Trade-offs. Will they never go away?

From What the Prescription Drug Debate Gets Wrong by John Tierney.

The American pharmaceutical industry is the most innovative in the world and saves more lives than any other institution. So, of course, it is also the national villain.

In this autumn’s election, once again, voters say that one of the top issues—the top issue, in some polls—is lowering the price of prescription drugs. Politicians of both parties ritually denounce Big Pharma for profiteering. In his first press conference as president, Donald Trump accused drug companies of “getting away with murder,” and Bernie Sanders has called the industry’s greed a “public-health hazard to the American people.” A central plank in the “Better Deal” that Democrats are promising in the midterm elections is for the federal government to “negotiate” drug prices, and some progressives don’t even make that semantical pretense. They call for outright price controls, if not the “deprivatization” of the industry, on the grounds that Big Pharma is too powerful to be constrained by market forces.

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At one level, this is just political opportunism. Big Pharma is easy to resent because its products are so essential, and it’s easy to attack because it’s actually not so big. Of every dollar that Americans spend on health, only a dime goes for prescription drugs. The lion’s share of health spending goes to hospitals and people in the health-care professions, whose relatively high fees and salaries are largely responsible for Americans bearing the world’s highest health-care costs. But how many politicians want to go after doctors and nurses? What Democrat would dare arouse the ire of the health-care unions? Much easier to scapegoat the greedy drug companies.

The critics do get one thing right: the pharmaceutical industry is no paragon of free-market capitalism. Companies spend much of their time appeasing regulators instead of satisfying customers. The bureaucratic delays and complexities discourage innovation and competition, allowing some firms to profit by gaming the rules rather than developing new drugs. The system is so opaque and convoluted that both parties agree that it needs to be reformed.

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The obvious explanation, at least to the academics and journalists and politicians who have dominated the debate for decades, is that America lacks the nationalized health systems of other developed countries. Too much of the money goes into the coffers of drug companies, private insurers, advertisers, and other profiteers. To make health care affordable and spread the benefits equitably, America must emulate the systems in Europe and countries like Canada and Japan.

The conclusion sounds plausible until you take a closer look at the numbers. Yes, Americans do spend more, but they can afford more because their incomes are higher, and they’re getting more in return. Yes, the statistics are better in other countries, but it’s not because of their price-controlled drugs and national health services. If America adopted their policies, the gaps would only widen.

The gap in life expectancy is due to demographic and cultural differences, starting with the much greater ethnic and economic diversity in the United States. Fans of government health care like to point to Sweden and Norway, where people live three years longer than Americans, but that gap shrinks to one year if you consider just Minnesota, a state with relatively little poverty or racial diversity and lots of well-educated Scandinavian-Americans. The U.S. life expectancy at birth, 79 years, looks bad compared with Singapore’s 83 or Japan’s 84 (the world’s highest), but people from those countries live even longer in the United States. The life expectancy for Asian-Americans is at least 85, and some estimates put it at 87. Some of that added longevity is presumably due to the American health-care system, though it’s hard to quantify because so many variables affect life expectancy: genes, income, education, diet, exercise, lifestyle, and other cultural factors.

Indeed, this latter point is critical. It is the Simpson's Paradox which undermines almost every conclusion based on drawing comparisons between the US and any other OECD country.

When you compare American lifespan, morbidity, PISA scores in education, etc. the US comes in at the mid-range or upper third of the OECD average, rarely at the top. There are a lot of potential reasons for this.

The one that explains most or all of the gaps is the Simpson's Paradox arising from the fact that the US is not only a huge continental country, but because of its founding principles (treating people as individuals with God given rights) means that the US is multicultural to a degree virtually absent anywhere else (Singapore being a, literally, tiny, exception).

On all measures the Simpson's Paradox is that while the US as a whole performs in the upper middle of the OECD pact, when you look at the subsets of multiculturalism (such as race, ethnicity, culture, religion, class, etc.) the US outstrips virtually everyone on all virtually all measures.

Take the crudest matchings of race for continent, in other words European Americans compared to Europeans, African Americans compared to Africa, Asian Americans compared to Asia, etc. In virtually all measures the American groups far outperform the origin continent comparisons. For example, European Americans are longer lived, richer, have less crime, are better educated, healthier, etc. than any country in Europe. Than same with African Americans and Africa, Asian Americans and any country in Asia, Hispanics and any country in Latin America.

I elaborate on this in Simpson's Paradox and The Texas-Wisconsin Paradox and intergenerational income mobility and US Education: Expensive and ineffective? Not so fast.

The Simpson's Paradox applies beyond race/ethnicity/culture to religion as well as indicated in that last link on American education.

Healthcare provision remains an area of the economy desperately requiring improvement. We won't achieve that through the naive solutions which seem to be the primary choices advanced by policy makers. It is more complicated and we have to keep an eye on the trade-offs which are really in front-of us instead of assuming away costs and uncertainties.