The centerpiece of Greg Mankiw’s column in the New York Times is this paragraph about the little white pill he takes every day:
Not long ago, I read that a physician estimated that statins cost $150,000 for each year of life saved. That approximate figure reflects not only the dollars patients and insurance companies spend on the treatment but also — and just as important — an estimate of how effective it is in prolonging life. (That number is for men. Women have a lower risk of heart disease.)
Mankiw used the word cost but I would be that what he is referring to is price. With monopolized drugs and dysfunctional health care insurance there is a huge difference between price and cost. And with this in mind, Mankiw’s column completely misses the real economic problem exemplified by his pills.
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September 21, 2009 at 9:17 am
Albert Nigrin
Regardless about the extraneous discussion of of statins, Mankiw’s article does hit the point squarely on the head. The fundamental question asked in the article is how do we allocate this magic pill when its cost (not price) reaches $150K per year?
The discussion about the cost of statins is a red herring. The true point that he was trying to make is that at some point, the cost (not price) of the highest level of care achievable will be more than what we can afford to pay as a society. In mathematical terms, if n is our population and c is the average cost of the best care per person per year, then what do we do when n * c > gdp?
Albert
September 21, 2009 at 9:46 am
el chief
Maybe you guys should buy in bulk like real countries?
September 21, 2009 at 11:38 am
brian
Maybe we should sell drugs like we sell food, in a market.
September 21, 2009 at 3:05 pm
gappy
That is a good point, but I don’t think it invalidated Mankiw’s reasoning. His is a thought experiment, and the value is just meant to be plausible. The centerpiece of the article is:
“Imagine that someone invented a pill even better than the one I take. Let’s call it the Dorian Gray pill, after the Oscar Wilde character. Every day that you take the Dorian Gray, you will not die, get sick, or even age. Absolutely guaranteed. The catch? A year’s supply costs $150,000.”
I remember a similar dilemma in Herve Moulin’s “Axioms of Cooperative Decision Making”. Given a budget, what do we pay for? Maybe effective and cheap drugs for a majority of the population? Should we pay for an expensive treatment? Should we increase the budget? While extreme examples like the $150K can suffer from framing effects, they also bring the dilemma in sharper focus.
September 21, 2009 at 9:44 pm
jeff
thanks to everyone for your comments. I understand that Mankiw is going in a different direction. But the point he is making is not specific to health care and in fact far from the hypothetical ethical challenge he suggests. Any time there is scarcity there is a decision about how to ration. Today we implictly decide every day who gets to eat the limited amount of food on the Earth. Some people do and they live, some people don’t and they die.
My point is that if you are thinking about those pills and you want to motivate some economic problem that is specific to those pills, it is that their price is so far distorted from their cost and this is due to the market structures in the health care market. These market structures are what health care reform is about.
September 22, 2009 at 2:40 am
prufrock
The real tragedy is that someone reasoning this way is “professor at Harvard University”. Nobody has never started a research program thinking at mr. Mankiw’s preventive care issues, costs and (comparative) advantage. First they tried to assess an issue – how to adress iper-cholesterolemy – then they discovered a class of active principles – statins – seemingly useful, finally this stuff come to “consumers” one way – seriously ill patients – or the other – preventive care aka secondary marketing theme running through public regulations -. There is such a thing called “time” between every single step but guys like mr. Mankiw – educated at economics that time doesn’t exist, really it doesn’t take time producing goods, at least it doesn’t take mr. Mankiw’s time for sure! – see a flat one-dimensional world come out from nothing&chaos in the last, say, 15 minutes… and they don’t get one single point. Useless piece.
September 22, 2009 at 8:36 am
gappy
Jeff, you have a point. I honestly don’t know how much drug costs and prices differ, but probably quite a bit. However, I also think that the *cost* of an additional year of life when we’re 80 is very high. And I think that the overall thrust of some of Mankiw’s recent research is to pinpoint the conflict between utilitarianism and commonly held expectations.
By the way, even if I never comment, I read this blog regularly and like it a lot. Specifically, I really appreciate that it delves into economic thinking and understanding rather than in passing judgment according to a preordained viewpoint. It also has a sense of humor, which is sorely lacking these days!
September 22, 2009 at 1:18 pm
Anne
Are statins scarce? Why?
Why does a pharma product – any pharma product – cost $150,000 a year per patient? Would like to know more about how pricing is determined for medical products.
When my husband broke his ankle a couple years ago, the EOB added up to more than $20,000 and included things like an $80 ace bandage. Why does a hospital (which can buy in bulk) get to charge $80 for something anyone can get at the drug store for less than $10?
September 22, 2009 at 1:28 pm
gappy
I would like to know too; I am puzzled as anyone. For example, how can a non-urgent 10-min visit in a ER cost over $650? Or applying stitches (a 15 minutes affair, 30 min door-to-door) cost $2000? My guess is that marginal cost of services and drugs is low, but that very high fixed costs (for drug research, or for infrastructure, or for doctor training) are “blended” in the final price. The way providers do this is opaque.
September 22, 2009 at 7:44 pm
JoshK
gappy, I think that if Wallmart could compete with a hospital it would all cost a lot less. But it’s regulated out of bounds.
September 23, 2009 at 6:54 pm
urbanhumanist
Whether talking about price or cost, Mankiw has cherry-picked his numbers. See, for example, http://jech.bmj.com/cgi/content/abstract/59/11/927, which discusses, via peer-review meta-analysis, efficacy of treatment for statins in European countries. Chances are the numbers are similar in the US. Mankiw’s number comes from an op-ed in the WSJ, which is also uncited.
Also, take his number as correct (which I am sure it is not) He is talking about $150K for each additional year of life, with that latter clause being the crucial point. What he’s talking about the consumer paying for is not $150k per year, but $150k for an additional year of life, as a result of taking statins. Of course, and this is why his number is incorrect, those with the highest risk benefit more from the drug than those who do not.
As for his principle argument he makes, it fails on two fronts. First, humans simply don’t reason like the rational economic actor he supposes them to be, especially when it comes to risk.
Second, he presumes that the argument about healthcare is about “equal healthcare” for all, when what it is really advocated is access to healthcare and expanding the coverage of the system, with the President potentially seeking to mandate participation. Thus, simply pointing to inequality of health care cost and even outcomes does not address what is the principle issue being debated…
I found this piece to be a bit of smoke and mirrors, without much rigor.
September 26, 2009 at 8:18 am
healthnut
This isn’t smoke and mirrors it is a thought experiment. The price and cost are not relevant to the point that at some point health care can and will be too expensive to give everyone equal treatment.
How do you allocate the scarce resources? Even health care has a scarcity when it comes to medications and technology (obviously preventive health like walking is available to everyone). Does the government develop a system of winners and losers? e.g. you are more important to society because you are a noble prize winner? or is it a first come first serve? or do you let people fight for the technology or drugs by themselves? Ultimately there is no “fair” way to administer such a program. It would be unethical to say that no one could receive it.
The House and Senate are trying to create a system for equal access to health care for everyone. Do you think they will use that system for themselves?
September 27, 2009 at 11:56 pm
ed
Surely the marginal cost of producing each pill is much lower than the price.
But if you are talking about designing a health care system that will produce good results in the long term, the marginal cost is not what’s relevant, rather the average cost of a pill, including the R&D costs to develop the pill, including the lost R&D on all the projects that didn’t pan out. In a competitive market with free entry the price might be a much better indicator of the relevant totals cost than simply the marginal cost of producing another pill.