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Comment by jacoblyles | Hacker News Reader

It's interesting that they tried the tactic of micro-regulating every aspect of the ship captain's business and that didn't work as well as broad incentives.

Today, this micro-regulation is politically popular as voters can more easily comprehend the direct effects of regulation as opposed to the indirect effects of broad incentives. For example, we force drug companies to perform very extensive clinical trials for new drugs and this makes us feel safe. But simply increasing the liability drug companies face for producing harmful drugs may be more effective and would certainly be a lot cheaper (as much as 90% of the cost of a new drug is meeting FDA requirements). But I doubt voters would feel as safe in a regime of broad incentives even if it worked better.

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It's also driven partly by a preference for that kind of regulation from the companies themselves (though they would prefer less regulation overall). Having to follow a bunch of rules on FDA trials is a manageable, mostly predictable expense; large, nearly unlimited potential liability if a drug turns out to have significant negative effects 10 years down the line is much scarier to managers and stockholders.

That's one reason the health industry is currently lobbying to move it in exactly the opposite direction of what you propose: they want less broad liability, and are willing to accept more FDA micromanagement in return if that's what it takes. The proposed bargain is something like: the FDA should tell us what to do, and if we follow their rules, we should be shielded from all liability.

Regulation = Barriers-to-Entry. Businesses accept (and secretly cheer on regulators.) People get this connection, even though it is non-intuitive on the face of it.

What is less studied are the regulators themselves. They rarely impose the kind of regulation that opens industry actions to sunshine and converts them to common knowledge.

There is a substantial body of theory that shows that the price system breaks down in the face of informational asymmetry. But regulators don't go for it since it does not make them more powerful. That's human nature. And it's fine with businesses, who would prefer to answer to the One rather than the Many. Preserves barriers to entry.

Not only that: expensive regulation also protects those companies big enough to absorb the costs from disruptive competition by startups.

> as much as 90% of the cost of a new drug is meeting FDA requirements

It's easy (and convenient) to blame this on the government. I'm somewhat familiar with the pharma industry (payed for my house), and I can tell you that at least some of these "regulatory" costs are things like flying doctors to expensive shindigs, to coordinate the research they're doing for you.

On this note, if a govt. agency throws a multi-thousand dollar party, it's a scandal, but those kinds of costs are built into the way (privatized) pharma operates.

It's easy to waste millions when you're making billions, and you don't have to answer to taxpayers.

This "government is wasteful" meme ignores the fact that there are powerful non-government actors milking the government.

It's easy to waste millions when you're making billions, and you don't have to answer to taxpayers.

Quite the opposite. The taxpayers only wake up once every 4 years, and even then they buy the crap that's shoveled at them, and the fearmongering ("OK, we may have made a few mistakes, but you still have to vote for us because the other side is evil"). Anything that happens between now and the next election will be largely forgotten, and anyone who tries to remind the electorate will be shouted down for "negative campaigning".

On the other hand, the shareholders are watching the actions of the corporations every day of the year. I'm not personally doing so, but I pay a variety of mutual fund managers to do it. If they can't maximize my return by steering clear of corporations that are flushing money away, I'm going to fire the fund manager and put my money elsewhere.

And that's why you'll never see a private organization as poorly run as a government agency, at least for any period of time. The quality of education we get is absurd for the money thrown at it. The amount of time it takes for a highway construction project to be completed (not to mention the number of workers I see loafing around when the town is filling potholes) would never be tolerated in industry. I could go on all day...

This "government is wasteful" meme ignores the fact that there are powerful non-government actors milking the government.

This is certainly true. But it doesn't absolve government of its responsibility as stewards of our money. The fact that government is just so huge that this is impossible is just another symptom of the root problems.

The recent financial meltdown should have made it abundantly clear that the "watchers" were in fact not watching and at times were colluding with those they were supposed to be watching to get a cut of the take. Shareholders do not watch companies for waste, they just watch the stock price (and maybe the bottom line if they are particularly dilligent.) In many cases government agencies are better managed than corporations of an equivalent size; there are usually better internal auditing and fraud controls in place and if you get caught trying to defraud a government agency you are more likely to go to jail than if you were to perform a similar fraud against a corporation.

The recent financial meltdown should have made it abundantly clear that the "watchers" were in fact not watching

That's true, but it's a very specific example that has a clear explanation in two parts, those being the government and the private sector together creating the problem.

First, there was the government (e.g., Barney Frank's efforts) that was forcing industry to accept risks that industry would have avoided under more natural market conditions. Second, forced to absorb those risks, industry experimented with ways to mitigate and dissipate that risk -- but the experiment failed badly.

It showed that nobody knew how to properly model the situation -- neither the regulators nor the industry. And for that reason, it's not really an instructive lesson to draw conclusions about industry. We've learned those particular lessons now, so you shouldn't see this repeated again.

Shareholders do not watch companies for waste, they just watch the stock price

That is patently absurd. It's not even true for any responsible individual investor, but for any fund manager that would be outright negligence -- and then the yields of his funds would tumble, and even the stupidest of individual investors would throw him out on his ear.

By contrast, I offer government idiocy, programs that have blatantly failed by any objective measure, yet continue to be money black holes. Consider public education, and the war on (some) drugs. Both actively damage society, and waste uncountable sums of money in doing so.

In many cases government agencies are better managed than corporations of an equivalent size; there are usually better internal auditing and fraud controls in place

Citations, please? Here are some counters: Aside from my examples above, consider Medicare, a well-known money pit that politicians have said they'll clean up for years if not decades. Indeed, government does all it can to prevent us from seeing the depths of its waste. I have a friend here in NJ who works tirelessly to uncover government waste, and the reason it's such a big job is the constant resistance to the use of open public records laws.

And the military (the remainder quoted from http://www.wanttoknow.info/corruptiongovernmentmilitary ):

"'According to some estimates we cannot track $2.3 trillion in transactions,' Rumsfeld admitted. $2.3 trillion -- that's $8,000 for every man, woman and child in America." -- CBS News, 1/29/02, U.S. Secretary of Defense raises evidence of government, military corruption

"A GAO report found Defense inventory systems so lax that the U.S. Army lost track of 56 airplanes, 32 tanks, and 36 Javelin missile command launch-units. When military leaders were scrambling to find enough chemical and biological warfare suits to protect U.S. troops, the department was caught selling these suits as surplus on the Internet 'for pennies on the dollar.'" -- San Francisco Chronicle, 5/18/03

"The Defense Department spent an estimated $100 million for airline tickets that were not used over a six-year period and failed to seek refunds even though the tickets were reimbursable." -- New York Times, 6/9/04

It's funny you mention Medicare, since it's actually more efficient than most private insurers when measured by fraction of revenue spent directly on patient care. The reason Medicare is a money pit is that it pays for expensive care for a huge population of elderly people,

Many people say this, but it's simply not true. The numbers miss crucial information, and I'll explain why. The reason that I've got this knowledge that isn't widely known is that my wife works for a hospital, where she is the "Manager of Budget and Reimbursement". That means that half of her job (and that of her department) is to secure reimbursement from Medicare (and Medicaid).

If you're sharp, you'll already see where this is headed.

The problem is that Medicare, while not quite a monopsony, is so large that they can call the shots pretty much as they like. Where other healthcare insurance providers (say, Aetna) still exist, Medicare's market share -- and thus power in the market -- is many times larger than the biggest of them. That being the case, Medicare can largely dictate unilaterally the terms under which it's willing to pay out. And that is the very raison d'etre for my wife's department.

So while other providers show greater expenses for administrative costs, Medicare's own expenses for the equivalent is far lower. But that doesn't mean that, in the larger picture of the patient's care, these expenses are not being incurred.

Medicare's size and market power allows them to demand that providers (e.g., my wife's hospital) offload a huge amount of the administrative costs, doing much of what ought to be Medicare's own work (by comparison with what's done by and for other carriers) for them. This means that while Medicare isn't paying directly for it, the administrative expenses are still incurred in the course of patient care; it's just that the costs are hidden from Medicare books, and must be amortized across the rest of the hospital accounting.

This means that half of the expenses the hospital pays for my wife and her department are really Medicare expenses, but don't show up on Medicare books -- instead, they're amortized as a fixed expense across the whole hospital.

> On the other hand, the shareholders are watching the actions of the corporations every day of the year.

This is simply not true in any useful sense. What is Lockheed Martin's entertainment budget? How much money did Pfizer spend on airline travel for doctors? What percentage of the doctors who flew in better than coach seats could have flown in coach?

There's no way for a share-holder to reasonably find out this information.

> And that's why you'll never see a private organization as poorly run as a government agency, at least for any period of time.

This is just dogma. As long as the overall organization is profitable, sub-domains can be spectacularly unprofitable for surprisingly long. You just don't get to see it as an outsider.

> But it doesn't absolve government of its responsibility as stewards of our money.

So, how do they do that wrt sub-contracting? They try to cover their butts with more and more regulation. Then the same people who are robbing them blind scream about government interference.

If you want to claim that only the government is an inneficient actor, I can only deduce that you've never worked in a Fortune 500 company with more than 100.000 employees.

Inefficiency is built into most of the large human structures. In large corporations few people have real incentives towards the bottom line, so we have industries that live off their cash cows while the rest of the organization is a complete mess.

You are also discounting the fact that inefficiencies are not necessarily a sufficiently important factor in productivity. American military contractors are some of the worst providers of value in terms of efficiency, yet their ability to play the political and legal game gives them all the advantage they need.

Another example is reducing fuel use: Any economist will tell you that if you want to reduce fuel use you can simply tax fuel (or tax it more heavily). Instead we get things like CAFE standards, which are both less effective (more efficient cars = cheaper driving = some amount of additional driving) and probably more expensive for everyone involved (i.e. someone that doesn't drive much might be better off with a cheaper, less efficient car). But no politician is willing to buck up and propose a higher gas tax (in fact recently members of both parties in the US proposed a gas-tax holiday).

(Note: there are other reasons why CAFE-type standards might be a good idea, but they are far from the most effective way to reduce fuel use).

Fuel taxes are a great way to reduce fuel use, but they aren't a very direct incentive to reduce fuel waste. Since there's no viable replacement for fossil fuels for cars (and public transportation in America generally sucks and can't be fixed quickly), it's fuel waste that needs to be attacked more than aggregate fuel use.

whats the difference between fuel use and fuel waste

Fuel waste is that fuel that enters the engine but is not converted to momentum, because it either didn't burn or the energy was lost.

Disagree that having a broad incentive is good enough for this case. This is an example of how hard it is to create an effective broad incentive. Since drugs can be created under the shelter of limited liability of corporations, people will just find a way around it. Shell corporations would be much more likely to risk other human lives than the FDA would. In addition to that, if the expected value of a risky drug is still positive, then many corporations may still rationally opt to proceed with the drug.

Agreed. Bring in that sort of incentive-based deregulation and suddenly every new drug would be made and manufactured by an entirely new company (which just happens to be 100% owned by an existing big pharma company).

Incentives aren't the solution to everything, sometimes regulation works better. For instance, you're liable for all the damage you cause while on the road, and yet we still need road rules to stop people from behaving like dicks (and even then, it barely works).

If a smaller company is 100% owned by a larger company then people suing the smaller company would have access to the large company's assets (there is some sort of equity cut-off here, in banking I believe it's as low as 9.9%). Corporate law thought of this.

OK, so you set up a wholly independent company owned by a few employees. This company licenses the patent for NewDrug from BigCompany.

Heck, you don't even have to do it with shelf companies. Hi there, I'm BigCompany, and I'm willing to license this drug which I think might work to any startup that feels like selling it! Or if that would expose me to liabiilty, I'm willing to license this substance which I developed which may or may not be useful as a drug. That would still be a win-win situation.

As a consumer, why would you inject yourself with an untested drug from some unknown startup?

It sounds crazy when you put it like that, but people really will swallow a random pill given to them by a man they've never met in the toilets of a dodgy club in Brixton...

Marketing. (Which makes it not "unknown").

> as much as 90% of the cost of a new drug is meeting FDA requirements

Really? I'll take it that you're not including marketing (which is where most of the money goes), as that doesn't kick in until the new drug is going to be approved.

Does that 90% include things like clinical trial, which should be done anyway?

You only have to pay for marketing for the drugs that make it through FDA trials, not the 9 others that didn't.

> I'll take it that you're not including marketing (which is where most of the money goes),

Marketing includes discount/free drugs for low-income folk, samples (which many doctors use the same way), and telling doctors what the drug does.

Which of those do you want to reduce?

Marketing may include those things, but isn't limited to them, and much of the marketing money is spent elsewhere. It's easy to tell the drug companies are awash in money dealing with them. Not that I blame them.

> Marketing may include those things, but isn't limited to them, and much of the marketing money is spent elsewhere.

And you know this how? And where exactly?

I'll assume that you're referring to ads.

> It's easy to tell the drug companies are awash in money dealing with them.

Oh really? I see significant ad campaigns for 4-8 drugs. Even 20 would be a small fraction of the total drug portfolio of a single company, and there are multiple companies.

I'm not terribly certain of that one. I don't disagree on the principle in the general sense, but (having been in clinical trials at one point) it seems every new drug will kill / have adverse effects on someone. Its the nature of the thing, drugs do not react the same for everyone and sometimes it is adverse. No amount of testing will fix that.

Do you see the obvious hole to that theory?

Each drug gets passed through to a holding company that funds R&D and assumes liability. How do you hold Pfizer or Novartis resonsible for a drug they don't "own"?

How do they earn any profits if they don't hold the equity? If they hold the equity, then they also are on hook for the liability. I used to work in banking and a lot of our clients would have loved to sell all their bad loans to a fully owned subsidiary, but the law simply doesn't let you do that.

I'm not a corporate lawyer but in my experience in the financial markets it is simply impossible to avoid liability while holding equity. Maybe there are some loopholes but it is not nearly as easy as you suggest.

IANAL either, but I could imagine many structures that would allow for the effect the holding company would want.

Pay a company for distribution and logistics expertise and make that transfer-pricing arrangement profitable for the logistics company.

Then, what profit remains goes to the company owning the patent on the drug (and the liability). The parent company could hold limited partnership stakes, convertible bond and/or options with a fixed term (which might be conveniently the same length as the patent term). If the drug "survives" 17 or 20 years without significant lawsuits, call in the options and claim your equity. If the drug explodes and tanks the discovering company, the parent company holds options, bonds or LP shares that are now worthless. Still, they're in business.

It's a fair question, and I personally don't see a good way around the legalities of this.

However, the moral questions are quite obvious, and it seems obvious to me that there would be consumer watchdog groups (like Consumer Reports) that would keep us abreast of these antics. Even if the law can't pierce the corporation, crowdsourcing and reputation certainly can.

The only downside is in the other case people die before they pay.

Lots of people die from not getting life-saving drugs because they are held up by the FDA too, including drugs which are already available and shown to be effective in other countries with less strict regulatory regimes. The net lives-saved statistic of FDA regulation is really hard to calculate.

But assuming that you have some number of lives-saved in mind, you have to ask yourself if that number is worth delaying pharmaceutical research. Maybe your counter-factual world is downright apocalyptic - I don't think that's likely. But if so it makes sense to have strict regulation. There are some scholars of the issue that think the lives-saved number of FDA regulation is negative, in which case of course the cost is not worth it.

edit: I removed an illogical claim that may make follow up comments make less sense.

You've thrown around the number 90% for both the amount of money the FDA delays drugs and the amount of time it delays it.

Which says to me you are just pulling numbers out of thin air here.

I read a few places before that 90% of the cost of developing a drug occurs after clinical trials begin but I have things to do other than write HN comments so I didn't look it up again. I will be happy if someone else finds a reference to support or deny that and will happily admit I am wrong if I am.

Of course I'm totally wrong about the 90% delay I put in this last comment, I was thinking about this on the way to the office. If we're thinking about the added cost of regulation we have to compare the cost of regulation to what drug companies would spend on clinical trials in an alternative regime, and that number is not $0.

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