Health Reform Innovation Physician Compensation Supply of Medical Services

Supply side health reform

Alex Tabarrok of Marginal Revolution notes that designing a health care system that focuses on benefits to consumers and is important, but one should not ignore how any health care system design affects the supply of health care, in particular incentives to create innovative goods and services.

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.

In addition to recommendations to increase spending on medical research and avoid price controls, Tabarrok also recommends increasing the supply of physicians and increase price transparency.  The former he recommends a  “free trade” approach of allowing more foreign physicians to practice in the U.S. and allowing more Americans to get treatment abroad.  

These recommendations are entirely sensible and I agree with Tabarrok that focusing on getting individuals insured is important, but if the insurance doesn’t cover high quality, innovative treatment or you need to wait weeks or months to visit a physician, insurance is not as valuable as it could be.  While in the short-run providing care to today’s patients is important, the importance of improving health care for future generations should not be underestimated.

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