Medical Innovation is expensive

Megan McArdle has some strong opinions on how high drug prices have managed to help drive medical innovation:

Drug development is essentially a giant international collective-action problem. The U.S. has kept it from being a total disaster because we don’t have good centralized control of our insurance market, and our political system is pretty disorganized and easy to lobby. If that changes -- and maybe we just changed it! -- we’ll knock down the prices of drugs to near the marginal cost using government fiat, and I expect that innovation in this sector will grind to a halt. Stuff will still be coming out of academic labs, but no one is going to take those promising targets and turn them into actual drugs.

and

There are some promising alternatives. The main two that have been suggested are prizes and having the U.S. government get into the business of developing actual drugs, rather than just funding basic research. I’m in favor of trying both of these approaches. But so far, prizes have not proved themselves as ways to fund what is essentially commercial product development -- at least, not at the same level that patents do. Nor has the government. As we’ve just seen from the government’s attempt to develop a Travelocity-like site for health insurance, there are reasons to think that government might not be very good at that sort of thing. I don’t mean to slur the government -- governments absolutely have developed drugs in the past. But these are not the majority, and government processes often make it hard to do things that companies do easily.

Now I don't want to knock pharmaceutical companies.  A lot of good work is done by these companies.  On the other hand, medical costs in the United States are really, really high.  And the National Institutes of Health has proven itself as a really effective model of targeted and efficient medical research.  Now it is true that the cost of doing this would not be trivial.  Randomized controlled trials are extremely expensive and crucial to ensuring that only safe medications reach the open market. 

So this would be expensive.  But I am unclear as to whether it would be more expensive than the current model of drug development.  And these subsidies could go to many of the same companies that develop drugs now.  I think that this conversation would be much better informed with some actual calculations as to cost/benefit.  This is a bit outside of my expertise, but I see it as a key step to really advancing the conversation.