Medical Research

Periodically I google the name "John Kanzius" to see how he's doing, and when he will begin testing his potentially revolutionary cancer treatment on human patients. I noticed that he is trying to come up with $10M to fund the testing. It got me thinking about our health care system in general, and R&D in particular.

My first question was, "Why is it so darn expensive?!" Well, there is equipment that needs to be built. Space that needs to be rented. Engineers, technicians, scientists, and doctors that need to be employed. Then there are the government regulations that need to be abided by in order to acheive the ultimate goal of an FDA-approved treatment. Then you've also got hundreds of regulatory safeguards that say, "such-and-such test must be administered by a licensed so-and-so". Licensed so-and-so's aren't always easy to come by; the licensing process creates a barrier to entry that limits supply which increases the costs of their time and expertise. Ultimately, it's a trade-off. The regulations protect us from dangerous treatments being introduced into the mainstream, but they also drastically inflate the costs.

My gut tells me that a lot of these costs probably outweigh the benefits, and it would generally be good for America if we could gut some of these barriers.

Another question is, "What entity is in the best position to pay for this?" I think I might have a pretty controversial answer: insurance companies. I haven't been able to figure out which insurance companies spend money on R&D, and if so, how much. But ultimately I think that insurance companies are in the best position to spend money on R&D.

The default response, unfortunately, seems to be that the government should do R&D, or at least be the principle funding mechanism. I'm not convinced this is correct for a variety of reasons. First of all, governments don't have the right incentives. Governments, are not results-oriented when it comes to spending programs. Certainly, some are better than others, but it is by shear force of will, because there is no natural mechanism to produce results. Governments do not have to be all that responsible with their money, so if a good friend happens to be chairman of a foundation for breast cancer research, then that foundation is much more likely to get funding than a foundation for diabetes research, regardless of which disease affects more Americans, regardless of which foundation is producing better results. In addition to the fact that a "better" foundation may not be getting funding, the "better" foundation will now have to spend more money on their R&D because the government has allocated precious resources elsewhere.

Some cynics have argued that hospitals and laboratories have a profit-motive, but not a cure motive. There is some truth here. Hospitals make money treating patients, not curing them. The problem is that customers still generally choose what hospital they will be treated at, and they care about things like results. Hospitals that cure more patients receive more patients. It is also true, however, that the unholy alliance of government-employer-insurer-hospital has created enourmous inefficiencies and disincentives, and I would conceed that this relationship waters down the customer-hospital relationship that should be driving lower costs and more cures.

Insurance companies are in a unique position. They are paid by their customers to pay for their treatment. It is in Blue Cross Blue Shield's best interest, for example, to find a cure for cancer. It is not in Blue Cross's best interest to perpetually spend money on treatments that don't work. Blue Cross would also have slightly different incentives in terms of intellectual property rights. Normally, companies that do R&D into new treatments have an incentive to protect their intellectual property, and to sell treatments at a premium to recoupe their investment costs. This is perfectly normal and healthy behavior because it ensures future advancements will be funded. Since advancements have been so rapid over the past 100 years, it has seemed like we are forever paying for intellectual property because the only treatments that consumers want are the latest and greatest treatment options, and those always come with a premium. Insurance companies also have an incentive to make a profit from their R&D, but they are equally motivated by cost-savings. What good does it do Blue Cross to charge hospitals a premium, only to have to pay them back when their customers are treated.