What is seen in Health Care and Defense Cost is not the Whole Story

The December 2, edition of The Washington Post carried a large essay on the subject of medical costs for devices, pharmaceuticals, vaccines, and other manufactured products (health care) has a different conclusion from mine about the whole story. The writer is the chief executive of SesameCare/com, a digital marketplace for discontinued health services.

It is widely known that American manufacturers of health care sell directly to the United States government at high prices and to foreign health care resellers – governments and private consumers at lower prices. The market for these manufactured products have a value of about $8 trillion, about half the total healthcare economy of the world, measured by the prices charged by the health care manufacturers in the U.S. Taking only pharmaceuticals, prices paid by United States customers are about $533.5 billion and sold to the next nine largest foreign countries about $400 billion. It is likely the per capita price is skewed to more like 2:1 higher in the U.S. than for the nine other countries, that include China/Japan/Western Europe, et al. The nine large countries making up the foreign-bought values of U.S. made products are probably about half the value of the quantities sold to U.S. customers. There are two conditions that account for the reasons this situation has become tolerated.

While it appears on the face of only the prices paid, that the U.S. government should be able to obtain a better price. The Washington Post writer would choose that, if possible. There are other considerations for the government which account for the fact that among the three parties; manufacturers in U.S., domestic customers and foreign customers, that each of them are satisfied with their results. The circumstances of the three parties to the transactions are influenced by the following:

  1.  Many health care manufacturers spend billions of dollars annually on research and development in order that their products are continually improving in quality and effectiveness. It is not unusual in the U.S. that research and development costs very high, and there is risk to the manufacturer that these costs will never be recouped by sales revenues. Americans consume more of these high-priced, highly effective products than elsewhere in the world. A company named Intuitive Surgical Systems began producing da Vinci robots that perform a variety of surgical procedures at less cost, lower error rates, and greater numbers of successful outcomes. The machines cost upwards of two million dollars each, but perform many more surgeries than by only human producers. Since the year 2000 about six thousand da Vinci robots have been sold worldwide; about four thousand in the U.S. and two thousand elsewhere. The same holds true for pharmaceuticals. Gleevec is a well known miracle drug that was priced at $123,000 per year per patient treated in 2001 and now is priced at $38,000 per year in Canada. The blockbusters produced by American manufacturers make up the difference in prices and profits for the non-poster drugs of the same manufacturers.

2.      Blockbuster drugs respond favorably to the “learning curve” because their manufacturers       work harder to reduce manufacturing costs in order to enlarge the market that responds more people affording the benefits. The most successful products eventually make up the differences in profits for more run-of-the-mill-drugs. In other words, successful products are successful enough to recover not only their own costs, but of the abandoned costs of the unsuccessful ones as well. There is great uncertainty manufactuters take in starting development of new drugs.

It turns out there is another industry that has most of the same characteristics as health care manufacturing. Many of the highest priced military hardware items become cheaper to make as time and economies of scale work to drive the learning curve down (make product costs cheaper). The U.S. buys at full cost early in the production cycle and eventually, supersonic fighter planes are sold to America’s allies at lower prices reflecting lower costs. The U.S. gains allies to from selling them materials they would need if they joined the U.S. in common defense of both the U.S. and the foreign nation allies. Using the same equipment broadens the number of countries capable and willing to arm themselves in international institutions such as NATO. Today there are non-NATO allies in 19 countries on four continents that participate with the current 28 NATO allies in Europe.

The U.S. is the only country capable of performing the role it has taken-on in buying product at higher prices in order that lower prices may be paid by allies whose ability to then distribute cost-saving benefits in attaining a safer and better world for which the U.S. shares because of enabling its allies to perform their respective roles as allies with Americans. I would rather see the Federal government spend money on common defense and general welfare in this way than to unconstitutionally appropriate spending under Article I, Section 8, Clause 1 of the Constitution which constitutionally contains the role which the federal government is able to play, particularly in domestic general welfare.

Publiustoo.com                                                                                                          December 8, 2022