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IP Rights Are Important, Even in Pandemics

Kristian Stout — 4 April 2020

[TOTM: The following is part of a blog series by TOTM guests and authors on the law, economics, and policy of the ongoing COVID-19 pandemic. The entire series of posts is available here.

This post is authored by Kristian Stout, (Associate Director, International Center for Law & Economics]

The ongoing pandemic has been an opportunity to explore different aspects of the human condition. For myself, I have learned that, despite a deep commitment to philosophical (neo- or classical-) liberalism, at heart I am pragmatic. I would prefer a society that optimizes for more individual liberty, but I am emphatically not someone who would even entertain the idea of using crises to advance my agenda when it is not clearly in service to amelioration of immediate problems.

Sadly, I have also learned that there are those who are not similarly pragmatic, and are willing to advance their ideological agenda come hell or high water. In this regard, I was disappointed yesterday to see the Gurry IP/COVID Letter passing around Twitter calling for widespread, worldwide interference with the property rights of IPR holders.

The letter calls for a scattershot set of “remedies” to the crisis that would open access to copyright- and patent-protected inventions and content, including (among other things):

voluntary licensing and non-enforcement of IP;
abrogation of IPR by WIPO members using the “flexibility” in the international IP regime;
the removal of geographical restrictions on IP licenses;
forcing patents into COVID-19 patent pools; and
the implementation of compulsory licensing.

And, unlike many prior efforts to push the envelope on weakening IP protections, the Gurry Letter also calls for measures that would weaken trade secrets and expose confidential business information in order to “achieve universal and equitable access to COVID-19 medicines and medical technologies as soon as reasonably possible.”

Notably, nothing in the letter suggests that any of these measures should be regarded as temporary.

We all want treatments for infection, vaccines for prevention, and ample supply of personal protective equipment as soon as possible, but if all the demands in this letter were met, it would do little to increase the supply of any of these things in the short term, while undermining incentives to develop new treatments, vaccines and better preventative tools in the long run.

Fundamentally, the letter reflects a willingness to use the COVID-19 pandemic to pursue an agenda that lacks merit and would be dismissed in the normal course of affairs.

What is most certainly the case is that we need more innovation now, and we need it faster. There is no reason to believe that mandating open source status or forcing compulsory licensing on the firms doing that work will encourage that work to proceed with all due haste—and every indication that the opposite is the case.

Where there are short term shortages of certain products that might be produced in much larger quantities by relaxing IP, companies are responding by doing just that—voluntarily. But this is fundamentally different from the imposition of unlimited compulsory licenses.

Further, private actors have displayed an impressive willingness to provide free or low cost access to technologies and content—without government coercion. The following is a short list of some of the content and inventions that have been opened up:

Culture, Fitness & Entertainment

“HBO Will Stream 500 Hours of Free Programming, Including Full Seasons of ‘Veep,’ ‘The Sopranos,’ ‘Silicon Valley’”
Dozens (or more) of artists, both famous and lesser known, are releasing free back catalog performances or are taking part in free live streaming sessions on social media platforms. Notably, viewers are often welcome to donate or “pay what they” want to help support these artists (more on this below).
The NBA, NFL, and NHL are offering free access to their back catalogue of games.
A large array of music production software can now be used free on extended trials for 3 months (or completely free and unlimited in some cases).
CBS All Access expanded its free trial period.
Neil Gaiman and Harper Collins granted permission to Levar Burton to livestream readings from their catalogs.
Disney is releasing movies early onto its (paid) Disney+ services.
Gold’s Gym is providing free access to its app-based workouts.
The Met is streaming free recordings of its Live in HD series.
The Seattle Symphony is offering free access to some of its recorded performances.
The UK National Theater is streaming some of its most popular plays for free.
Andrew Lloyd Weber is streaming his shows online for free.

Science, News & Education

Scholastica released free content intended to help educate students stuck at home while sheltering-in-place.
Nearly 100 academic journals, societies, institutes, and companies signed a commitment to make research and data on COVID-19 freely available, at least for the duration of the outbreak.
The Atlantic lifted paywall restrictions on access to its COVID-19-related content.
The New England Journal of Medicine is allowing free access to COVID-19-related resources.
The Lancet allows free access to research it publishes on COVID-19.
All material published by theBMJ on the coronavirus outbreak is freely available.
The AAAS-published Science allows free access to its coronavirus research and commentary.
Elsevier gave full access to its content on its COVID-19 Information Center for PubMed Central and other public health databases.
The American Economic Association announced open access to all of its journals until the end of June.
JSTOR expanded free access to some of its scholarship.

Medicine & Technology

The Global Center for Medical Design is developing license-free PPE designs that can be quickly implemented by manufacturers.
Medtronic published “design specifications for the Puritan Bennett 560 (PB560) to allow innovators, inventors, start-ups, and academic institutions to leverage their own expertise and resources to evaluate options for rapid ventilator manufacturing.” It additionally provided software licenses for this technology.
AbbVie announced it won’t enforce its patent rights for Kaletra—a drug that may provide treatment for COVID-19 infections. Israel had earlier indicated it would impose compulsory licenses for the drug, but AbbVie is allowing use worldwide. The company, moreover, had donated supplies of the drug to China earlier in the year when the outbreak first became apparent.
Google is working with health researchers to provide anonymized and aggregated user location data.
“Cisco has extended free licenses and expanded usage counts at no extra charge for three of its security technologies to help strained IT teams and partners ready themselves and their clients for remote work.”
Microsoft is offering free subscriptions to its Teams product for six months.
Zoom expanded its free access and other limitations for educational institutions around the world.

Incentivize innovation, now more than ever

In addition to undermining the short-term incentives to draw more research resources into the fight against COVID-19, using this crisis to weaken the IP regime will cause long-term damage to the economies of the world. We still will need creators making new cultural products and researchers developing new medicines and technologies; weakening the IP regime will undermine the delicate set of incentives that cultural and scientific production depends upon.

Any clear-eyed assessment of the broader course of the pandemic and the response to it gives lie to the notion that IP rights are oppressive or counterproductive. It is the pharmaceutical industry—hated as they may be in some quarters—that will be able to marshall the resources and expertise to develop treatments and vaccines. And it is artists and educators producing cultural content who (theoretically) depend on the licensing revenues of their creations for survival.

In fact, one of the things that the pandemic has exposed is the fragility of artists’ livelihoods and the callousness with which they are often treated. Shortly after the lockdowns began in the US, the well-established rock musician David Crosby said in an interview that, if he could not tour this year, he would face tremendous financial hardship.

As unfortunate as that may be for Crosby, a world-famous musician, imagine how much harder it is for struggling musicians who can hardly hope to achieve a fraction of Crosby’s success for their own tours, let alone for licensing. If David Crosby cannot manage well for a few months on the revenue from his popular catalog, what hope do small artists have?

Indeed, the flood of unable-to-tour artists who are currently offering “donate what you can” streaming performances are a symptom of the destructive assault on IPR exemplified in the letter. For decades, these artists have been told that they can only legitimately make money through touring. Although the potential to actually make a living while touring is possibly out of reach for many or most artists, those that had been scraping by have now been brought to the brink of ruin as the ability to tour is taken away.

There are certainly ways the various IP regimes can be improved (like, for instance, figuring out how to help creators make a living from their creations), but now is not the time to implement wishlist changes to an otherwise broadly successful rights regime.

And, critically, there is a massive difference between achieving wider distribution of intellectual property voluntarily as opposed to through government fiat. When done voluntarily the IP owner determines the contours and extent of “open sourcing” so she can tailor increased access to her own needs (including the need to eat and pay rent). In some cases this may mean providing unlimited, completely free access, but in other cases—where the particular inventor or creator has a different set of needs and priorities—it may be something less than completely open access. When a rightsholder opts to “open source” her property voluntarily, she still retains the right to govern future use (i.e. once the pandemic is over) and is able to plan for reductions in revenue and how to manage future return on investment.

Our lawmakers can consider if a particular situation arises where a particular piece of property is required for the public good, should the need arise. Otherwise, as responsible individuals, we should restrain ourselves from trying to capitalize on the current crisis to ram through our policy preferences.

Vapor products, smoking, and harm reduction policies: Recent blog posts

Eric Fruits — 22 October 2018

Over the past few weeks, Truth on the Market has had several posts related to harm reduction policies, with a focus on tobacco, e-cigarettes, and other vapor products:

Harm reduction policies are used to manage a wide range of behaviors including recreational drug use and sexual activity. Needle-exchange programs reduce the spread of infectious diseases among users of heroin and other injected drugs. Opioid replacement therapy substitutes illegal opioids, such as heroin, with a longer acting but less euphoric opioid. Safer sex education and condom distribution in schools are designed to reduce teenage pregnancy and reduce the spread of sexually transmitted infections. None of these harm reduction policies stop the risky behavior, nor do the policies eliminate the potential for harm. Nevertheless, the policies intend to reduce the expected harm.

Carrie Wade, Director of Harm Reduction Policy and Senior Fellow at the R Street Institute, draws a parallel between opiate harm reduction strategies and potential policies related to tobacco harm reduction. She notes that with successful one-year quit rates hovering around 10 percent, harm reduction strategies offer ways to transition more smokers off the most dangerous nicotine delivery device: the combustible cigarette.

Most of the harm from smoking is caused by the inhalation of toxicants released through the combustion of tobacco. Use of non-combustible nicotine delivery systems, such as e-cigarettes and smokeless tobacco generally are considered to be significantly less harmful than smoking cigarettes. UK government agency Public Health England has concluded that e-cigarettes are around 95 percent less harmful than combustible cigarettes.

In the New England Journal of Medicine, Fairchild, et al. (2018) identify a continuum of potential policies regarding the regulation of vapor products, such as e-cigarettes, show in the figure below. They note that the most restrictive policies would effectively eliminate e-cigarettes as a viable alternative to smoking, while the most permissive may promote e-cigarette usage and potentially encourage young people—who would not do so otherwise—to take-up e-cigarettes. In between these extremes are policies that may discourage young people from initiating use of e-cigarettes, while encouraging current smokers to switch to less harmful vapor products.

International Center for Law & Economics chief economist, Eric Fruits, notes in his blog post that more than 20 countries have introduced taxation on e-cigarettes and other vapor products. In the United States, several states and local jurisdictions have enacted e-cigarette taxes. His post is based on a recently released ICLE white paper entitled Vapor products, harm reduction, and taxation: Principles, evidence and a research agenda.

Under a harm reduction principle, Fruits argues that e-cigarettes and other vapor products should face no taxes or low taxes relative to conventional cigarettes, to guide consumers toward a safer alternative to smoking.

In contrast to harm reduction principles, the precautionary principle as well as principles of tax equity point toward the taxation of vapor products at rates similar to conventional cigarettes.

On the one hand, some policymakers claim that the objective of taxing nicotine products is to reduce nicotine consumption. On the other hand, Dan Mitchell, co-founder of the Center for Freedom and Prosperity, points out that some politicians are concerned that they will lose tax revenue if a substantial number of smokers switch to options such as vaping.

Often missed in the policy discussion is the effect of fiscal policies on innovation and the development and commercialization of harm-reducing products. Also, often missed are the consequences for current consumers of nicotine products, including smokers seeking to quit using harmful conventional cigarettes.

Policy decisions regarding taxation of vapor products should take into account both long-term fiscal effects and broader economic and welfare effects. These effects might (or might not) suggest very different tax policies to those that have been enacted or are under consideration. These considerations, however, are frustrated by unreliable and wildly divergent empirical estimates of consumer demand in the face of changing prices and/or rising taxes.

Along the lines of uncertain—if not surprising—impacts Fritz Laux, professor of economics at Northeastern State University, provides an explanation of why smoke-free air laws have not been found to adversely affect revenues or employment in the restaurant and hospitality industries.

He argues that social norms regarding smoking in restaurants have changed to the point that many smokers themselves support bans on smoking in restaurants. In this way, he hypothesizes, smoke-free air laws do not impose a significant constraint on consumer behavior or business activity. We might likewise infer, by extension, that policies which do not prohibit vaping in public spaces (leaving such decisions to the discretion of business owners and managers) could encourage switching by people who otherwise would have to exit buildings in order to vape or smoke—without adversely affecting businesses.

Principles of harm reduction recognize that every policy proposal has uncertain outcomes as well as potential spillovers and unforeseen consequences. With such high risks and costs associated with cigarette and other combustible use, taxes and regulations must be developed in an environment of uncertainty and with an eye toward a net reduction in harm, rather than an unattainable goal of zero harm or in an overt pursuit of tax revenues.

In Health Care, International Center for Law & Economics, Regulation, Taxes, Truth on the Market commercialization, e-cigarettes, harm reduction, New England Journal of Medicine, tobacco, vaping

An Apollo 13 approach to Obamacare

Eric Fruits — 7 July 2017

“Houston, we have a problem.” It’s the most famous line from Apollo 13 and perhaps how most Republicans are feeling about their plans to repeal and replace Obamacare.

As repeal and replace has given way to tinker and punt, Congress should take a lesson from one of my favorite scenes from Apollo 13.

“We gotta find a way to make this, fit into the hole for this, using nothing but that.”

Let’s look at a way Congress can get rid of the individual mandate, lower prices, cover pre-existing conditions, and provide universal coverage, using the box of tools that we already have on the table.

Some ground rules

First ground rule: (Near) universal access to health insurance. It’s pretty clear that many, if not most Americans, believe that everyone should have health insurance. Some go so far as to call it a “basic human right.” This may be one of the biggest shifts in U.S. public opinion over time.

Second ground rule: Everything has a price, there’s no free lunch. If you want to add another essential benefit, premiums will go up. If you want community rating, young healthy people are going to subsidize older sicker people. If you want a lower deductible, you’ll pay a higher premium, as shown in the figure below all the plans available on Oregon’s ACA exchange in 2017. It shows that a $1,000 decrease in deductible is associated with almost $500 a year in additional premium payments. There’s no free lunch.

Third ground rule: No new programs, no radical departures. Maybe Singapore has a better health insurance system. Maybe Canada’s is better. Switching to either system would be a radical departure from the tools we have to work with. This is America. This is Apollo 13. We gotta find a way to make this, fit into the hole for this, using nothing but that.

Private insurance

Employer and individual mandates: Gone. This would be a substantial change from the ACA, but is written into the Senate health insurance bill. The individual mandate is perhaps the most hated part of the ACA, but it was also the most important part Obamacare. Without the coverage mandate, much of the ACA falls apart, as we are seeing now.

Community rating, mandated benefits (aka “minimum essential benefit”), and pre-existing conditions. Sen. Ted Cruz has a brilliantly simple idea: As long as a health plan offers at least one ACA-compliant plan in a state, the plan would also be allowed to offer non-Obamacare-compliant plans in that state. In other words, every state would have at least one plan that checks all the Obamacare boxes of community rating, minimum essential benefits, and pre-existing conditions. If you like Obamacare, you can keep Obamacare. In addition, there could be hundreds of other plans for which consumers can pick each person’s unique situation of age, health status, and ability/willingness to pay. A single healthy 27-year-old would likely choose a plan that’s very different from a plan chosen by a family of four with 40-something parents and school aged children.

Allow—but don’t require—insurance to be bought and sold across state lines. I don’t know if this a big deal or not. Some folks on the right think this could be a panacea. Some folks on the left think this is terrible and would never work. Let’s find out. Some say insurance companies don’t want to sell policies across state lines. Some will, some won’t. Let’s find out, but it shouldn’t be illegal. No one is worse off by loosening a constraint.

Tax deduction for insurance premiums. Keep insurance premiums as a deductible expense for business: No change from current law. In addition, make insurance premiums deductible on individual taxes. This is a not-so-radical change from current law that allows deductions for medical expenses. If someone has employer-provided insurance, the business would be able deduct the share the company pays and the worker would be able to deduct the employee share of the premium from his or her personal taxes. Sure the deduction will reduce tax revenues, but the increase in private insurance coverage would reduce the costs of Medicaid and charity care.

These straightforward changes would preserve one or more ACA-compliant plan for those who want to pay Obamacare’s “silver prices,” allow for consumer choice across other plans, and result in premiums that more closely aligned with benefits chosen by consumers. Allowing individuals to deduct health insurance premiums is also a crucial step in fostering insurance portability.

Medicaid

Even with the changes in the private market, some consumers will find that they can’t afford or don’t want to pay the market price for private insurance. These people would automatically get moved into Medicaid. Those in poverty (or some X% of the poverty rate) would pay nothing and everyone else would be charged a “premium” based on ability to pay. A single mother in poverty would pay nothing for Medicaid coverage, but Elon Musk (if he chose this option) would pay the full price. A middle class family would pay something in between free and full-price. Yes, this is a pretty wide divergence from the original intent of Medicaid, but it’s a relatively modest change from the ACA’s expansion.

While the individual mandate goes away, anyone who does not buy insurance in the private market or is not covered by Medicare will be “mandated” to have Medicaid coverage. At the same time, it preserves consumer choice. That is, consumers have a choice of buying an ACA compliant plan, one of the hundreds of other private plans offered throughout the states, or enrolling in Medicaid.

Would the Medicaid rolls explode? Who knows?

The Census Bureau reports that 15 percent of adults and 40 percent of children currently are enrolled in Medicaid. Research published in the New England Journal of Medicine finds that 44 percent of people who were enrolled in the Medicaid under Obamacare qualified for Medicaid before the ACA.

With low cost private insurance alternatives to Medicaid, some consumers would likely choose the private plans over Medicaid coverage. Also, if Medicaid premiums increased with incomes, able-bodied and working adults would likely shift out of Medicaid to private coverage as the government plan loses its cost-competitiveness.

The cost sharing of income-based premiums means that Medicaid would become partially self supporting.

Opponents of Medicaid expansion claim that the program provides inferior service: fewer providers, lower quality, worse outcomes. If that’s true, then that’s a feature, not a bug. If consumers have to pay for their government insurance and that coverage is inferior, then consumers have an incentive to exit the Medicaid market and enter the private market. Medicaid becomes the insurer of last resort that it was intended to be.

A win-win

The coverage problem is solved. Every American would have health insurance.

Consumer choice is expanded. By allowing non-ACA-compliant plans, consumers can choose the insurance that fits their unique situation.

The individual mandate penalty is gone. Those who choose not to buy insurance would get placed into Medicaid. Higher income individuals would pay a portion of the Medicaid costs, but this isn’t a penalty for having no insurance, it’s the price of having insurance.

The pre-existing conditions problem is solved. Americans with pre-existing conditions would have a choice of at least two insurance options: At least one ACA-compliant plan in the private market and Medicaid.

This isn’t a perfect solution, it may not even be a good solution, but it’s a solution that’s better than what we’ve got and better than what Congress has come up with so far. And, it works with the box of tools that’s already been dumped on the table.

In Health Care, Health Insurance, Taxes Affordable Care Act, health care reform debate, Labor Law, New England Journal of Medicine

How Copyright Drives Innovation in Scholarly Publishing

Adam Mossoff — 5 April 2013

[Cross posted at the Center for the Protection of Intellectual Property blog.]

Today’s public policy debates frame copyright policy solely in terms of a “trade off” between the benefits of incentivizing new works and the social deadweight losses imposed by the access restrictions imposed by these (temporary) “monopolies.” I recently posted to SSRN a new research paper, called How Copyright Drives Innovation in Scholarly Publishing, explaining that this is a fundamental mistake that has distorted the policy debates about scholarly publishing.

This policy mistake is important because it has lead commentators and decision-makers to dismiss as irrelevant to copyright policy the investments by scholarly publishers of $100s of millions in creating innovative distribution mechanisms in our new digital world. These substantial sunk costs are in addition to the $100s of millions expended annually by publishers in creating, publishing and maintaining reliable, high-quality, standardized articles distributed each year in a wide-ranging variety of academic disciplines and fields of research. The articles now number in the millions themselves; in 2009, for instance, over 2,000 publishers issued almost 1.5 million articles just in the scientific, technical and medical fields, exclusive of the humanities and social sciences.

The mistaken incentive-to-invent conventional wisdom in copyright policy is further compounded by widespread misinformation today about the allegedly “zero cost” of digital publication. As a result, many people are simply unaware of the substantial investments in infrastructure, skilled labor and other resources required to create, publish and maintain scholarly articles on the Internet and in other digital platforms.

This is not merely a so-called “academic debate” about copyright policy and publishing.

The policy distortion caused by the narrow, reductionist incentive-to-create conventional wisdom, when combined with the misinformation about the economics of digital business models, has been spurring calls for “open access” mandates for scholarly research, such as at the National Institute of Health and in recently proposed legislation (FASTR Act) and in other proposed regulations. This policy distortion even influenced Justice Breyer’s opinion in the recent decision in Kirtsaeng v. John Wiley & Sons (U.S. Supreme Court, March 19, 2013), as he blithely dismissed commercial incentivizes as being irrelevant to fundamental copyright policy. These legal initiatives and the Kirtsaeng decision are motivated in various ways by the incentive-to-create conventional wisdom, by the misunderstanding of the economics of scholarly publishing, and by anti-copyright rhetoric on both the left and right, all of which has become more pervasive in recent years.

But, as I explain in my paper, courts and commentators have long recognized that incentivizing authors to produce new works is not the sole justification for copyright—copyright also incentivizes intermediaries like scholarly publishers to invest in and create innovative legal and market mechanisms for publishing and distributing articles that report on scholarly research. These two policies—the incentive to create and the incentive to commercialize—are interrelated, as both are necessary in justifying how copyright law secures the dynamic innovation that makes possible the “progress of science.” In short, if the law does not secure the fruits of labors of publishers who create legal and market mechanisms for disseminating works, then authors’ labors will go unrewarded as well.

As Justice Sandra Day O’Connor famously observed in the 1984 decision in Harper & Row v. Nation Enterprises: “In our haste to disseminate news, it should not be forgotten the Framers intended copyright itself to be the engine of free expression. By establishing a marketable right to the use of one’s expression, copyright supplies the economic incentive to create and disseminate ideas.” Thus, in Harper & Row, the Supreme Court reached the uncontroversial conclusion that copyright secures the fruits of productive labors “where an author and publisher have invested extensive resources in creating an original work.” (emphases added)

This concern with commercial incentives in copyright law is not just theory; in fact, it is most salient in scholarly publishing because researchers are not motivated by the pecuniary benefits offered to authors in conventional publishing contexts. As a result of the policy distortion caused by the incentive-to-create conventional wisdom, some academics and scholars now view scholarly publishing by commercial firms who own the copyrights in the articles as “a form of censorship.” Yet, as courts have observed: “It is not surprising that [scholarly] authors favor liberal photocopying . . . . But the authors have not risked their capital to achieve dissemination. The publishers have.” As economics professor Mark McCabe observed (somewhat sardonically) in a research paper released last year for the National Academy of Sciences: he and his fellow academic “economists knew the value of their journals, but not their prices.”

The widespread ignorance among the public, academics and commentators about the economics of scholarly publishing in the Internet age is quite profound relative to the actual numbers. Based on interviews with six different scholarly publishers—Reed Elsevier, Wiley, SAGE, the New England Journal of Medicine, the American Chemical Society, and the American Institute of Physics—my research paper details for the first time ever in a publication and at great length the necessary transaction costs incurred by any successful publishing enterprise in the Internet age. To take but one small example from my research paper: Reed Elsevier began developing its online publishing platform in 1995, a scant two years after the advent of the World Wide Web, and its sunk costs in creating this first publishing platform and then digitally archiving its previously published content was over $75 million. Other scholarly publishers report similarly high costs in both absolute and relative terms.

Given the widespread misunderstandings of the economics of Internet-based business models, it bears noting that such high costs are not unique to scholarly publishers. Microsoft reportedly spent $10 billion developing Windows Vista before it sold a single copy, of which it ultimately did not sell many at all. Google regularly invests $100s of millions, such as $890 million in the first quarter of 2011, in upgrading its data centers. It is somewhat surprising that such things still have to be pointed out a scant decade after the bursting of the dot.com bubble, a bubble precipitated by exactly the same mistaken view that businesses have somehow been “liberated” from the economic realities of cost by the Internet.

Just as with the extensive infrastructure and staffing costs, the actual costs incurred by publishers in operating the peer review system for their scholarly journals are also widely misunderstood. Individual publishers now receive hundreds of thousands—the large scholarly publisher, Reed Elsevier, receives more than one million—manuscripts per year. Reed Elsevier’s annual budget for operating its peer review system is over $100 million, which reflects the full scope of staffing, infrastructure, and other transaction costs inherent in operating a quality-control system that rejects 65% of the submitted manuscripts. Reed Elsevier’s budget for its peer review system is consistent with industry-wide studies that have reported that the peer review system costs approximately $2.9 billion annually in operation costs (translating into dollars the British £1.9 billion pounds reported in the study). For those articles accepted for publication, there are additional, extensive production costs, and then there are extensive post-publication costs in updating hypertext links of citations, cyber security of the websites, and related digital issues.

In sum, many people mistakenly believe that scholarly publishers are no longer necessary because the Internet has made moot all such intermediaries of traditional brick-and-mortar economies—a viewpoint reinforced by the equally mistaken incentive-to-create conventional wisdom in the copyright policy debates today. But intermediaries like scholarly publishers face the exact same incentive problems that is universally recognized for authors by the incentive-to-create conventional wisdom: no will make the necessary investments to create a work or to distribute if the fruits of their labors are not secured to them. This basic economic fact—dynamic development of innovative distribution mechanisms require substantial investment in both people and resources—is what makes commercialization an essential feature of both copyright policy and law (and of all intellectual property doctrines).

It is for this reason that copyright law has long promoted and secured the value that academics and scholars have come to depend on in their journal articles—reliable, high-quality, standardized, networked, and accessible research that meets the differing expectations of readers in a variety of fields of scholarly research. This is the value created by the scholarly publishers. Scholarly publishers thus serve an essential function in copyright law by making the investments in and creating the innovative distribution mechanisms that fulfill the constitutional goal of copyright to advance the “progress of science.”

DISCLOSURE: The paper summarized in this blog posting was supported separately by a Leonardo Da Vinci Fellowship and by the Association of American Publishers (AAP). The author thanks Mark Schultz for very helpful comments on earlier drafts, and the AAP for providing invaluable introductions to the five scholarly publishers who shared their publishing data with him.

NOTE: Some small copy-edits were made to this blog posting.

In Copyright, Google, Health Care, Intellectual Property, Platforms commercialization, copyright policy, legal scholarship, New England Journal of Medicine, open access, scholarship, seattle, SSRN

Changes at the FTC Bureau of Economics

Josh Wright — 12 June 2012

Recently, the FTC announced that Howard Shelanksi would be taking charge of the Bureau of Economics on July 1st. Now comes news that DOJ economist Ken Heyer (and UCLA Bruin!) — longtime Economics Director at the Division — will be moving over to the Commission as Deputy Director for Antitrust. Leemore Dafny (Northwestern) will also come to the Commission to serve in a newly created role as Deputy Director for Health Care.

From the FTC press release:

“I am very pleased that we will have two such distinguished economists joining the Bureau,” said Howard Shelanski, who was named Director of the Bureau last month and is slated to assume the position on July 1. “Ken’s skill and wealth of experience will be invaluable to our competition mission, and Leemore will bring cutting-edge expertise to our antitrust enforcement in health care markets and more broadly as well. I am also very thankful to Alison Oldale, who Ken replaces, for her expert guidance of the Bureau’s antitrust mission during her year as Deputy on detail from the UK Competition Commission.”

Heyer has held a variety of management positions since joining the DOJ’s Antitrust Division in 1982. Most recently, he was Chief of the Economic Analysis Group’s Competition Policy Section, and from 2001 to 2010 he served as the Division’s Economics Director, the highest position held by a career economist in DOJ’s Antitrust Division. Prior to being promoted to management, he had worked at the Division for many years as a staff economist. In 1999 Heyer received the Antitrust Division’s first William F. Baxter Award for outstanding contributions in the area of economic analysis. Heyer holds a Ph.D. in Economics from U.C.L.A., and a B.A. from Queens College, CUNY.

Dafny is an Associate Professor of Management and Strategy, and the Herman Smith Research Professor in Hospital and Health Services at the Kellogg School of Management at Northwestern University, where she has served on the faculty since 2002. She is a microeconomist whose research focuses on competition in healthcare markets. Her work has appeared in the American Economic Review, the Journal of Law and Economics, and the New England Journal of Medicine. Dafny graduated summa cum laude from Harvard College and earned her Ph.D. in Economics from the Massachusetts Institute of Technology. From 1995-1997, she worked as a consultant with McKinsey & Company in Washington, DC. She is a Research Associate of the National Bureau of Economic Research, a Faculty Associate of the Institute for Policy Research, and a Faculty Affiliate of the Center for the Study of Industrial Organization at Northwestern.

In Antitrust & Competition, Antitrust Division, Federal Trade Commission, Health Care, International, Justice Department, United Kingdom New England Journal of Medicine

Cheap Donuts, Expensive Broccoli and Soda Taxes

Josh Wright — 17 June 2011

David Leonhardt’s NY Times column laments the fact that the price of healthful foods has increased relative to unhealthful foods. He presents this useful chart:

The fact that relative prices have changed is often invoked in support of various “fat taxes,” e.g. consider the recent salvo of proposed soda taxes (For example, here and here). Or consider the claim of Kelly Brownell (Yale) and Thomas Frieden in the New England Journal of Medicine that “Sugar-sweetened [beverages] … may be the single largest driver of the obesity epidemic.” Really? That would be a pretty impressive claim if true. But its not. What do the data really say? For starters, and on a more general level, consider the research by Gelbach, Klick and Strattman (which inspired the title of this post), which concludes that “relative price changes can only explain about 1 percent of the growth in BMI and the incidence of being overweight or obese over this period” and that ” a 100 percent tax on unhealthful foods could reduce average BMI by about 1 percent, and the same tax could reduce the incidence of being overweight and the incidence of obesity by 2 percent and 1 percent respectively.” It should also be pointed out that there are also some significant social benefits that flow from low prices of calorie dense food.

More recently, Klick and Helland have looked at the evidence on soda taxes and obesity more directly. One of the problems here from an empirical perspective is that one must account for substitution toward other calorie dense beverages when the price of soda increases. There are others. Its a nice, accessible piece in Regulation on the various studies in this area: what they find, what data they use, their methodologies, and what the evidence actually says and what it cannot. I encourage readers interested in this policy area to read it (as well as the underlying studies). Here is how Klick and Helland conclude:

While politicians at all levels of government in the United States have been drawn to soda taxes as a way to both raise money and fight obesity, the evidence suggests that taxes may in fact do neither. Yes, individuals do seem to be price sensitive when it comes to soda and other sugar-sweetened beverages. That implies, however, that any increase in tax rates will be offset largely by declining demand for soda specifically, but not for calorie-rich foods overall. While many public health advocates grab on to any indication of price sensitivity to support taxes as a way to reverse the upward trend of obesity, no study finds that this effect is very large in terms of the ultimate effect on body weight, as individuals substitute to consuming other calorie-dense beverages, adjust their eating habits in ways that have little net effect on BMI, or generally undo the positive effects of reduced soda consumption.

Keep that in mind the next time you hear a claim that a soda tax is likely to cause a significant reduction in obesity.

In Health Care, Taxes New England Journal of Medicine

Get Ready for that Twinkie Tax.

Thom Lambert — 1 April 2011

Arizona’s governor has proposed charging $50 to certain Medicaid beneficiaries who smoke or are obese. As today’s Wall Street Journal reports, the point of the surcharge is to internalize the externalities smokers and snackers impose on their fellow citizens, who bear much of the cost of their unhealthful choices:

“If you want to smoke, go for it,” said Monica Coury, spokeswoman for Arizona’s Medicaid program. “But understand you’re going to have to contribute something for the cost of your smoking.” She said the proposal is a way to reward good behavior and raise awareness that certain conditions, including obesity, raise costs throughout the system.

That’s exactly the sort of Nannyism our former TOTM colleague, Todd Henderson, predicted. Before Todd joined us at TOTM, I discussed his terrific article, The Nanny Corporation, on the blog:

In imposing Nanny rules, Todd argues, governments and firms are merely responding to the demands of, respectively, citizens and employees. Governments (through Medicare, Medicaid, etc.) pay many of the health care expenses of their citizens, and firms (through employer-provided insurance) usually pick up the tab for employees’ health care expenses. But, of course, the citizens and employees themselves ultimately bear these costs in the form of, respectively, higher taxes and lower wages. Thus, each citizen has an interest in reducing his co-citizens’ health care expenditures, and each employee has an interest in having safe and healthy co-employees. Nannyism, then, can be seen as a means by which governments and firms force individuals to internalize the costs of their risky behaviors. In imposing nanny rules, Todd argues, governments and businesses are merely responding to citizens’ and employees’ demands for cost-reducing paternalism. They are, in short, suppliers in a “market for paternalism.”

That raises the question: “Who is the more efficient provider of paternalistic rules?” There’s no clear answer to that question, Todd maintains, but there are reasons to believe that firms will often be the superior rule-providers. First, competition in the labor, product, and capital markets will constrain firms from overreaching (imposing liberty restrictions that are not cost-justified) and from diverting the benefits of nanny regulations. (This latter benefit results in a tighter “fit” between the rules and their cost-reducing rationale, thereby ensuring that only cost-justified rules are adopted.) In addition, firms may have an advantage in that they can adopt and enforce rules that would be difficult for governments to adopt. Obesity, for example, could be more easily regulated by an employer who regularly sees her employees than by the government. The government, on the other hand, “may have advantages both in the severity of the penalties that can be employed (and thus less need for enforcement costs) and in covering behaviors, such as consuming specific foods like trans fats, that may be difficult for firms to observe.” While the superiority of one nanny over another will depend on the liberty restriction at issue and other contextual matters, firms will likely be the better nannies in many situations.

Of course, as governments play a larger role in paying for citizens’ health care under Obamacare, demand for laws that encourage or mandate healthful conduct and discourage or ban unhealthful conduct will increase. That’s a troubling development for a number of reasons. First, there’s the inevitable knowledge problem: how is a lesiglator or regulator to quantify the external cost imposed by a particular lifestyle choice? If the tax or surcharge is set too high, it will over-deter, destroying “citizen surplus.” Second, it’s often difficult to enact a law or regulation that targets only those citizens who are capable of imposing external harm on other taxpayers. Look for lots of Nannyisms that are promulgated in the name of protecting the public fisc but in fact apply to all citizens, not just participants in a publicly financed insurance program. Third, the “we’re just trying to constrain public health care expenditures” rationale is so elastic that it will inevitably operate as a license to meddle.

For example, while Governor Brewer’s $50 smoker surcharge to cut health care costs will likely resonate with her majority non-smoking constituency, discouraging smoking among Medicaid participants is probably not in the state’s fiscal interest in the long run. In The Health Care Costs of Smoking, published in the New England Journal of Medicine in 1997, the authors “analyzed health care costs for smokers and nonsmokers and estimated the economic consequences of smoking cessation.” They found that

Health care costs for smokers at a given age are as much as 40 percent higher than those for nonsmokers, but in a population in which no one smoked the costs would be 7 percent higher among men and 4 percent higher among women than the costs in the current mixed population of smokers and nonsmokers. If all smokers quit, health care costs would be lower at first, but after 15 years they would become higher than at present. In the long term, complete smoking cessation would produce a net increase in health care costs, but it could still be seen as economically favorable under reasonable assumptions of discount rate and evaluation period.

The authors thus concluded that “[i]f people stopped smoking, there would be a savings in health care costs, but only in the short term. Eventually, smoking cessation would lead to increased health care costs.”

In any event, Nannyism seems to be the wave of the future. Better stock up on junk food and booze!

In Health Care, Regulation, Taxes health care reform debate, knowledge problem, New England Journal of Medicine, politics

Who’s Your Nanny?

Thom Lambert — 10 March 2009

My law school classmate, M. Todd Henderson (Chicago Law), has posted an interesting paper on SSRN. The paper, entitled The Nanny Corporation and the Market for Paternalism, explores “Nannyism” by business firms and the government. Nannyism consists of imposing paternalistic rules designed to protect the governed — e.g., rules against smoking, drinking, over-eating, and engaging in extremely risky activities like sky-diving.

In imposing Nanny rules, Todd argues, governments and firms are merely responding to the demands of, respectively, citizens and employees. Governments (through Medicare, Medicaid, etc.) pay many of the health care expenses of their citizens, and firms (through employer-provided insurance) usually pick up the tab for employees’ health care expenses. But, of course, the citizens and employees themselves ultimately bear these costs in the form of, respectively, higher taxes and lower wages. Thus, each citizen has an interest in reducing his co-citizens’ health care expenditures, and each employee has an interest in having safe and healthy co-employees. Nannyism, then, can be seen as a means by which governments and firms force individuals to internalize the costs of their risky behaviors. In imposing nanny rules, Todd argues, governments and businesses are merely responding to citizens’ and employees’ demands for cost-reducing paternalism. They are, in short, suppliers in a “market for paternalism.”

That raises the question: “Who is the more efficient provider of paternalistic rules?” There’s no clear answer to that question, Todd maintains, but there are reasons to believe that firms will often be the superior rule-providers. First, competition in the labor, product, and capital markets will constrain firms from overreaching (imposing liberty restrictions that are not cost-justified) and from diverting the benefits of nanny regulations. (This latter benefit results in a tighter “fit” between the rules and their cost-reducing rationale, thereby ensuring that only cost-justified rules are adopted.) In addition, firms may have an advantage in that they can adopt and enforce rules that would be difficult for governments to adopt. Obesity, for example, could be more easily regulated by an employer who regularly sees her employees than by the government. The government, on the other hand, “may have advantages both in the severity of the penalties that can be employed (and thus less need for enforcement costs) and in covering behaviors, such as consuming specific foods like trans fats, that may be difficult for firms to observe.” While the superiority of one nanny over another will depend on the liberty restriction at issue and other contextual matters, firms will likely be the better nannies in many situations.

Unfortunately, Todd argues, there are a host of legal constraints that prevent private firms from responding to the demand for paternalism. The last part of the paper explores those barriers and argues for their elimination (or, at a minimum, for clarification on what firms are and are not allowed to do).

I learned a ton from this informative paper. I particularly enjoyed Part II, which traces the history of corporate nannyism from company towns in which all sorts of amenities were provided but all sorts of behaviors were regulated, to the Ford Motor Company’s “Sociological Department,” to modern efforts to reduce health care costs by controlling smoking, obesity, etc.

My one quibble with the paper is with its implicit assumption that government nanny rules are aimed at forcing individuals to internalize their externalities. I’m skeptical. There are good reasons to believe, for example, that government (and thus taxpayer) expenditures on health care would actually increase if people stopped smoking. Because of the de facto mandatory Medicare system, government pays a disproportionate share of the health care expenses of old people. From the government’s (and taxpayers’) standpoint, smoking deaths are cheap. The folks who really screw us are those healthy sons of guns who hang on forever and develop all sorts of costly, late-life ailments.

In The Health Care Costs of Smoking, published in the New England Journal of Medicine in 1997, the authors “analyzed health care costs for smokers and nonsmokers and estimated the economic consequences of smoking cessation.” They found that

Health care costs for smokers at a given age are as much as 40 percent higher than those for nonsmokers, but in a population in which no one smoked the costs would be 7 percent higher among men and 4 percent higher among women than the costs in the current mixed population of smokers and nonsmokers. If all smokers quit, health care costs would be lower at first, but after 15 years they would become higher than at present. In the long term, complete smoking cessation would produce a net increase in health care costs, but it could still be seen as economically favorable under reasonable assumptions of discount rate and evaluation period.

Anti-smoking rules, then, probably reduce an employer’s overall health care costs (since the employer usually doesn’t see the “benefit” of the early death that typically occurs post-retirement, only the increased costs associated with smoking-related ailments) but probably don’t reduce taxpayers’ health care costs. Still, the government pushes for more rules to limit smoking. How come?

I can’t say for sure, but experience has led me to believe that people like to meddle. When employers do so, they have to “pay” for the liberty restrictions they impose by raising the wages of marginal employees. When governments do so, they just have to ensure that they don’t tick off 50+ percent of the populace.

Despite the fact that I’m a bit more cynical about government’s motives than my old classmate, I very much enjoyed his terrific paper, and I heartily recommend it to others.

In Health Care, Law & Economics, Regulation, Taxes New England Journal of Medicine, politics, SSRN

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