Why stem-cell research won't make states rich.

Health and medicine explained.
Feb. 6 2007 3:28 PM

The Biotech Bubble

Why stem-cell research won't make states rich.

As Congress hunts for ways to push its stem-cell bill past an expected veto, states are charging ahead on their own. Last month, Gov. Eliot Spitzer kicked off plans to spend $1 billion on New York-based stem-cell research over the next decade. Spitzer is following the lead of California, whose massive $3 billion effort pioneered the state-level stem-cell surge two years ago. Similar, if smaller-scale, efforts are afoot in Connecticut, Florida, Illinois, Maryland, and New Jersey.

In backing stem cells, state leaders are promising miracle cures for deadly diseases such as Alzheimer's disease, Parkinson's disease, and AIDS—and telling voters that those miracles can be had for free. Spitzer promised during his State of the State address in January that the stem-cell investment "will repay itself many times over in increased jobs, economic activity and improved health."


This sort of claim appears to have originated with a study produced in the run-up to the 2004 vote on California's initiative. The authors, Stanford University health economist Laurence Baker and Bruce Deal of the Analysis Group, concluded that stem-cell research would generate state revenues and health-care savings of $6.4 to $12.6 billion over the 30 years it will take to pay off the state bonds used to fund it. California's $3 billion investment would not only pay for itself and another $2.4 billion in bond interest payments, it would also turn the state a profit of at least $1 billion.

But the Baker-Deal numbers look hopelessly optimistic. To begin with, they assume that stem-cell treatments will work in the first place. Many of the most hyped biotechnology innovations of the last 25 years have yet to live up to their early promise. And when they do work, they often tend to improve medical care at the margins instead of revolutionizing it.

If medical treatments can be derived from stem-cell research, they are at least a decade or two away, if history is any guide. Even then, new therapies envisioned by supporters, such as diabetes treatments that regenerate insulin-producing islet cells, might add to government health-care costs instead of curbing them. The Baker-Deal report figured that stem-cell therapies could save California at least $3.4 billion in health-care costs over the next three decades by assuming the therapies would reduce state spending on six major medical conditions by 1 percent to 2 percent. While the authors cast that as a "conservative" estimate, they don't even model the possibility that costs might rise instead. Recent medical advances haven't appreciably slowed growth in overall U.S. health-care spending, which continues to rise far faster than inflation.

Ideally, of course, stem-cell therapies would start a trend in the opposite direction by reducing or eliminating the need for expensive and often lifelong medical care. For that to happen, though, the new treatments would need to largely replace existing ones at a reasonable price, and then doctors would have to use them sparingly—for instance, only on the patients most likely to benefit. None of these assumptions is a particularly good bet under the current U.S. health-care system, in which new treatments are often simply added to older ones, and where insurers so far have tended to pay top dollar for incremental medical advances.

Baker and Deal also suggest that stem-cell support could yield California as much as $1.1 billion in royalty income, assuming that companies who license the rights to new discoveries pay 2 percent to 4 percent of treatment sales back to the state. But as Richard Gilbert, a University of California at Berkeley economist, pointed out in a recent critique of the study, most basic research doesn't yield commercial products, and the actual returns on commercialized research tend to be far lower than the level Baker and Deal assume. Gilbert estimates that California's total royalty income could be as low as $18 million in current dollars, or just 0.6 percent of its $3 billion investment. (Here's some of his reasoning.) As he dryly notes in his paper, "If income generation were the sole justification for stem cell research funding (which of course it is not), the State would be better off investing in its own municipal bonds."