TO GRASP the central crisis in the health system, consider the history of cancer drugs. In 1992 a new breast cancer medicine called Taxol was marketed at $4,000 for a year's prescription, a sum considered exorbitant at the time. Six years later, as the New York Times reported on Tuesday, another breast cancer drug called Herceptin hit the market at $20,000. Then in 2002 a colon cancer drug called Erbitux weighed in at $100,000 -- a twenty-five-fold increase in the space of 10 years. Drug companies charge this much mostly because our broken non-market system allows them to get away with it.
The standard justification for high drug prices is that they finance medical research. Yet huge research budgets are justified only if they achieve something useful. Usefulness means not just producing drugs but extending and improving the quality of life at a reasonable price. Because decisions about treatment are made by patients and doctors who don't pay for medicines, drugs that fail the usefulness test nonetheless get purchased. Cancer doctors are willing to prescribe medicines costing more than $300,000 for an extra year of life, according to a study by Dr. Eric Nadler of Harvard Medical School. But by analyzing how much people are willing to pay for various life-extending safety precautions, health economists have concluded that society values an extra year of life at about $75,000. The physicians' indifference to cost explains why drug firms charge outrageous prices.
Paying too much has painful consequences, even if they aren't immediately visible. The rising cost of health care helps to explain why airlines are going bankrupt and why Detroit has trouble competing against foreign automakers. To the extent that corporations cushion themselves by holding down wages, rising health costs contribute to the stagnation of incomes in the bottom half of the workforce. Medical inflation also obliges some people to do without insurance: Between 2000 and 2003, the percentage of Americans covered by employment-based health benefits fell from 63.6 percent to 60.4 percent. Finally, medical inflation drives up the cost of Medicare and Medicaid, which will ultimately force taxes up.
So the appealing assumption about medical research -- that more is always better -- turns out to be wrong. Huge research budgets, financed by sky-high drug prices that reflect an absence of market discipline, come at the expenses of diminished corporate competitiveness, stagnant wages, growing numbers of Americans who can't afford insurance, and higher taxes. The way to fix this problem is to create a health care market that pays for only cost-effective treatment; price signals would then refocus the research establishment on producing useful therapies.
The Bush administration and Congress are passing up opportunities to create a more rational health market. Some effort has been made to address the fact that doctors earn profits by selling the exorbitant cancer treatments that they prescribe, but doctors increasingly invest in high-tech equipment that they profitably recommend to patients. Meanwhile managed care companies, which were once regarded as the best hope for containing unjustified spending, have been more or less defeated; but faced with this failure of the private market, federal policy is to move Medicare toward a private model. Oh, for a political leader with the courage to take on this mess.