How exactly do you cold call a CT scan?

Via Chait, M.S. at the Economist has some sharp thoughts on the way markets handle health care.

Here's one example among a million. The other day I went to the IPO announcement of a company that does some fairly state-of-the-art medical stuff. The company was spun off from a public institute a few years back to exploit this technology, but it's been unable to establish significant revenue or market share, or to get within shouting distance of breaking even. Meanwhile, competitors with similar technologies have gobbled up most of the market share, and one is already quite profitable. The company said it planned to raise some tens of millions of dollars with the share issue, many times its current annual expenditures and about a third of its overall market cap. And what would it do with this money? It was going to use half of it to finance a marketing drive, targeting key decisionmakers at American health-care providers and health insurers, and doctors.

Why hadn't this company been able to generate significant revenues? Were its technologies inferior? No, said an independent molecular biologist I talked to. Its product was certainly as good as the competition's. Moreover, it had actually gone to the trouble of getting its technology approved by the FDA, which the competition hadn't. (In this sub-sector FDA approval isn't yet mandatory.) But it hadn't marketed itself well. It hadn't established the relationships with providers and insurers that would ensure that its product was the one they selected. Doing so would require a marketing budget of tens of millions of dollars, in a sub-sector where the entire annual market is a few hundred million dollars.

Just think about this for a minute. A medical technology company is going public to generate the money it needs to advertise its products to hospital directors and insurance-company reimbursement officers. This entails significant extra expenditures for marketing, the new stocks issued to fund the marketing will ultimately have to pay dividends, banks will have to be paid to supervise the IPO that was needed to generate the funds to finance the marketing campaign (presumably charging the industry-cartel standard 7%)...and all this will have to be paid for by driving up the price the company charges to deliver its technologies. But beyond the added expense, why would anyone think that a system in which marketing plays such a large role is likely to be more effective, to lead to better treatment, than the kind of process of expert review that governs grant awards at NIH or publishing decisions at peer-reviewed journals? Why do we think that a system in which ads for Claritin are all over the subways will generate better overall health results than one where a national review board determines whether Claritin delivers treatment outcomes for some populations sufficiently superior to justify its added expense over similar generics? What do we expect from a system in which, as ProPublica reports today, body imaging companies hire telemarketers to sell random people CT scans over the phone?