark and other public healthcare countries are clearly host to innovation in the healthcare sector. In some select cases, they host healthcare innovation that is even outsize of their population and economy. That’s not to say that Europeans are better or worse than the United States, with its hybrid healthcare system.
The structure of the healthcare system just might not be really relevant either way, with other factors being more important?
It is totally incorrect to couple medical device and Pharma innovation to single payer national Healthcare.
Innovation is completely unaligned and uncoupled and autonomous from Insurance.
I served as a Planning Commissioner in the city of Elk Grove, CA for about 9 years.
I saw first hand the use of CEQA (state version of NEMA) lawsuits to force builders into expensive and time consuming project labor agreements -- essentially a set of unions would come in and say, "Gee, nice little project you've got here... be a shame if you found an endangered snail on this land. Now we've got a union labor agreement for you to sign..."
How much of the decline in construction productivity it causes, I don't know. But it's a real thing and pretty common. It's especially devastating for smaller builders who lack the resources to fight it.
It makes sense to focus on OECD countries when evaluating whether greater fiscal stimulus leads to more inflation, as developing countries face different inflationary pressures, particularly currency depreciation. Many poorer nations, especially in Africa, rely heavily on imports for essentials like food, fuel, and fertilizer. Without sufficient foreign reserves to stabilize their exchange rates, a depreciating currency can spiral into a crash, making imports significantly more expensive. This often forces these countries to float their currencies, as seen with the massive inflation & falling currency values in Sri Lanka, Nigeria, Ghana, Egypt, Ethiopia, and more.
Original Medicare is accepted by every hospital and every doctor. 99.999%
So why have Health Insurance?
A. Original Medicare has NO out of pocket maximum.
B. So why did Congress (D+R) create Insurance but not provide a maximum cap for Original Medicare?
C. OM has no drug plan coverage. But Supplement and Advantage do. Why didn't Congress allow OM to cover drugs?
How do these Insurance companies then, actually make money to provide the free Rx and out of pocket maximum. These two benefits if allowed for Original Medicare would be fair.
But, Congress wanted to create an unnecessary business for lobbyists and umm kickbacks ie pac spending.
Medicare sets the fee for your doctor and hospital. If you use OM they get paid 100% of the set rate.
But Insurance creates "networks" where they negotiate fees that are 50% and lower than OM pays. Why do doctors and hospitals sign up with Network A and not B?
They get sold on the customer volume power that the Insurance companies offer. They drive business to them. And screw the providers!
The money algorithm is simple and stupid. Your doctor charges $150 a visit and your hospital stay example costs $50,000.
Insurance company pays doc and hospital their plan network negotiated rate. Doc only gets $75 and hospital gets $25k. But, because Insurance is managing your Medicare part A and B, Medicare pays Insurance the full amounts, $150 and $50k.
Insurance company takes the cash difference. And that funds the Rx and iut of profit maximum.
As I've long said, Insurance has a very negative pressure by reducing health outcomes vs single payer democracy. The lie is socializing medicine like M4A lets government choose and deny coverage. The truth: Original Medicare to my knowledge never denies your doctor or hospital. But Insurance hires disbarred and lousy doctors to deny your medical necessary coverage. Stupid.
Right. You're presented with the choice of 1) actually having choice in your treatment (original Medicare), or 2) having most choice removed, but with the incentive of a cap on out of pocket expenses. It's a bit of a Hobson's choice.
Exactly. So why did Congress let insurance companies do all this and didn't allow Medicare to do this?
Money greed.
Single payer would cut Medicare expenses by up to 50%
I think there are many reasons why most construction companies are generally small. One example is that the construction labor pool, both for skilled trades and for competent construction managers, is for the most part fixed in place and only willing to service the small region surrounding where they live (and do just fine, making good wages and enjoying life). You can't find many carpenters and electricians, for example, who will travel from state to state while their company chases the big projects. Those few that are willing to do that are already working for the very few large firms that service a larger area, so there's a limit to how many firms can do this.
I live in northern New England and work in the construction industry. Regional factors that keep our construction firms on the small side include:
--Geography - not a lot of wide-open land, hilly, and rocky, lots of wetlands, with most of the easy to build on sites already occupied
--Commuting times for the labor pool -- one hour of travel north and south gets you 60 to 70 miles, but east and west only 30 to 40 miles due to the mountain ranges
--Weather (trending milder by the way) -- construction in winter conditions is costly, affects willingness to commute, and so on...
--Smaller sized urban areas north of Boston's
--Small intuitions that order construction (schools, universities, hospitals, municipalities)
--Small companies ordering construction (ditto above)
--Lots of recreation areas, but these tend to be small, so hotel construction is on the smaller size.
I think our construction companies are about right sized for our region.
So maybe studies tend to find stagnate construction productivity because they focus on too large an area. The more helpful study would ask something like.... given northern New England's construction environment, what's the best our construction productivity could ever be? Are some of our companies already at that level? I suspect that many are.
Regarding the medical innovation paper, I was an executive for a private company selling into this market during the period discussed. The paper is very interesting, but the dynamic analyzed is subject to so many idiosyncratic dynamics that no macro lessons should be drawn from it. My company got ~50% of revenue from the home care/DME market they analyzed. We stopped all innovation into that market and shifted all investment into hospital products.
TLDR: profits were high mostly because Medicare was paying too much. They changed from setting rates by fiat to an auction system. Because of this, the profitability of the space cratered for DMEs and for device manufacturers. But, the impact was high for device categories with little differentiation, like in oxygen. For those where there was a real clinical benefit -- e.g. CPAP -- companies continued to invest and earn strong profits.
Here's what happened in home oxygen, the area I know best:
- Serving oxygen patients was historically very expensive because DMEs had to deliver oxygen tanks to patients every 2 weeks.
- Reimbursement rates set by Medicare not only covered these high costs, but were so high that it was easy for a small DME owner to get rich.
- There were very high rates of fraud in these categories, which CMS was well aware of based on multiple OIG analyses. The law enabling reimbursement changes and Medicare's implementation were also informed by a desire to reduce fraud.
- In many DME segments, the majority of patients are covered by Medicare. In most medical device categories, private insurers pay more than Medicare. But in the several DME categories, Medicare paid the most. Therefore, DMEs were incredibly exposed to changes in Medicare reimbursement rates.
- The industry was highly fragmented with many unsophisticated mom and pop providers. Barriers to entry were low and success came from providing physician prescribers with high levels of service.
- Oxygen concentrators became inexpensive enough that it could be much more profitable to switch from delivering tanks of oxygen to providing a patient with a concentrator that would last 3-5 years or more, but that required an up-front capital investment. Adoption of these lower-cost therapies was slow.
- Medicare imposed competitive bidding: basically an auction where providers would bid on servicing a region and access was awarded to a small number of providers purely based on cost.
- As a result, the DME industry went through substantial consolidation: our customer list went from ~6500 to less than 3000 over about 5 years.
- Due to all of this, manufacturers shifted R&D to reducing product costs instead of innovation.
- Finally, the incentives for manufacturers changed. There was no payoff for incremental innovation. We had many ideas, but shelved them all. But transformational innovation was still possible. I'd argue that society was better off by incentivizing manufacturers to spend more dollars on bigger improvements versus small things that justify keeping reimbursement high.
By contrast, competitive bidding also affected CPAP for obstructive sleep apnea, an area where private insurance plays a bigger role. These products have a great ROI for society and innovation has continued.
Thanks - nice to see an in-depth explanation in a sector - I'm quite suspicious of a lot of generalizations about Medicare in a sector that big.
One of my all-time favorite career/political experiences was when the owner of a DME (home equipment provider) went on a rant about "Obama's socialist competitive bidding program": the program that changed top-down government pricing to a market-based auction system, created by a law passed by a Republican congress and signed by George W Bush.
> Note that the first of these challenges the progressive notion that companies have just been buying back their stock instead of investing.
This was always a fundamentally dumb idea. Firms in aggregate can't buy back stock without investors changing their overall portfolio composition. All buybacks from large companies do is reallocate capital from firms buying back stock to firms *selling* their stock. Which is to say, transferring capital from large established firms with a low marginal return to capital to small high return to capital firms.
This has the effect of reducing market concentration, which progressives should celebrate. Instead they get their brains twisted up by the fact that someone made money and they miss the actual flow of capital goods!
Buybacks are a way for owners to receive capital gains rather than dividends.
In both cases they either consume the return that or reinvest it in other firms. The net effect for retirees is to transfer capital from established firms to old people for consumption. Alternatively, for the rich (who mostly reinvest), the net effect is to transfer capital from established firms (net stock buyers) to new firms (net stock sellers, think IPOs).
Could firms be buying back their stock in aggregate if the wealthy are switching their asset base from stocks to government bonds and/or real estate?
This is correct. If that's the case then capital resources are transferred from firms to the government.
Net land can't be created. For each parcel there is a seller and a buyer. Not so for each bond.
I suppose it could be that net buildings are created, but again the capital winds up as a transfer between firms.
Noah, there are some "giant Wal-Mart style construction companies that handle projects all over the country." They include DR Horton, Lennar, and Pulte. https://www.builderonline.com/builder-100/builder-100-list/2024/. See also Tim Jennings' comment below.
I agree that DBCF tax is better than a business income tax, but even better is neither. Just impute business income to owners personal incomes and tax those. Ideally of course, the personal tax would be a progressive tax of consumption, not income.
Have you tried investing in partnerships that send you a K-1 before? It's painful. My taxes haven't been correct the last two years because one startup just never sent them. And the others send them months after April.
Can you do a full post on DBCFT?
Yes, but do it in relation to not taxing business income at all. Of if we do, credit the taxes paid to the owners' income taxes, raising the schedule of rates to maintain revenues.
There are some confounders in the innovation and monopsony argument. There is evidence of reduced innovation from European pharma companies, though it is difficult to unpack how much of this is an effect of, for example, the French or German government's rigorous product evaluation processes and how much is the comparatively less dynamic corporate sectors in those markets. Further, Switzerland, which does not have a centralized health purchasing entity and has only 8 million inhabitants nevertheless generates substantial medical innovation (though as someone notes, not merely for the Swiss population...).
Recent policy changes -- the HTA Regulation in the EU and the IRA in the US -- are effectively pushing towards a more rigorous standard of what good looks like, necessitating strong comparative evidence of incremental benefit to get approval or access. In Europe this has been the case in many countries, but for the US it will have a profound impact. The IRA -- sometimes angrily described as the "innovation reduction act" -- will reduce investment in marginal assets without a path to value. These assets -- line extensions, me-toos, or products approved on placebo data -- might previously have been successful in the US but are now seeing enormous GTN pressure and reduced access. In contrast, innovative products with real incremental benefit, as shown in rigorous trials, still consistently find a market everywhere, irrespective of whether the market is single payer or not.