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That Saturday Night Live cold-open about Elizabeth Warren pitching her “Medicare for All” plan to skeptical Iowa voters may seem like an in-kind donation to the Warren campaign. Kate McKinnon’s impression of the Massachusetts senator is both spot-on and compelling.
But there was one way in which the sketch was unfair to Warren. At one point, “Warren” is asked why she claims her plan will cost $20.5 trillion over a decade even though many economists put the cost at 50 percent higher or more. “Warren” then dismisses all these estimates as “pretend,” then adding, “You ready to get red-pilled? Money doesn’t exist!”
But the real Warren has a more thoughtful answer than that. Her plan would supposedly spend far less than commonly assumed through lower administrative costs than private insurance, reimbursing physicians and other non-hospital providers at current Medicare rates, and “reining in out-of-control prescription drug costs” through a variety of government-driven means.
All of which brings us to what economists might call “partial equilibrium reasoning.” In the case of a health plan like Warren’s, it’s the dodgy notion that even if America starts to pay a lot less for healthcare, all else will stay equal and everything will be better. Sounds great!
But might it be the case that the folks getting paid less might respond to this new status quo in ways that would affect American healthcare in ways the rest of us might not perceive as “better?” Incentives matter. And if the incentives change, actions will often follow.
For example: The Warren plan would first try to reduce drug prices by giving Washington “real bargaining power” to negotiate lower prices for patients. But if that tool proved insufficient, Warren would consider overriding patents so generics could be immediately manufactured, and perhaps even supported by public funds. Bernie Sanders’s plan would do much the same. In a podcast Q&A earlier this year, my AEI colleague Ben Ippolito explained “partial equilibrium reasoning” in terms of drug prices and tradeoffs:
Whether you hate drug prices or not, in the world of drug manufacturing, the early stage development is done by biotech firms and is funded by venture capital money. Then, if they are successful they are bought up by “big pharma” and then they develop the products and bring them to market. But with venture capital, that funding isn’t guaranteed to just stay within pharmaceuticals. If you drastically lower the returns on making a drug, venture capital is going to go make some app or some new, I don’t know, skateboard sharing app. There are other things you can do with money and they will chase profits, and you cannot simply assume that away. You need to stand up and say, “Okay, where are we spending too much money relative to what we’re getting,” identify those places, and make active and transparent decisions about when those trade-offs are worth making. Don’t just pretend that they’re not there. … And those are the kinds of trade-offs that we need to be making. But if we’re going to do this, we can’t just pretend they’re not there and say, “It’ll be fine if we just set low prices.”
And, of course, the substantial decline in prices would come with a substantial increase in uncertainty. Similar to how investors must now contend with the possibility of future presidents being more willing to actively wield expansive powers when it comes to trade protectionism, pharmaceutical sector investors would also have to factor how future administration would use this patent lever. As Ippolito adds, “It would be nice if everyone just really wanted to invent new drugs and all that. That would be great, but it’s just not the reality. And when you hear these plans discussed, when you hear the words, ‘what are the potential costs,’ generally the only thing you ever hear is, ‘Well, how would you fund it?’ That’s not the only trade-off that you need to think about and frankly, it might not be the most important one in the long term.”Published in