Healthcare spending and innovation

Greg Mankiw quotes a post he wrote a couple of years ago. The normative analysis is pretty much what I wrote about in a post a couple of days ago:

The reason that we spend more [on healthcare] than our grandparents did is not waste, fraud and abuse, but advances in medical technology and growth in incomes. Science has consistently found new ways to extend and improve our lives. Wonderful as they are, they do not come cheap. Fortunately, our incomes are growing, and it makes sense to spend this growing prosperity on better health.

Ezra Klein talks about innovation and healthcare spending today, but comes down on the opposite side of Mankiw in terms of his positive analysis:

Like Kevin Drum, there's one objection to a national health-care system that I find kind of interesting. As the argument goes, the United States overspends on health-care insurance. But that overspending has a point. It supercharges innovation. The rest of the world, in fact, free rides off of the high prices we pay for new drugs and ingenious technologies. That's not a great deal for us, but it's better than the grim future that awaits us in a world where the United States is not massively overpaying, and innovation thus grinds to a global halt.

The problem with that objection is that it's all theory. I've never seen empirical evidence quantifying the benefits of domestic overpayment, nor the cost to innovation of, say, a government health-care system that cut spending by 15 percent. Similarly, you'd also want to consider whether further drug innovation was the most productive use of those dollars. Out of every $100 we spend paying more for drugs and devices than other countries, would those last $8 do more good contributing to "innovation" (along with profits, advertising, me-too drugs, etc) or funding early childhood education? Or cutting taxes?

Nor do proponents of this theory seem to take it particularly seriously. They'll use it as a cudgel against single-payer, but never as an argument to increase domestic spending. But why not? If the benefits to innovation are really so grand, why shouldn't we double our spending? Or increase it by 20 percent? It seems unlikely that fortune has delivered us to the optimal point on the curve. If the need to better fund global medical innovation were truly so persuasive, you'd imagine that it would cease being a convenient objection to universal health care and be built into an affirmative policy proposal in its own right.

I'm more with Klein on this point, but don't agree fully with what he says. Like I said a couple of days ago, some reduction in costs is necessary to make sure the federal deficit doesn't explode to ridiculous levels, as well as to ensure all people have access to the care they deserve. However, that reduction comes a price that manifests itself in may forms, most notably, reduced innovation. Some of the slack will (hopefully) be picked up by other researchers (ie universities), but innovative, if very expensive, life-saving technologies will not come to market as quickly, if at all. I don't think the ever increasing healthcare costs are the most efficient use of money (especially when an alternative use of money is covering people in the lowest income bracket), but cost inflation reduction is not a free lunch.