Category: Medicine

In the words of a recent article, the FDA’s rejection of a recent drug application was a stunning setback. Stunning setbacks are by definition unpredictable and unpredictable risks aren’t correlated with other risks which means that they can be easily priced and bought and sold. The all-star team of Adam Jørring, Andrew W. Lo, Tomas J. Philipson, Manita Singh and Richard T. Thakor propose just this in Sharing R&D Risk in Healthcare via FDA Hedges.

The idea is to create FDA Hedges that pay out a fixed fee if a drug fails to be approved and zero otherwise. Pharmaceutical firms could then buy some of these contracts and reduce their risk exposure which in turn would increase their incentive to invest in R&D.

The idea is clever but firms and even more so firm owners already have many ways to diversify and its not clear what the value of an additional source of diversification is, even one that is more closely tuned to the firm’s profits. It’s also not clear how much additional R&D would be driven by offloading these risks. Pharmaceutical R&D is valuable, however, so even small increases in R&D are welcome even if more fundamental changes would be better. Prices in these markets would also provide useful information.

I also worry that we are asking a lot of FDA reviewers and firm insiders to keep their inside information private. Information about FDA approval decisions is already very valuable and there have been a few cases where insiders trade on their information or leak it to make millions. FDA Hedges might make this problem worse which should be balanced against the possible gains.

We fight over health care policy because we focus on demand and redistribution. We could reach greater agreement if we focused on supply and innovation. What are the key areas where agreement is likely?

1) Cancer kills both Republicans and Democrats so more spending on medical research is likely to reach broad agreement.  As I said in Launching:

Looking at the future, if medical research could reduce cancer mortality by just 10 percent, that would be worth $5 trillion to U.S. citizens (and even more taking into account the rest of the world). The net gain would be especially large if we could reduce cancer mortality with new drugs, which are typically cheap to make once discovered. A reduction in cancer mortality of this size does not seem beyond reach, and the value of such a reduction in mortality far exceeds that of spending more on medical care today. Yet because the innovation vision is not central to our thinking, we overlook potentially huge improvements in human welfare.

By greater spending on medical research, I mean not only greater spending through the NIH but also a commitment to innovation policy more broadly. We know, for example, that price controls kill medical research so no price controls. We can also improve the FDA. I would favor less regulation but there are other methods to speed up the approval process which could command bipartisan support such as greater funding of the FDA. The FDA is also not monolithic, some departments are better than others, so we can reform the FDA by making it more like the better parts of itself.

In thinking about pharmaceutical regulation we also need to remember that 80-90% of prescriptions are for generic drugs and due to intense competition, generic drug prices are low and falling–so lets build on the parts of the US health care system that work well by keeping the entry barriers to entry in the generics market low.

2) Increase the supply of physicians. Despite an aging population and greater demand, the number of MDs per person has been trending downwards! Increasing physician supply could involve a combination of increased immigration of foreign physicians (skilled immigration is really a non-brainer that receives widespread support), increased slots at medical schools and in residency programs (via Medicaid), increased support for allowing nurse practitioners, dental hygienists and so forth and making occupational licenses portable across states. (In addition to making it easier for foreign physicians to come to US patients we should also make it easier for US patients to travel to foreign physicians–patients without borders). None of these things are easy to do, of course, but neither are they riven by ideological differences.

3) Demand price transparency from hospitals and other health care providers. In real markets, a price is a signal wrapped up in an incentive. With few exceptions, we don’t have real markets in health care and so “prices” neither signal nor incentivize. Thus, I don’t expect miracles from “price” transparency and this is a policy that could go wrong but transparency would still allow for some standardization, comparison, and computation of tradeoffs. Price transparency would also limit some of the worst forms of bill abuse. Even the Soviets found prices to be useful for these purposes.

Other supply side reforms that could find bipartisan support?

Fatigued drivers cause accidents. In response to this obvious fact, we limit bus and taxi drivers to a maximum of 10 hours of driving after 8 consecutive hours off duty. Yet when it comes to physicians, the current standard is significant more lax; first-year residents are restricted to 16-hour shifts! That already is nuts. I often teach a night class, 7:20-10 pm and I always try to teach the more difficult material early because by 9pm I am not at the top of my game. Needless to say, medical residents are far more stressed and fatigued than teachers. Moreover, while first year residents can work up to 16 hours, second year residents can work up to 24 hours straight and even up to 30! Isn’t it amazing how one year of residency can teach physicians how to function without sleep?

The current standards, which strike me as absurdly low, are actually due to restrictions put in place in 2003 and 2011–restrictions which are now being lifted. The new plan is to allow longer hours for first year residents:

Rookie doctors can work up to 24 hours straight under new work limits taking effect this summer — a move supporters say will enhance training and foes maintain will do just the opposite.

A Chicago-based group that establishes work standards for U.S. medical school graduates has voted to eliminate a 16-hour cap for first-year residents. The Accreditation Council for Graduate Medical Education announced the move Friday as part of revisions that include reinstating the longer limit for rookies — the same maximum allowed for advanced residents.

An 80-hour per week limit for residents at all levels remains in place under the new rules.

Studies have found that physicians who work longer hours are much more likely to get into auto accidents on the way home. Physicians and nurses who work longer hours also make more medical mistakes.

The main argument in favor of long hours is that the 2003 and 2011 restrictions do not seem to have greatly improved patient safety. That is surprising but the micro and experiential evidence that fatigue makes for mistakes is so strong that the lesson to be drawn isn’t that longer hours don’t lead to mistakes–the lesson is either that the restrictions were routinely ignored (as the National Academy of Science study found), that the studies done to date are misleading for a statistical or design reason or that there is another constraint in the system that needs to be examined. One possibility for another constraint is that handoffs of patients between physicians aren’t handled well. But that means that poor handoffs are killing as many people as fatigue!

In no other field do we tolerate error as much as we do in medical care. Why does the government regulate driving hours more than medical hours? It’s not just the government. It’s amazing that in a society where McDonald’s can be sued for making people fat that the tort system hasn’t shut down absurdly long residency hours (there have been a few cases). Medical care is a peculiar field (cue Robin Hanson).

Aside from Hanson-type factors, a key factor that explains what is going on is that residents are a huge profit source for the hospitals. Much like student athletes, residents are underpaid. As a result, hospitals want to use residents as much as possible so they lobby for longer hours even at the expense of patient safety.