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Ashish's Niti

Niti in Sanskrit means policy/strategy/vision. This blog hosts my political views, along with news and commentary. This blog has moved here.

Tuesday, November 09, 2004

Why don't HMOs invest in drug research?

Cost of drug development and health insurance premiums are both rising rapidly. Drug development requires huge upfront R&D costs while health insurance involves collecting premiums before claims are filed and have to be settled. What if HMOs invest in drug research and development?

It can benefit both patients and HMOs. Since, premiums will cover the R&D portion of cost of drugs, patients covered under the HMO schemes will need to pay only administrative costs and the manufacturing costs, which are considerably less.

This scheme will work even if HMOs don't develop and manufacture the drugs directly. HMOs can always purchase equity in pharmaceutical companies. The profit (dividends) from the investment can help HMOs to settle the claims.

When customers choose various insurance plans and coverages for the diseases they provide tremendous amount of information about relative importance of cure of various diseases. While calculating premiums HMOs also generate and utilize information about relative probabilities of occurence of various diseases. Thus they can use this information to direct the investment towards cure of appropriate diseases. If they are successful they make profit and in turn lower the costs to their customers.

Given this nice synergy, it always puzzles me why HMOs (and other health insurance companies) don't invest in drug research!

Update: Marginal Revolution has a good post on health insurance.

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