Compare & Contrast, Part 4

Dr. Jerry Avorn--chief of the division of pharmacoepidemiology and pharmacoeconomics at Brigham and Women's Hospital--interviewed by the Washington Post's Ezra Klein:

Virtually every progressive recommendation about health policy for the last 20 or 30 years that the drug industry felt might harm its bottom line has been met by the threat that if they don't make as much money before, innovation will cease and there will be no cures for new diseases. It came up around Medicare drug pricing and generic drugs. It's not a surprise to see it come up around health-care reform.

There are a couple reasons that this is a specious argument. One is that according to their filings with the SEC, the drug companies only spend about 15 cents of every dollar on research and development. That's compared to more than 30 cents in administration and marketing and more than 20 cents on shareholder equity. As an investment in R&D, I think any venture capitalist would say a company spending 15 percent on research is not a robust innovation engine.

Megan McArdle in her Atlantic magazine blog:

This makes about as much sense as saying that Dr. Jerry Avorn cannot be that smart because his brain only weighs about three pounds. Presumably, you can't be really smart--really innovative--unless your brain is at least 30 percent of your body weight!

This is obviously ludicrous--so why would Dr. Avorn say it about an R&D department? Like your brain, the R&D department is part of a complex system that does a lot of important stuff. You can argue that the R&D department is the most important part of a company, not least because it couldn't survive long without it. I think the same thing about my brain--but I'd still be just as dead without my liver. You certainly can't prove anything about my effectiveness as a journalist by pointing out that it weighs less than my bones.

So how big should a "brain" be? Hard to say. But let's look at some companies that are generally recognized as pretty innovative, and their R&D as a percentage of revenue:

Apple: three cents out of every dollar

Google: ten cents out of every dollar

Intel: fifteen cents out of every dollar

Genzyme (innovative biotech startup!): sixteen cents of every dollar

US Government: three cents out of every dollar

I can assure Dr. Avorn that any venture capitalist would be happy to invest in these hidebound laggards who haven't had a new idea in centuries. The first few, anyway.

Agreed. Question: if reform advocates can't even Google, why should we trust them with healthcare?

(via Marginal Revolution)