Weak arguments for medicine subsidies

This appendix briefly canvasses some arguments for subsidising private goods or services. Readers wanting a more comprehensive discussion of these first-principle issues regarding subsidies for medicines could consult Woodfield, et al.’s 270-page analysis and the largely supportive subsequent commentary by Victoria University of Wellington economists Lewis Evans and Neil Quigley. 136

‘Merit good’ paternalism Paternalists argue that others do not know what is best for them and will not consume enough medical services unless the state obliges them to prepay through taxes or mandatory health insurance premiums. 137 That is not an affordability argument.

Such arguments are sometimes called ‘merit good’ arguments. Arguably, they are more applicable to education where over-consumption is less of a concern.

The fact that a good is being subsidised for no clear public policy reason does not make it a merit good. It may be subsidised simply because it was once politically expedient to do so and it subsequently became politically entrenched, as subsidies so commonly are.

The first problem with this paternalistic justification is that it is too unspecific. If people do not spend wisely on pharmaceuticals, why would they spend wisely on food, housing, education or anything else? The more philosophical question is to what degree the state is justified in taking coercive action to stop people from doing things that do not harm others. If people are not free to make poor decisions, what is freedom about? Paternalism and freedom tread different paths. John Stuart Mill’s famous assessment was that people can be told what others think is good for them, but respect for individual autonomy precludes forcing them to change. 138

A burden of proof must be applied to paternalistic coercive action if the domain for individuals to pursue goals of their own choosing without curtailing similar freedoms of others is to be protected. In general, one person’s consumption of prescription medicines does not harm others. People can be informed of the benefits, but the case for coercing them by taxes or regulations is weak.

Egalitarianism An egalitarian argument is that therapeutic medicines are good for those who need them, and issues of affordability should not preclude people from getting their benefit.

However, many things are good for people who need them, including food, clothing and housing. The welfare state exists to help people with affordability problems. It does not exist to subsidise those good things for everyone else.

Egalitarianism does not justify subsidies for those who do not need them. The state can only help those in financial need by taxing others. The egalitarian argument that a universal subsidy treats everyone as being in the same boat seeks to avoid this reality. Moreover, it is impossible to politically or financially stop the well-off from obtaining more health services than the government of the day funds for those in financial need. The rich will normally spend more on any given good or service than the poor, including health services, for the obvious

reason that they can afford to. 139 There is nothing intrinsically wrong with that under a system of liberty.

Health event uncertainty Uncertainty about the magnitude of future costs does not justify a state subsidy. Private health insurance exists to pool fire-, accidentand health-cost risks. Health insurers in New Zealand are offering policies that cover some unsubsidised medicines.

Inability to assess therapeutic value Technical complexity does not justify a state subsidy. No lay consumer needs to know anything technical about how computers or cars work to enjoy their capabilities. Nor do they need a government agency to deal on their behalf. Independent private specialists and consumer information agencies (worldwide through the internet) reduce problems of unequal information. Patients look to expert consultants and prescribers for professional advice.

Monopoly pricing due to patent protection A monopoly is relevant to competition, but not to the subsidy issue. Patents confer timelimited monopoly rights on innovators for widely accepted reasons. 140 Such rights allow different prices to be charged in different market segments, where resale from one segment to another is difficult. 141 Pharmac’s example demonstrates that existing patent rights need not stop commercial procurers with scale from achieving major discounts on posted prices.