HEALTH, DEATH AND ECONOMICS
by Peter Huber
Forbes, May 10, 1993 at Pg. 172
Copyright 1993 by Peter Huber. Electronic copies of this document may be distributed freely, provided that this notice accompanies all copies.
Smokers live short and smelly lives. They check out in their 60s with a clean heart attack or viciously quick lung cancer. The rest of us don't die any cheaper and we die later. In those extra years -- typically a decade or so -- we nonsmokers cash our Social Security checks and run up Medicare bills. It's a hard-hearted fact, but a fact nonetheless: For the most part, smoking doesn't kill people in the productive years of their lives. It kills them before they live long enough to burden the social welfare system. You can tax smoking if you like, but it is complete nonsense to raise cigarette taxes on the ground that smoking imposes costs on everyone else.
The White House policy wonks who are talking about cigarette tax increases -- and who are planning to save us all a bundle by redesigning the health care system -- don't seem to grasp even this simple fact about tobacco. They betray similar ignorance about the economics of pharmaceuticals. They believe -- quite sincerely, it seems -- that price controls will lead to more and cheaper drugs. Only one economic theory supports that view, the theory that massive, high-risk investment in pharmaceuticals is supplied not by Wall Street but by the Tooth Fairy.
The Administration wants life-extending drugs to be cheaper, and intends to make them so by a stroke of the President's pen. Vaccines are deemed so essential to the public health that they're going to be free. No doubt the new sin taxes on cigarettes will be earmarked for subsidies of things like vaccines.
Vaccines are indeed wonderfully effective. Nothing in the modern medical arsenal provides anything close in terms of benefit per dollar spent. Not long ago, for example, childhood polio was the terror of every parent. For kids who survived it and ended up in iron lungs, it was also fantastically expensive. Today a vial of polio vaccine can be manufactured for pennies. But it's sold for a lot more, and that's what has the health-cost reformers up in arms. Their plan is to make the federal government the monopoly buyer of vaccines, and then put the squeeze on those rapacious pharmaceutical companies.
Rarely have central planners displayed such profound ignorance of market realities. Between 1965 and 1985 the number of U.S. vaccine manufacturers shrank by more than half; by 1986 the nation depended on a single supplier for vaccines against polio, rubella, measles, mumps and rabies. In the 1960s there were eight U.S. manufacturers of whooping cough vaccine; by 1986 there were only two. For a long stretch only two major companies, Merck and American Cyanamid's Lederle Labs, were still investing heavily in vaccine research.
What happened? Investors painfully learned that the risks in vaccine manufacturing were high and the rewards low. When the swine-flu crisis struck in 1976, the Surgeon General advised President Gerald Ford to launch an emergency national immunization program. But there was no insurance to be had, and drug manufacturers were not willing to proceed without it.
Congress was outraged. From the Senate floor, Edward Kennedy denounced the insurance companies' "cupidity" and "lack of social obligation." Actuaries for the Federal Insurance Administration predicted that if 45 million Americans were immunized, 4,500 injury claims would be filed, only 90 of which would result in awards, with a total cost under $2 million. The Congressional Budget Office projected that the insurance books on any claims would be closed within five years.
The private sector was unimpressed, and Congress ultimately passed a law denying drug companies all profits from the swine-flu vaccine and substituting the U.S. Treasury as the insurer. By 1986 the Treasury had paid cash settlements in 704 cases, or eight times the earlier projection, and total payments amounted to $86 million, 60 times the original estimate.
Since then, Congress has imposed a substantial tax on vaccine manufacturers, to fund a federal compensation program for vaccine-related liability claims. But people are still permitted to sue if they prefer, and the industry still wonders just when the next big wave of litigation will hit. A few smaller biotech companies have recently crept back into the fringes of the market, but investment in vaccines remains far lower than it should be, given the huge benefits that vaccines provide. Not long ago Science magazine reported that research on AIDS vaccines has been slowed by fears of liability.
From opposite ends of the health care spectrum, cigarettes and vaccines richly illustrate how easy it has become to concoct rubbishy economic justifications for a government takeover. With vaccines, the policy wonks emphasize only demand. They ignore the supply side, they ignore the investor's perspective and they completely forget the last, fiscally disastrous federal incursion into this market. With smoking, the wonks concoct a pseudo-economic theory to explain why private risk taking is really public expenditure. But smoking is in fact good for your national deficit. The real wonder is that Alan Greenspan doesn't print a little thank-you note on every box and billboard, right beneath the warning from the Surgeon General.
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