Industrial Policy -- Health Care Investment

In the torrent of words over health care reform, insufficient attention is paid to the reality that whatever is enacted will constitute industrial policy toward a major economic sector, which by its effects on investment flows can determine whether that sector flourishes or stagnates:

Finance pro Tigerhawk makes this point in Innovation After Obamacare:

Will a "reform" plan reduce the rates of return on investment to pharmaceutical and medical technology companies and, even, physicians? If you cut costs to the "system" (which is different than to the economy taken as a whole) by reducing returns to drug and technology companies, then it follows ineluctably that it will be relatively more difficult to attract capital to develop new drugs and devices. Fewer projects will meet the requirements for expected returns, so fewer projects will get funded. Same thing for medical devices. As I wrote in my 2007 post "a few questions for health care reformers," reform advocates need to explain how much reduction in innovation ought to be acceptable. Some surely would be if the result were massively lower costs and universal coverage, but even those benefits would not be worth technological stagnation.

Tigerhawk also notes that the government is squeezing the providers, dumping costs on them in a way that must inevitably decrease the quality of future care by discouraging entry by competent professionals.

This is the world's oldest government ploy -- find some sunk capital that is not easily withdrawn, whether in the form of industrial facilities (such as grain elevators, in Munn v. Illinois) or medical professionals' education costs and time, and then take it by regulation or taxation. It works in the short term, at the expense of the long. (Of course, then the pol can complain about a "capital strike.")

I make a related point in Saving the Goose: Intellectual Property and Follow-On Biologics (FOB), CLI White Paper (Sept. 17, 2008), where I argue that third-party payers do not want expensive treatments to exist because they create political problems. Rationing by non-existence is the easiest course.

So far, the stars are not looking favorable for a good outcome here -- a deliberately chosen image, because astrology has more rational content than much of the health care debate.