Megan McArdle's Homework

Via TNR, I see that conservative Megan McArdle continues her "moderate" wingnuttery by pretending to take an open-minded view of why she opposes healthcare reform, before insisting that she's forced to oppose it based entirely on shit she just made up.

Her post says her primary reason for opposing government healthcare is because America is the last major market that hasn't socialized medicine, and therefore, we're supporting all the drug profits that keep the innovation pump flowing. And so she thinks we need to keep biting the bullet and subsidizing the rest of the world or we won't be getting any more new drugs.

And surely, if she's so open-minded about all this, she's readily providing the factual basis for her claims, right? No. She provides none. She merely asserts repeatedly that America is subsidizing the Pharma profits and, without us, there wouldn't be enough profits to make it worthwhile for them. And it's not even enough that she can't possibly provide proof of the second half of that claim, as it's a hypothetical with no real basis for objective analysis; she can't even support the first half of her claim...you know, the fact part.

TNR has a real catch, as she wrote in a comment at that post:

The United States currently provides something like 80-90% of the profits on new drugs and medical devices. Perhaps you think you can slash profits 80% with no effect on the behavior of the companies that make these products. I don't.

But as TNR points out, McArdle later admitted in a chat that "It wasn't a statistic--it was a hypothetical." It other words, she pulled this matter-of-fact rebuttal completely out of her ass. But it wasn't just that comment. She made that 80% claim a second time and repeated the basic assertion endlessly, often citing her earlier assertions as support for her later assertions; as if repeating an assertion makes it come true.

And the main assertion is absurd: McArdle is resting on the idea that price controls force drug companies to sell barely above their costs, and that we'll do the same if we control prices. Is there any basis for this bizarre idea? I don't know, as Megan never provides one. But as we'll see, there's good reason to believe she's wrong.

Megan Asserts

Here are a few of her other comments on that post (ellipses indicate separate comments):

1) Socialised systems in Europe use price controls and rationing to reduce the profits in providing medical care, discouraging innovation, and then free ride on innovations that are primarily aimed at the US market.
[....]
B) Even for foreign companies, we provide most of the profits.
[....]
Actually, the bulk of the profits are from the US. Look at the financial statements of any company that breaks out its international operations. The bulk of the sales often comes abroad. But all the margin is here.
[....]
As pointed out above, the issue is not that no company outside the US innovates. It's that they make the bulk of the money off of their innovations in US markets.
[....]
But those biotechs get funding largely because there's an exit strategy through an acquisition or IPO. If you slash the future profits on drugs 80%, the capital will dry up.

I'm not defending Big Pharma--I could care less if Pfizer stays in business. I'm defending market pricing for drugs.
[....]
Look at the financial statements of any company that breaks out its numbers by region.

And mind you, I wasn't selectively editing her facts out of this. She never provided any. She merely kept asserting that her position was factually correct and kept telling other people to cite their evidence and research her claims. Frankly, I can't conceive of any reason why these people tried to debate this ninny.

Crunching the Numbers

But hey, I'm a CPA who knows his way around numbers, so I decided to take Megan up on her challenge and actually read these financial statements. If she insists on having us do her research for her, I guess I'm up to the challenge. And the first drug company that came to mind was Pfizer, so I looked at their financial statements for 2008 (pdf).

And sure enough, Megan is totally full of shit. As page 59 clearly shows, Pfizer made far more money from international markets than from the USA. In fact, for 2008, Pfizer lost $1.7 billion in the US, due to a Justice Department settlement, while they made over $11.4 billion internationally. And over the last three years, they made over $30.2 billion internationally, compared with $1.7 billion domestically.

And mind you, these are profits before taxes; not total revenue. So not only did the US not account for 80% of Pfizer's profits, as Megan stated twice, they accounted for less than 6% of their profits. And sure, this is just one company, but this already refutes Megan's claim that we'd see this on "any" drug company. (Disclosure: I also researched GlaxoSmithKline's financials (pdf), but they only break-out revenues by country, and not profits, so I couldn't do that one. Plus, they use weirdo Europe-talk that I'm not familiar with, and the whole experience creeped me out.)

Ridiculous Profits

And so that shoots down the first part of Megan's premise. And the second one is even easier. Her claim that American profits are the only thing spurring innovation is completely destroyed once one realizes that a company like Pfizer spent $23.6 billion in research over the past three years while making $32 billion in profit. Meanwhile, GSK spent €6.7 billion on research in two years to make €16.2 billion. So they can spend billions on research while still raking in tremendous fortunes. Seems to me that they could be doing a whole lot more innovating, if they wanted to.

Needless to say, a price cap here in the US isn't going to break these guys. After all, it's not as if these caps will make them sell at a loss. And that's the thing, for as much as conservatives accept on faith that the US is subsidizing drug profits, it's obvious that they're doing quite well without us. And so Megan is left with a faulty premise with no factual basis as the primary reason she opposes our healthcare plans.

Of course, as with most conservatives, I suspect she reached her conclusion first, which is why she never bothered giving any actual facts. Not only did she not need them, but they would simply have refuted her point. After all, no one with half a brain could possibly assert that our current system reflects "market pricing for drugs," as she asserted in a comment. Thanks to temporary monopoly status granted to new drugs, drug companies pretty much get to set their own prices.

And based upon their tremendous marketing budgets (roughly double their research budgets for both companies above), I suspect that quite a bit of flim-flam also goes into supporting these "market prices." After all, new drugs aren't tested to see if they're any better than the old drugs, and that's why they pay more to sell the snake oil than they do to make it.

And so, for as much as Megan would like to imagine that America is the last bastion of innovation and that her faith in the all-powerful Profit Motive forces her to oppose healthcare, reality tells a different story.