Via Mark Thoma, here is an interview with the ever-impressive Kevin Murphy. One excerpt, on the topic of medical R&D:
What really does matter is the cost of treatment. If treatment costs
are $10 trillion, the project has a negative net present value even if
the research is free. With $2 trillion in treatment costs, the net gain
from success is $3 trillion, so that we would get a good return even if
the probability of success was one in 30. So when you think about
research, it’s not the dollars you spend that matter–what matters is
the cost of implementing the treatment that might be discovered. The
downside to research is not failure, but unaffordable success.
I think the following message comes out of that exercise: Cost
containment and health progress are complementary. That is, if we can
control costs, that makes research a much more attractive option.
That’s the most important lesson I learned from doing this work.
When you go to Washington and talk to people at NIH, what are they
excited about? They’re excited about that $5 trillion number. They’re
excited that, boy, we could do something that could generate tremendous
value for people. We can cure disease and lengthen lives, both of which
make people much better off. The work that Bob and I did quantifies
that number; it says it’s huge, $5 trillion for that 10 percent
reduction in cancer.
You walk across the street and talk to the guys who have to pay for
it, and they’re terrified that people are going to come up with more
new medical treatments that they’re somehow going to have to finance.
Is there any man who thinks more like an economist than does Kevin Murphy? Maybe one:
Region: Does Gary Becker ever stop working?
Murphy: No. He never stops working. He’s a machine. He outworks everybody half his age.
I think Murphy is brilliant but I think he might be wrong this time. As an academic exercise, where you first assume some boundaries, arguments can seem compelling. In this case, Murphy assumes that the health system often produces cures that too expensive to implement on a cost benefit basis. In addition, he argues that the system encourages research into medical cures that aren’t cost effective for society.
I think this runs counter to the history of medical research. While Murphy is correct that the initial cost of medical research is often expensive, history shows us that those costs tend to drop quickly over time. I am uncertain why he thinks that this historical pattern has reached a peak.
The government wants to curtail medical spending because it increasingly consumes more of its resources. Resources that interest groups increasingly covet. People spend more on health care, costs that they would prefer to transfer to the government.
I tend to doubt that he have reached the point where the costs of medical research is greater then the benefit. While I agree that the cutting edge of medical research is, over the short run, often outlandishly expensive compared to the benefits, I think the history of medical research has shown that in the long run the costs drop and the benefits to society increase.
I think CYA care is overstated. Does the threat of legal action force doctors to think twice about a course of action? Sometimes. Indiana has more legal protection for doctors but I haven’t seen any evidence that physicians in Indiana have different practices from other surrounding states.
MRIs were very expensive in the beginning. But they are now widely widely available and cheaper. Look at this history of Polio. Look at all the new drugs in the last 30 years. Look at TB treatment.
In contrast to Murphy, I think we do sometimes reach an upper bound on health care spending. People often see that a given course of action may increase their lifespan without sufficiently increasing the quality of their life. People refuse treatments. Farrah Fawcett followed a course of action that probably shortened her life. But she did not want to deal with the consequences of more aggressive treatment. That was her choice. If the world becomes more like the Murphy world, expensive treatments that don’t add to the quality of life, or don’t have enough of a return on the investment, many people will not want to undergo such treatments.
And think of what has happened to the mentally ill in this country. Government agencies thought that new psychiatric medications would lead to the successful deinstitutionalization of the mentally ill. The projections on cost savings and increases in the quality of health were way off. I don’t see the current claims of cost saving through “improvements” in the system will be any more effective then the changes in the system for the treatment for the mentally ill.
Of course don’t forget the top ten facts about kevin murphy…
http://www.evanmiller.org/murphy/mention
I have a number of problems with his reasoning in a number of areas:
We laid out in our analysis how someone would behave who was a perfectly rational individual faced with the notion that if he starts, say, smoking cigarettes, that that will have an effect on his desire to smoke cigarettes in the future—that is, our perfectly rational individual realizes that smoking today raises his demand for smoking in the future. And he takes that into account in his decision-making.
He also takes account of the impact of smoking today on other things in the future, like his future health—smoking today means he’s more likely to get lung cancer or cardiovascular disease.
That theory has some pretty simple implications. One is, if I learn today that smoking is going to harm me in the future, then I will smoke less—that is, people will respond to information about the future.
By 1970, there could be no doubt not only was nicotine the most addictive drug (commonly available?) and that is was extremely harmful to long term health.
The first warnings appeared on tobacco in the US in 1966, after Canada first required warnings. In 1970, the warning changed from “may be” to “is” in the US, and the warning was strengthened further in 1985. But I grew in the 50s being told tobacco was harmful (age five onward).
Further, by 1970, it was well established that nicotine was highly addictive and that is the reason people smoke. Further, heroine addict found it easier to kick that than the tobacco they invariably smoked.
So, we must assume that Barack Obama chose to illegally smoke as a rational decision knowing it was highly addictive and harmful to his health. (By the early 70s, all but “southern states” had had raise the legal age to 18.) Hardly seems a rational assumption. So, that says Obama, one who exhibits extremely rational and foresighted thinking made an irrational decision to smoke.
But he’s not alone, 90% of all smokers, past and present, became addicted in their teens.
Consumer Reports published a report, “Licit and Illicit Drugs” in 1972 that was a comprehensive survey of all the drugs, licit and illicit, their legal history, their health risk and addictive characteristics, with policy recommendations. It recommended decriminalization and research especially into the nature of addiction, and methods of weaning addicts off their drug.
The reduction in smoking, and the number starting smoking, has been the result of major shifts in the rules of society: restrictions on how it is sold and given away, prohibitions on public smoking, major smoking prevention campaigns, and much more. As the tobacco companies lost power, taxes were raised to fund “virtue” like schools and health, as well as major cessation efforts. Of course, that started long ago, so any rational person would have anticipated from the 60s on that tobacco taxes would be raised at every chance (although I must admit that I could never have imagined taxes raising packs to $8.) Still, taxes aren’t raised or restrictions made without major additional campaigns to promote cessation, so the drop in smoking is merely coincident with raising taxes and prices, and the higher price is just one of a number of factors affecting behavior.
And let’s not forget the development of products to help stop smoking, the various nicotine patches.
Now, it could be argued that kids under age 19-20-21 are irrational, so that means the reason people don’t smoke after age 21 is because of rational behavior, but that doesn’t mean that those who start smoking after age 21 were rationally deciding to become addicted.
But more important for national health, lifestyle, eating and exercise, is largely established by the time one reaches 18-20, and this is seen in the rates of juvenial obesity and diabetes. Further, research indicates food triggers the kinds of reactions in the brain similar to addiction.
So, bringing this back around to the blog post…
The investment in research should not be in “cure” but in prevention, first, and second in ways of aiding behavior change. The argument that people chose to not exercise, eat poorly is as a rational decision is clearly as suspect as the view that people rationally decide become addicted to to harmful tobacco. Food, like tobacco and heroine rewire the brain in rather permanent ways, so changing that wiring is very complicated and science is ignorant of a practical method of doing so.
The good news is that if a drug that acted on the brain like prozac to break the food craving were developed and used like nicotine patches, that would be a relatively cheap drug like the drugs used for hypertension and collesteral, which are needed even for people who exercise and eat well – better lifestyle would only reduce the number and the dosing. These drugs are now very cheap thanks to various efforts and patents expiring.
But perhaps even better news for the cost of health care, the biggest impacts to health would come from learning the correct lesson from tobacco: changing the human ecology is the most effective way to change lifestyle, and that isn’t a medical cost. It is costly to our industrial food system, and it will take a major effort to first make good food widely available and then to reduce the amount of bad food in comparison. And that will run into the same industry resistance that prevented tobacco laws from being passed to discourage tobacco use by setting society norms.
As the US has the most industrial food manufacturing and it has honed its product and marketing highly since 1960, I’d say that alone explains a major part of the 3x rise in health care spending. And while the US spending increased by 3x, the increase in Europe, Canada, and Asia was much less, with lifestyle probably explaining a lot, along with profit being removed, so little incentive exists for selling more heath care to boost earnings and profits.
Mario Rizza:
Mario Rizzo,
If you ask me, Becker should work harder on giving credit where it is obviously owed: for example, his not citing Leibenstein’s seminal work on ‘bandwagon effects’ in prominent piece he had in the JPE and in his book with Murphy (who oddly didn’t cite Becker’s sole authored article in his co-authored book with Becker, “Social Economics”) fails any test of due diligence straightaway. For details see the following piece in EJW entitled “Some Anomalies Arising from Bandwagons that Impart Upward Sloping Segments to Market Demands”:
http://www.aier.org/ejw/archive/comments/doc_view/4020-ejw-200901?tmpl=component&format=raw
It has always struck be as odd, because I agree fully with Tyler that these guys are generally extraordinary economists, that Becker (in the JPE article on Restaurant Demand) and subsequently Becker&Murphy (in their book on social economics) postulated that bandwagon demands alternatively slope downward AND UPWARD (upward sloping contra Leibenstein, again, without citing Leibenstein).
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