Manhattan Institute for Policy Research.
Subscribe   Subscribe   MI on Facebook Find us on Twitter Find us on Instagram      


Beyond Obamacare: Focus On Cures, Not Costs (Part 2)

February 24, 2014

By Yevgeniy Feyman

In part one, I explained why the focus on Obamacare – and indeed, even insurance reform – merely deals with changes at the margins. It turns out that the distribution of health care spending is enormously skewed – and neither conservative nor liberal insurance reforms are likely to change the distribution. Here, I will explore why focusing on the basic science of diseases is the “killer app” for dealing with high health spending, and mediocre health outcomes.

To truly make a dent in health care spending, the chronic diseases responsible for the skewed distribution of health care spending – cancers, neurological disorders, heart disease – have to either be cured or prevented from happening in the first place. (Preventive care, as it is currently defined, may be of some marginal help, but studies have found little in the way of cost-savings from greater preventive care adherence, which is unsurprising, since aging is strongly correlated with the prevalence of chronic diseases.)

Treating 21st century diseases

And treating these “21st century diseases” requires a different approach than the crowd diseases of the 20th century. For instance, few cancers have a simple biochemical profile, and modern oncology uses a cocktail of drugs and treatments that include chemotherapy, drugs to limit the side effects of chemo, and in the best case scenarios, targeted therapies (such as treatments for chronic myeloid leukemia, which is usually caused by the formation of one particular gene). The latter, targeted therapies, are truly the “gold standard” – after all, curing a disease or preventing it from ever occurring to begin with is worth millions of dollars per-capita, and billions (if not trillions) in the aggregate.

But targeted therapies are still in their early stages – most diseases are still treated by focusing on clinical outcomes like survival rates. Although improved clinical outcomes are the ultimate goal, it is often difficult to know why some drugs work for some people but not others. And focusing on outcomes – which may often be measurable only years after the start of treatment – increases the cost and time of developing drugs dramatically.

Fortunately, a new paradigm for dealing with chronic diseases is slowly emerging – a focus on “surrogate biomarkers” (measurable biochemical changes that are associated with positive health outcomes) is being recognized by pharmaceutical manufacturers, policy researchers (my Manhattan Institute colleague Peter Huber has literally written the book on this), and even the risk-averse FDA. By developing drugs that can target biomarkers (the success of most HIV/AIDS drugs, for instance, is measured by “viral load” rather than mortality reductions), the cost and time of getting new drugs to market falls significantly, but more importantly, innovative, life-saving drugs that might fail under typical clinical trial requirements (“crowd science”), can be successfully brought to market to help the patients who need them.

This new paradigm hits what might be called an economic “brick wall,” however. Many existing biomarkers are still unverified and their relationships with positive health outcomes are not well-vetted. Biomarkers also represent the classic underinvestment problem. Much of the research required to vet biomarkers falls within a category called “basic research.” This type of scientific research, which is non-patentable, deals with the basic science of how things work – developing a better understanding of a cancer strain for instance, can help eventually develop targeted therapies, but on its own, is of little use. Because basic research is non-patentable, pharmaceutical companies have little incentive to invest in it – particularly because those companies who wait on the sidelines would still benefit from these discoveries (the “free-rider” problem).

The economic “brick wall”

Enter the National Institutes of Health (NIH), which devotes around half of its pauper’s budget (relative to federal spending – the NIH receives just under one percent of total federal spending in 2013) to basic research. And since 2012, the NIH has funded the National Center for Advancing Translational Sciences (NCATS), which helps translate basic research into applications. The problem however, is that without adequate funding the NIH’s successes will be limited. And you would be hard-pressed to claim that NIH funding is anywhere near “adequate.” And for NIH’s achievements – which includes helping to map the human genome and conducting the basic research for Gleevec, the first cancer drug to target the molecular cause of chronic myelogenous leukemia (CML) – Americans are truly getting enormous bang for their buck.

Historically, the NIH budget closely tracked pharmaceutical investment in research and development. In the late 80s and early 90s, however, inflation-adjusted pharmaceutical spending on R&D exploded from around $9 billion in 1990, to almost $30 billion in 2000. Over the same time frame, the inflation-adjusted NIH budget more than doubled and continued growing through 2003. Yet since then, the NIH budget has barely kept up with inflation, remaining mostly flat over the course of a decade. (In retrospect, the doubling of the agency’s budget in a short period of time was likely a poor decision. It created expectations of a gradual slowdown post-doubling – instead, the agency faced budget growth that averaged slower than general inflation, and significantly slower than inflation in lab equipment and materials.)

Worse still, the NIH was among the agencies affected by the ill-conceived sequester which slashed 5 percent ($1.55 billion) of the agency’s 2013 budget.

This isn’t simply irresponsible, it’s downright foolish.

Making spending more useful

Spending decisions should be about priorities, and there are a number of relatively inefficient tax expenditures that are ripe for a reduction or outright elimination. Take for example, the mortgage interest deduction. According to the Joint Committee on Taxation, this deduction costs over $60 billion annually in lost revenue (and research shows that this deduction tends to help the rich buy more expensive housing rather than helping the middle-class). Taking on average about $5 billion out of this each year (say, by turning the deduction into a credit) could do wonders to the NIH budget and it would do more to benefit lower-income purchasers.

Fortunately, the most recent budget agreement includes a 3.5 percent increase for the NIH. However, this doesn’t go nearly far enough. The NIH should be protected from annual politicking about the budget and debt ceiling. Policymakers concerned about the state of health care spending, and our ability to tackle new diseases (this should be on every elected official’s top 10 list), should consider multi-year budgets for the NIH. The idea would be to set a budget goal for, say, ten years down the line, and align NIH funding increases to inflation or federal budget projections to meet that goal.

Let’s say, for example, that the goal is to raise the NIH budget to $33 billion (adjusted for inflation — $42 billion in nominal terms) by 2022, from its current level of $28.3 billion in 2014. Using CBO’s projections for inflation growth (as measured by the implicit GDP deflator), the budget would need to grow at inflation +2 for the next eight years. To ensure that the money is well spent, Congress could even require that it be used strictly for basic research – or require a better assessment of indirect cost growth, as per the Government Accountability Office’s recommendations. Of course, the increased funding for NIH is only one piece of the puzzle – getting drugs to market faster is also critical, but this requires reforms from FDA and merits a separate discussion.

When all is said and done, insurance reforms like Obamacare (or even conservative reforms like the Coburn-Burr-Hatch bill) mainly engage in changes at the margins. U.S. health care is in dire need of a transformational change not only in financing and care delivery, but in the underlying science as well. The best way for government to help spur this change is with a high-return, and high-valued investment in the NIH.

Original Source:



America's Legal Order Begins to Fray
Heather Mac Donald, 09-14-15

Ray Kelly, Gotham's Guardian
Stephen Eide, 09-14-15

Time to Trade in the 'Cadillac Tax' on Health Insurance
Paul Howard, 09-14-15

Hillary Charts the Wrong Path on Wage Inequality
Scott Winship, 09-11-15

Women Would Be Helped the Most By an End to the 'Marriage Penalty'
Diana Furchtgott-Roth, 09-11-15

A Smarter Way to Raise Paychecks
Oren Cass, 09-10-15

Gambling with New York's Pension Funds
E. J. McMahon, 09-10-15

Vets Who Still Serve: After Disasters, Team Rubicon Picks Up the Pieces
Howard Husock, 09-10-15


The Manhattan Institute, a 501(c)(3), is a think tank whose mission is to develop and disseminate new ideas
that foster greater economic choice and individual responsibility.

Copyright © 2015 Manhattan Institute for Policy Research, Inc. All rights reserved.

52 Vanderbilt Avenue, New York, N.Y. 10017
phone (212) 599-7000 / fax (212) 599-3494