 I know this getting toward the end of the week, your endurance is being tried, you've stuffed a lot into your heads I hope this week and hopefully it'll stick. What I've been tasked with here is a discussion of the economics of medical care which of course in the last several years particularly with the advent of the so-called Affordable Care Act there's been a lot of concern about the American medical care system and what needs to change and most people do think some some kind of change is in order and I'd like to give a bit of a perspective on this that's consistent with markets it's consistent with the Austrian view of how markets work and I'd like to do this in two parts first I'd like to spend some time on bureaucracy and medical information and then later we'll spend some time on the effects of third party payers in the medical care system insurance government most people in the United States are paying a small fraction of the total bill out of their own pockets most people don't even have a good idea of how much their insurance costs because their employer would provide their insurance and that may not show up as a deduction off of their paycheck at least not the entire amount so a lot of there's a lot of ignorance about what people are really paying for medical services and I am going to talk a little bit about comparisons between the United States and other countries but I hope you don't get the impression that I'm trying to set this up as some kind of comparison of a free market system versus those nasty socialists in other countries because our medical care system as I think I can show you today is pretty well socialized at least in some regards we've just had a lot of bureaucracy overtake medical care particularly since the 1960s let me quickly go through one of the problems that has beset medical care and I'm going to overlap a bit with with Bob Higgs talk this week on the FDA but I will mention just a few things here that I think are pertinent in trying to understand the information problems affecting regulators you know about the socialist calculation problem by this point in the week you've heard mention of the difficulties that governments have in weighing costs and benefits and coming up with information sufficient to make good decisions even if they were so inclined to make good decisions so there's a separate problem of their incentives and their inclinations and even if they had good information would they use that for the benefit of the public so there's two separate problems and I think that the problem of drug regulation is a good example of that the FDA approval process has changed over time in 1906 there was a law passed that said medications should not contain substances harmful to health by 1938 the manufacturers were also required to demonstrate safety and we know safety as a it's not an either or binary condition it's the varying levels of safety pretty much anything you put in your body will do damage if you take enough of it and that's true medications but the law says now the government's got to supervise safety and medications and then in 1962 the Food and Drug Act was modified to require pharmaceutical companies to prove safety and effectiveness again effectiveness varies and it's a it's not an either or but again the government was supposed to make sure you didn't put something into your body that they didn't think was appropriate according to their standards prior to 1962 the FDA was required to approve a substance within 180 days unless it was not proven safe so they had a limited amount of time after 1962 that time constraint was completely removed and now the drug approval process has greatly lengthened it now takes many years from the time that a drug is submitted to the FDA before it will be approved for public consumption prior to 1962 the time from filing to approval averaged about seven months by 1967 it had gone to 30 months and by the late 1970s it had gone to 8 to 10 years the testing cost rose along with that so that now it's somewhere around 800 million dollars for each new drug and if you take into account the fact that a lot of drugs that start off in laboratory don't make it to the FDA or they fail at some point along the approval process then the average cost of bringing the drug to market is somewhere in the billions a drug that actually is approved by the FDA and this creates significant barriers to entry for example there was a case I read of some years ago in which a doctor at the Boston Children's Hospital was trying to get a nutritional supplement for newborn babies that had liver problems they were premature and and the there's a kind of a catch-22 situation apparently with newborn children with liver problems you have to feed them intravenously because their digestive tract isn't mature but if you feed them intravenously for too long then they get liver problems and so he had found something that they were using in Europe that was pretty effective but the company would not even file with the FDA to try to get approval in the United States of this substance it was available only on a trial basis here they couldn't mass market the substance but nutritional supplement or whatever it was and that they weren't going to try because they said look we've got something else in the pipeline it's going to take us a few years to get it but if we're going to spend the money to get the FDA approval we're going to spend it on this other thing so it effectively kept the effective alternative out of the US market and it's difficult to know how many patients were adversely affected by that kind of thing you can come up with some other examples here like Sceptra which is an antibiotic it was about a five-year delay at least in introducing that to the US market and one estimate by George Hitchings who won the Nobel Prize in medicine is that this delay cost about 80,000 lives in the United States we don't know exactly who they who they were of course you don't know who would have been saved and who would not have been but there is a substantial cost to this beta blockers I've talked to physicians some of which say beta blockers really weren't that great a thing anyway but most physicians seem to think that it's nice to have them on the market and the lag in the FDA approval of beta blockers may have cost by one estimate 250,000 lives in the United States so the FDA will say well we're protecting people against some awful substance that might have made it onto the market and see we saved some lives but they're also costing lives and there's very little attention paid to that you can of course go to Bob Higgs book on FDA regulation which I recommend on this topic if you want more also if you advertise for an already approved drug that you want to use for a newly discovered purpose then that can violate FDA rules some companies will not then find it worthwhile to revisit the approval process for a new use my understanding is that even Thalidomide which got this this terrible reputation is now being used for some other purpose in the United States just not for pregnant women it was originally out introduced I think as a drug for morning sickness and pregnant women and now it's being used for something very different you can come up with a lot of examples of that kind of thing we had this drug it was bad for this use but it might be good for something else the new use whatever it is might be relatively unknown so and this is from Tom DeLorenzo's article which you can find on the Mises daily on the mises.org website he says new drugs do consumers no good if they do not know about them advertising restrictions imposed by the FDA therefore prop up the profits of incumbent drug marketers at the expense of newcomers in the industry and of course consumers and that's of course the point of these barriers to entry the whole point of the FDA is to keep drugs off the market now the average Joe on the street probably says well that's good because otherwise there'd be rat poison in my aspirin but the reason for the for the barrier is to protect the existing manufacturers against some new innovative competitor here's an example of this in 1988 there was a meeting in the offices of the FDA commissioner who at that time was Frank Young and all companies making aspirin were told that they could not advertise the benefits of the product in reducing risks for first-heart attacks if they did the FDA would bring legal action as a consequence the ban on aspirin advertising undoubtedly causes tens of thousands of needless deaths per year that's from Thomas Sowell's book applied economics he's got a great chapter in there on medical or health care economics and he talks about the FDA and some other aspects of medical care now when we're talking about information whether it's the information that we want want the the pharmaceutical companies to use when trying to develop innovative new drugs or the information we want a doctor to have and to employ when trying to decide on a treatment for a patient or a diagnosis for a patient we have to consider how that knowledge that medical knowledge is going to get to the relevant decision-makers and it's important to remember something that Hayek pointed out that there is a kind of knowledge which you cannot put into statistical form you might not even be able to articulate it in words but it is relevant knowledge my father was a physician for many many years and he would say there's all kinds of things that a doctor can find out about a patient in a ordinary office examination that don't have anything to do with the outcome of a test we and you sometimes you see a science fiction movie where there'll be a robot taking care of a patient and taking a blood sample or probing or something and and the the robot comes up with a diagnosis and that's silly of course because there are so many things about that human being in front of you that have to be taken into account to make a good decision and this problem is magnified by the fact that medical care is now becoming increasingly bureaucratized so that there are multiple third parties who are trying to intrude into that relationship between the doctor and the patient and second guess the doctor's decisions are you sure doctor that it really should have been this diagnosis I mean we we're looking at the numbers on the lab test that you gave and we notice that the the numbers are this or that and and we notice that you gave this lab test instead of that lab test and it's the government it's the insurance companies and and on a micro scale the hospitals themselves who are under pressure from accreditation and other kinds of third-party agencies looking at that meeting between the doctor and the patient and trying to figure out what was going on when they were not in the room they're a thousand miles away and there's relevant information that cannot be understood or absorbed by those third parties conco and Arnett in the 2008 article say that thousands of physicians and patients every day make myriad choices from available drug options they take into account differences in effectiveness side effects and drug interactions for each individual patient FDA scientists may know a lot about the drugs they evaluate and their average effects on thousands of users but they know nothing about the individualized physiology of each patient on the other hand intensively trained clinical physicians who do have knowledge of individual patients are best able to advise them if the drug is appropriate can we really assess the quality of a doctor patient encounter from a distance there are risks to trying to do this for one thing if you try to distill everything about that encounter into a code you're going to miss some things there are these I think it's called current procedural terminology for CPT codes that miss circumstantial information that might be important so doctors in a lot of cases are forced to choose do I want to comply with the standards being imposed from a distance or do I want to meet the needs of this patient that's sitting in front of me and that's a terrible dilemma for a physician who knows what needs to be done but is restrained from doing that by the fact that what needs to be done is not going to look like what needs to be done from a thousand miles away so conscientious doctors are frequently encouraged not officially of course but encouraged by their own sense of morality in the situation to bend or break the rules to help patients and so the rules end up becoming in the penalties end up becoming more and more draconian to try to discourage doctors from doing what they think is best. Ludwig von Mises in his book bureaucracy which is another great book it's not one of his longer ones and it's a good introduction to some of the problems of bureaucracy said government must be formalistic and rigid by its nature the core problem is the lack of a measure of success or failure you don't have a profit loss signal to indicate when you're being efficient in your use of resources so sort of like traffic cops you know you get pulled over and the cop comes up to your window and says do you know how fast you were going and I'm not sure I know what the correct response is that you're supposed to give to try to get out of the ticket but you're supposed to say something like well I mean it's a trap really right if you say I don't know that means you weren't paying attention if you say well yes I know and then you were intentionally breaking the law well the cop doesn't really care too much about what your intentions were or what your purpose was whether you were speeding because you're you know having to get to the hospital to see your sick mother or something it's oh well the speed limit is 55 you were doing 58 QED is just that's it and the officer is really a bureaucrat in the situation any circumstantial information may be ignored so Misa says it's pointless to try to complain about this kind of thing because this is the nature of bureaucracy if you don't want something to be treated that way take it out of the bureaucracy take it out of the government's hands but that's the nature of government here's an example of this the AAPS by the way is is the Association of American Physicians and Surgeons I think their website is AAPS dash online dot com I think or dot org I can't remember now it's a great organization I spoke it in one of their conferences last fall in Denver and they have a journal where they're they're quoting Rothbard and they're quoting a lot of Austrian types and and these are physicians who are very very serious about free markets it's a great free market alternative to the AMA and if you're involved in in medicine I encourage you to to look them up or if you've got maybe relatives or something that are involved in this kind of thing they're a great organization and in their journal they reported on a survey of doctors this is some years ago but I think it's still interesting regarding Medicare fraud and they found that the rules basically make fraud very difficult to avoid they they define fraud as an error they assume that if you made an error then you must have been trying to defraud the the government and unintentional errors are virtually unavoidable and 82% of those responding to the survey said they reported increased fear of prosecution or investigation in the past three years 71% reported making changes in their practice to avoid the threat of prosecution including greatly restricting services more than a third of all the respondents restricted services to Medicare patients like surgery because they were concerned with what would happen if they were charged with some kind of fraudulent behavior so rather than try to navigate the minefield they just say well I'm not going in the minefield I'm I'm just going to stay stay clear of the whole problem 20% reported they did not accept new Medicare patients because of hassles or threats from Medicare almost a fourth do not accept new Medicare patients of those who do 9% do so only under special circumstances more than a third have trouble finding physicians willing to accept referrals of their Medicare patients and more than a fourth who do restrict services to Medicare patients I said this already they do this because of hassles and threats from Medicare there was a study from what I think is now called the general account of government accountability office or something like that used to be accounting office and anyway the GA GAO reported that in 2002 85% of the time Medicare customer service representatives gave the wrong answer to questions posed by positions regarding the proper way to bill Medicare you've heard this maybe about the IRS you call the IRS and you say well how should I fill out this my tax form and they'll give you an answer but they're not held to account if they give you the wrong answer I mean you take their advice you put down the stuff and you turn in your tax form and you get audited and and and you're found that to have committed an error on this point you say well I called you and you told me to do this and that's sorry that's no excuse well the same thing apparently is happening with Medicare they're giving the wrong answers to these questions well so the then the government said okay we're we're going to improve we will fix this we are sorry so then they did a follow-up study in 2004 two years of improvement 96% of the time Medicare customer service representatives gave the wrong answer alright so I I guess you know you could call up Medicare and say well what should I do and whatever they tell you do the opposite because it's more likely to be correct so these regulations are so confusing that even the people that are supposed to be explaining them as a as their job to doctors can't can't do so reliably so we get a number of competing incentives here the the hospitals have an incentive to cycle the Medicare Medicaid patients through as fast as possible because they're paid only for the diagnosis not for the treatments that follow the physicians have an incentive to keep the patient in longer and do more tests do more therapy because that's how they're paid so there's a conflict here and doesn't mean that it's going to balance out so that the patient stays in about the right amount of time sometimes they're going to be out too early sometimes they're going to be in too long and that's all a lot of this is changing under the health care reforms so that hospitals are facing very high penalties now for readmissions under the ACA and so they are keeping people in longer than they would otherwise to make sure they're okay before they leave now that may mean that some people stay too long because the hospital is trying to make sure it's not falling afoul of some some ACA penalty let's talk a little bit about rising costs boyapati says there's four reasons for rising medical care costs and they are basically employer provided health care insurance licensure the obesity epidemic in the United States particularly and intellectual property I'll mention here that that employer provided health care insurance is very much a product of our tax system in the United States in 1943 our marginal tax rate income tax rate for individuals was extremely high it rose rapidly during the war I think by the end of the war the top marginal tax rate was somewhere around 97% in the United States which means that and those high tax rates persisted until the Kennedy tax cuts about 20 years after the war so employers who wanted to compensate their employees had an incentive to provide fringe benefits or in kind compensation rather than cash compensation which would be taxed so one of the ways they found to do this was to simply provide a to provide health care medical care insurance for their employees and that was paid from pre-tax dollars so that the employee would receive a more more money than they would have received if they had been paid cash gotten a taxed and then paid the premiums out of their own pockets medical care licensure is also very important as a restriction on entry into the medical care field there are certain things that a nurse might be very well capable of doing but is restricted by law from doing and so each medical specialty has its turf that it tries to protect with licensure there is this obesity epidemic one of the things that you sometimes hears that the American medical care system must be broken because Americans have this life expectancy that's lower we have higher rates of this or that or the other thing that must be because the medical profession well I don't know how much control my doctor has over my weight but I'd suggest it's not much I mean my doctor can suggest that I should lose weight or my doctor can suggest that I exercise but to lay American health problems at the feet of the medical profession is I think a bit unfair Americans also have higher accident rates than some other countries and furthermore if you look at certain categories of illness and disease like well newborn illnesses and deaths are sometimes counted differently in different countries some countries that if an infant dies they don't count that as a as a death and so they don't count that against the life expectancy of that country so we're not really comparing apples to apples when we're looking across different countries on something like life expectancy and again I think it's unfair to charge American doctors with all of the health care problems that we see in the United States so one of the reasons I think that we're seeing rising costs is that we see these intermediaries interposing themselves between the patient and the doctor care providers some doctors don't like that term because it sort of lumps them in with other providers like I don't know anyway I'm trying to lump find a term for doctors nurses nurse practitioners and everybody else that group starts looking to satisfy the insurance company or the bureaucrat from Medicare rather than satisfying the patient and this produces a large number of problems there are basically two problems that you can observe with with third-party payers one is the moral hazard problem moral hazard you if you're taking economics courses at some point you've heard this it's basically the idea that if somebody else is paying for your mistakes you're going to make more mistakes so in terms of medical care it's the risk or the hazard that the insured person might engage in activities that are undesirable we can call that immoral for moral hazard that are undesirable from the insurer insurers point of view because they make it more likely the claims are going to be larger if I have car insurance that ensures me against hail damage then I'm more likely to leave my car outside when there's a storm because I know that if my car gets ruined with chunks of ice falling from the sky then somebody else is going to pay the bill now I do care about my deductible and so that may give me enough of an incentive to behave appropriately in that case but insurance tends to create this make tends to make patients behave differently than they would otherwise also there's a principal agent problem those who are charged with acting on behalf of the patient being the principal have their own objectives their own goals and they're not necessarily compatible with those of the patient now let's talk a little bit about cosmetic surgery I was doing a paper recently on medical care costs and I ran across this information on cosmetic surgery costs I pick on cosmetic surgery because it's less likely to be insured kinds of procedures and there's a lot of kind of minimally invasive cosmetic surgery that's something like Botox injections or collagen or something like that and it's outpatient it's pretty pretty basic and then there's more substantial cosmetic surgery which we won't get into now and then there's other similar kinds of services like laser eye surgery it's not really cosmetic surgery but it's it's treated similarly in a lot of ways laser eye surgeons according to one source I have rarely accept insurance and therefore you get some similar outcomes as you do with cosmetic surgery now here's a graph that shows what's happened with medical care costs this is labeled nominal health care inflation this is from Devin Herrick's article from the National Center for Policy Analysis and he's got several really good articles on this topic and you'll see medical care costs from 1992 to about 2012 went up 118 percent physician services up about 92 percent the overall level of inflation going from the I think the CPI yes the CPI 64 percent over that period of time and then cosmetic services only about 30 percent less than the rate of inflation the real cost of a lot of cosmetic surgery has dropped and yet if you look at the technology that's used and the procedures that are done the quality of these procedures has often increased for example laser surgery has become faster and more precise eye surgeons have found that their patients are very careful shoppers unlike doctors who are working with insured patients or government pay patients one doctor who's a LASIK provider named Brian Bonani this is again from Devin Herrick's article explains he must tell potential patients exactly how much the service is going to cost because patients tend to shop around when they are using their own money Dr. Bonani also notes that many patients will see three or more doctors before making a decision you're also seeing market-oriented general surgery centers there that are doing orthopedic surgery and other kinds of surgery that attracts patients from across the country when I was at the AAPS meeting and last fall in Denver I listened to a presentation by a couple of doctors who are running a surgery center in Oklahoma in fact it's called the surgery center of Oklahoma which attracts patients from all over they they have a website you can look it up some of you probably already have and you're you get a price list and you you can call them up you can pay a deposit you go out there you get a kind of an examination they tell you yes you're a candidate for the surgery or no you're not and it's and I listen to these guys they're very enthusiastic about what they're doing and they're fully aware of the benefits of introducing self-pay into the medical practice they're very free market-oriented guys and they know what they're doing and they their quality is very high I mean the infection rates are about two orders of magnitude less than the national average the infection rates are kind of a benchmark for a lot of surgery do you want you want to find out what the quality of surgery is we'll find out how many patients can infect infections post-surgery two orders of magnitude what's that one one hundredth or something so we're getting competing standards and the patient is getting lost and the patient's priorities are getting lost you have the patient who wants the care provider to do something the employer receives competing bids from insurance companies and once in a while they'll swap out insurance companies you get government that you know patients can vote and at least on the surface they look like they have some kind of kind of say which I think is more of an illusion but it's they they they get to pretend that they have some kind of impact on what government does and then governments regulate the care providers and then the insurance companies are lobbying the government and governments regulating the insurance companies and the insurance companies are providing these efficiency standards on to the on to the doctors and hospitals and nurses now if you look at the the money you're gonna you're gonna expect the doctor to pay attention to the person who's providing most of the money well 45 to 50 percent is coming from the government about 40 percent or so is coming from insurance and only around 10 or 15 percent maybe less by now is coming out of the patient's own pocket and now once you introduce the affordable care act I have trouble those words coming out of my mouth but affordable care act you get this okay so here you've got let's see the federal government's going to mandate that the patient get insurance health insurance the government taxes patients they provide subsidies to patients the federal government issues mandates on employers if you're over a certain number of employees you have to have insurance we just saw this this high-profile hobby lobby case that came about about the you know whether or not the government can force the corporation to include certain things in their insurance packages for employees then federal governments got these exchanges some states have set up their own state exchanges some states like my state have said no we're not going to do this so you get a federal exchange and then there's the regulations and eligibility requirements imposed on these exchanges it's just and this is a simplified diagram um here's the here's uh one that I picked up from tight so small they had so much to fit in there you know it's kind of hard to see where if you're interested I can probably find you the source on this I'm sorry Galen Institute it's the one that came up with this then um and it it's it's really so complex I mean this is a 2800 page piece of regulation it it requires insurance companies to cover a greater number of services it forces individuals who don't already own government or employee provided insurance to buy their own or pay a penalty it expands Medicaid it reduces the autonomy of healthcare providers which is very serious I mean you may think well you know that's just doctors they just want to be able to do what they want and nobody telling them what to do well you start interfering with the way doctors run their practices and a lot of doctors are going to say I'm not going to do this anymore and they back out of the medical profession probably with some of the best ones leaving first so you get doctors that exit and then you're left with fewer doctors and less access to medical care as a result of this so these features of the Affordable Care Act aggravate the problem of moral hazard for people who remain insured that tends to push prices higher it requires insurers to cover pre-existing conditions which violates the very principle of insurance you imagine I call up an insurance agent and say hey I'd like to buy some fire insurance on my house and he says oh well we'll send somebody out in a week to do an appraisal of your house and figure out how much the premium is going to be and I'll say well actually I need it right now because there's a fire in my kitchen so we can already see the impact of some of this now insurance companies have gotten very worried about what's going to happen they're being forced to take on a risk that they're not really sure about they don't know what the risk is exactly and so premiums have already started to rise Obama when he was back when he was running for the office he now holds promised during his campaign that the average family would see medical insurance premiums drop by about $2,500 a year I was reading a report a few weeks ago based on data that's come out in 2014 that indicates that the average family premium for employer sponsored coverage has risen by $3,700 $36.71 actually now supporters of the affordable care act have argued that there's been a recent slowdown in the growth rate of medical care expenditures and if you look at the graphs you can see well the growth rate of medical care expenditures has dropped over the last several years now this started this this declining trend in the growth rate started well before this affordable care act so trying to take have the affordable care act take credit for this is a little bit difficult but there the supporters will say well there's penalties imposed now on hospitals for readmissions and that means that the hospitals because readmissions are expensive we're we're cutting back on costs that way and and if you look at the data from about 2010 through about 2013 the growth rate annually in national health care expenditures was only about 1.3 percent which is a lot lower than the growth rate you saw from about 2000 to 2007 there's a drop during the recession and a lot of this is due to the recession but we haven't seen much of an increase in in recent years and the growth rate seems to have stayed fairly low now Michael Tanner who does work with Cato on some of this did a study in which he says well probably what's happened is that the affordable care act slowed or stopped a separate trend toward low growth and medical expenses a another a report from the Centers for Medicare and Medicaid Services showed lower estimates for future spending and they said it's not due to the ACA it's due to other things it's due to technological improvements and a few other other factors other people have seen have looked at the ACA and they say well you know there could be a silver lining in this as disastrous as this may be there could be a positive inadvertent effect of the Affordable Care Act and that is that it pushes Americans toward higher deductible insurance plans now higher deductible insurance plans have been available for a long time and you would sometimes take out one of these high deductible plans and enjoy a lower premium because of this but lately we're getting high deductible plans and sometimes that's the only option that the employer provides and we're not seeing the savings on insurance premiums as a result. Price Waterhouse Coopers did a survey last year where they found that 17% of employers at that time offered a high deductible health plan as the only option for employees this is a one-third increase over 2012 and more than 44% of employers reported they were considering offering it as the only option so it looks like this is going to be a significant increase in high deductible plans now this where's the silver lining and all this well the silver lining is that if people have high deductible plans that means more of what they spend is coming out of their own pocket which makes them more careful shoppers now I don't think that that feature of or that effect of the it's not a feature really because it wasn't intended apparently but that I don't think that that effect of the Affordable Care Act is really going to to offset all of the damage that's being done with other parts of that 2800 page regulation but it is um it is something to think about uh in if you look at deductibles in if you're looking for an in-network physician in 2009 those in-network deductibles averaged about 680 dollars in 2013 they had gone to 1230 almost doubling out of network deductibles more than doubled over the same time period so we're seeing Americans paying higher deductibles um over time I don't have a lot of time left and I want to talk a little bit about national medical care systems now if you are looking at an ordinary supply and demand diagram you can see downward sloping line here if the equilibrium price is here and we're relying on the market to to allocate medical care then prices are going to be here quantity provided is going to be about here now if you tell people as some countries have tried to do that your medical care is going to be zero cost to you out of pocket then at a zero price the quantity of demand is going to be way over here that you can't provide that much medical care I mean you could you could overwhelm the I mean you could have everybody in the country working in the medical care field and you wouldn't be able to provide as much as people will want if the cost is if the price is truly zero so what the government will then do is start to ration medical care according to some criteria of its own um Miller Benjamin North in their little book on um I've forgotten the title of it now but a little micro economics paperback that I use in classes sometimes say that a single government agency in each country acts as a monopsony buyer of health care services on behalf of everyone individuals are either prevented from buying health care on their own or are limited by government rules as to what they may buy like other other monopsonies these health national health insurance systems force down the prices of the goods they buy such as drugs medical services and physicians and nurses services this in in turn reduces the quantities of those goods and services that suppliers will provide particularly in the long run so Americans sometimes look at the canadiens and they say well look the drugs the pharmaceutical products in in Canada are are so cheap we should be like Canada you know my my friend in Canada he gets he gets drugs for such a low price I mean why can't we do that well what's what Canada's doing is basically selling you can't is saying you can't sell your drug here unless you agree to sell it at this very low price which may be close to marginal cost for the for the drug company well making drugs is a high fixed cost very low marginal cost industry most of the cost is involved in figuring out what the formula is in the production process is once you got that figured out you can churn them out like making copies photocopies or something it's it's pretty cheap to do that once most of the time once you've got that process done the billions of dollars that you spent as a pharmaceutical company are in developing the ability to produce the first one all right so what Canada and other countries that do this kind of thing are doing is saying well you know we're not going to we're not going to help you repay those fixed costs well so far in the United States market prices are more often allowed to prevail and so the pharmaceutical companies recover those fixed costs here and then in other markets around the world they sell these things at at marginal cost well that is not a recipe for innovation and if pharmaceutical companies cannot charge a price that allows them to recover their upfront costs they're not going to innovate to create new drugs they're going to figure they they're not going to be able to recover the cost why start why spend the billions of dollars up front if we can't make that back so less health care ends up being provided Uri Malsef wrote a great article several years ago I think it appeared as a mesas daily and I think I put it on the reading list for this talk and he says the brookings institution found that every year 7 000 britans in need of hip replacements between four and 20 000 in need of coronary bypass surgery cabbage surgery and some 10 to 15 000 in need of cancer chemotherapy are denied medical attention in britain age discrimination is particularly apparent in all government run or heavily regulated systems of health care in russia which he should know about patients over 60 are considered worthless parasites and those over 70 are often died even denied even elementary forms of health care in the uk in the treatment of chronic kidney failure those who are 55 years old are refused treatment at 35 percent of dialysis centers 45 percent of 65 year old patients at the centers are denied treatment and patients 75 or older rarely receive any medical attention at these centers in canada the populations divided into three age groups in terms of their access to health care the below 45 45 to 65 group and those over 65 the first group enjoys priority treatment now there's been a lot made about how insurance companies deny claims and they and they do and i'm not trying to paint insurance companies as any kind of they may be sort of market entities but they are rent seeking and they they have a whole lot of problems but if you compare private insurance companies to say the government medicare medicaid services the denial rates on claims are actually higher for medicare uh medicare denies 6.85 percent of its claims higher than any private insurer and then you get these effects on the availability of medical care and we can look at rough numbers on the number of doctors per person the number of nurses per person the number of MRI machines per person and i'll just throw a few of these up here on the screen really quick in 2006 2.1 practicing physicians per thousand in canada 2.4 in the us canada's got 8.8 practicing nurses per thousand the us is 10.5 again i'm not trying to say well this is the free market us compared to the socialist canadians because it's the more socialist canadians and the less socialists so far us and i'm not even sure we can say that anymore but this is 2008 um ronald hamaway spoke at mises university a couple of years well this is three years ago now and there's a recording on mises dot org of his uh talk which is great on canadian medicare and i encourage you to take a look at that as well medicades costs and medicare's have risen a lot faster than the cost of private health care even though health care costs for the young have risen faster than those for the old over time some people say well you know medicare's covering older people and therefore you would expect higher higher price increases and in fact that's um that works in favor of medicare and despite that they've had higher cost increases so you can take a look at this the red line there is combined annual per patient cost of all health care in the u.s except for medicare and medicare and the black line is medicare and medicare per patient so um in the u.s where you can make a comparison between a market based entity and a government based entity the government tends to produce higher costs mri machines are far more common in the u.s than in the uk and canada uh ct scanners about the same um if you look at the uk they've got a higher rate of death from heart attack stroke and cancer than the u.s candidates higher rates for heart attacks and cancer cancer survival rates are better in the u.s and wait times are much better in the u.s than they are in many other countries you want to wait to get a specialist appointment you're going to you're going to wait a long time in countries where the um medical care system is more uh government run i always throw this in at the end of my talk on this and and i just kind of have to laugh i mean kind of a austin powers type british have this kind of apologies for any british in the room but it's a little funny to americans um that apparently some english have resorted to pulling out their own teeth because they can't find or can't afford a dentist um six percent of those questioned in a survey of 5000 patients submitted they had resorted to self-treatment using pliers and glue more than three quarters of those polls said they had been forced to pay for private treatment because they had been unable to find a national health services dentist almost a fifth said they had refused dental treatment because of the cost one respondent in Lancashire claimed to have extracted 14 of her own teeth his his teeth i guess with a pair of pliers i took most of my teeth out in the shed with pliers i have one to go others said they had fixed broken crowns using glue to avoid costly dental work well free health care and dental care is great when you can find it if you can't find it then you're left to your own devices with kind of grisly results so um valerie haulsworth says uh she removed seven of her own teeth using her husband's pliers when her toothache became unbearable and she was unable to find a nhs dentist and this is this is a real problem all right so to sum up here pharmaceutical regulation kills people bureaucracy produces rule-based behavior instead of entrepreneur directed discretionary behavior so you get more death and suffering the principal agent problems emerge as third party payers separate the patient from the doctor moral hazard problems create about third parties increase medical costs and so you get government rationing of some type and i know this is this looks very very bad that's because it is very very bad it's really no way to sugarcoat the situation although i will say i'm encouraged when i see the people like the surgery center in oklahoma and others that are really innovating in spite of all of this and that is encouraging to see i mean i'm i'm amazed at the resilience of the marketplace in spite of all the pressure all the costs and the regulations that the government puts on it i'm really amazed at that and that there still is innovation there still is progress being made as people invariably find ways to work through all of these difficulties and produce a quality product so there is i think some some room for optimism but right now particularly after the aca i understand it looks a little dim uh dismal um so i will stop there and i think i've got a couple of minutes for questions yes um is this the one that's uh i there's a there's a group called um it's run by bobby gendall's group that's sort of trying to produce an alternative to the aca it's got some holes like it's maintaining the pre-existing condition exclusion and some other things like that i i don't think i know the details the one you're referring to okay i'll stop okay um i'd have to look at it to be able to to evaluate what i'm seeing what i what i what it's saying um i'm there there are a lot of groups out there that are wanting to change something about they they they profess to hate obama care and then what they what they want to substitute is sort of obama care light and and uh i'm not saying that gendall's is that way i've only briefly read what his group suggested and i noticed that it's it's got a few disturbing problems but i i'd say it's probably an improvement um over what we've got yes well you know that is the tendency of um of regulation um the government creates a problem with its regulation the problem becomes obvious to everybody and they say fix it with some more regulation and i think this is what misa has observed that this is how this is this is why he said there's no third way because a little bit of regulation is going to lead to more regulation to fix the problems created by the initial regulation and you just keep going down this path until you end up with um and i'm sure that there are people who are going to look at the failures in the affordable care act and they're going to say well uh let's just nationalize the whole thing now whether that's politically feasible i don't know i mean i know there's quite a bit of opposition to the affordable care act but i'm not sure people really understand why it's why the affordable care act has these these uh yawning gaps in in its um functionality yes in the back yes okay yeah well um that i could lead to the kind of thing that he's suggesting that people look at their deductible and say well i've got a five thousand dollar or ten thousand dollar deductible i don't have that money um i i need to have this service and what am i going to do and you're going to have enough of those kinds of stories that um i think you are going to get some calls for increased intervention now you still have medicare and medicaid which don't have that that high deductible system but you could find you or that high deductible feature but you could find more and more people pushed into um medicare and medicaid yes medical research um to my to my knowledge the two top countries in pharmaceutical research i don't know about medical research generally but pharmaceutical research would be the u.s and switzerland and switzerland's i haven't looked at at this in some time but swit last time i did look switzerland's medical care system was structured roughly like the u.s i think germany's also but switzerland and the u.s are top in in pharmaceutical research i'm afraid i'm out of time so i'll have to stop if you have other questions i'll be happy to talk to you