The Surprising Argument Against Single Payer Healthcare in the United States

Whether you're for single payer healthcare in the United States or against it, you're probably familiar with a whole bunch of arguments that fly around in favor of it, or against it (ideally, you hear them in favor of some other system, rather than a flat-out refusal, but take what you can get).

While I shall neither advocate for nor against single payer here, I wanted to point out a potential consequence of the United States adopting single payer insurance that I have not yet seen spoken elsewhere.

Drug and medical device companies in the United States have massive profits, especially compared to other countries--this is due for many reasons. People have argued--likely correctly--that a single payer system would create a powerful government monopsony (like a monopoly, but it's the buyer rather than the seller), that would be able to negotiate very low prices and thus slash drug and medical device company profits.  

Sounds great so far. Here's where things get interesting.

Because the United States is both a very large and wealthy country, and also is a country in which drug and device companies can make very large profits, it actually accounts for the majority of these companies' profits--perhaps above 60%. In other countries, drug and device companies make razor-thin margins on their products.

This means that when drug and device companies are calculating the potential Return on Investment (ROI) for bringing a new device or drug to market, the majority of the Return is bucketed within the United States.

Were the United States to create a structure that slashed drug and device company profits to the levels of rich single payer nations (which would be something like an 80%+ reduction in profits), then the total profit for the company would drop dramatically--about 50% total.

Why would this be a bad thing? 

Let's look at the cost to bring a new drug to market. The FDA and other agencies have very stringent tests required to bring a drug to market. In addition to the research and development required, the regulatory and testing costs bring the total average cost to well over $2.5 billion dollars. This number has actually more than doubled in the past 10 years, as these regulations grow tighter. 

To overcome this cost and create a profitable product, drug companies need to take a bet that the drug is going to make that money back, and then some, in a reasonably short period of time. Bringing a drug to market is already dicey--most by far don't make it through R&D, and still more don't make it past the FDA and other regulatory bodies. Many lose money, others make very little, and some are cash cows that rake in a lot of money--at least while the drug company has a patent (the abuse of which is another story altogether). After the patent expires, generics show up and all but eliminate margins per drug.

Medical devices face much lower costs, ranging from $10s-$100s of millions, though that's only for their regulatory costs. But their margins tend to be lower, as their patents are harder to enforce, and others can move in easily.

The upshot of this is that if drugs and devices become far less profitable, then far fewer are going to pass the ROI calculation hurdle. In a regime of global low margins, most drugs and devices cannot be depended upon to make back the $2.5B or tens/hundreds of millions, and therefore will never be developed in the first place. A friend of mine that is the CEO of a medical device startup is currently bottlenecked by fundraising for regulatory approval; luckily for him, the potential for profit is fairly high. But already, it's a dicey proposition to investors.

What will happen is this: if the US adopts a low-margin single payer system, the rate of innovation and product development in the drug and medical device market would slow down dramatically. In short, high American costs are subsidizing the innovation of new medical drugs and technology for the entire world. If the US stops subsidizing these costs, innovation will slow, and new, potentially live-saving drugs will either never make it to market or make it much further down the line.

I don't make the case that the US should strictly speaking not adopt single payer healthcare for that reason, but it's a consequence that will occur if the US does, and should be part of the equation.

It's important that this be part of the bigger discussion on single payer healthcare in the United States, and it's hopefully a good lesson in thinking through all of the potential unintended consequences of sweeping economic reforms.

By the way: an interesting potential alternative to single payer healthcare to reduce individual costs is what I call the "dog model."  

[Edit: NHS monopsony paragraph was inaccurate, and has been removed.]

1 Comment

Erik Fogg

We do politics, but we don't do the thinking for you.