The Price of Magic Pills

Greg Mankiw's column today is one of his best.  Here are the key points:

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.

Anyone who is able to afford this new treatment can live forever. Certainly, Bill Gates can afford it. Most likely, thousands of upper-income Americans would gladly shell out $150,000 a year for immortality.

Most Americans, however, would not be so lucky. Because the price of these new pills well exceeds average income, it would be impossible to provide them for everyone, even if all the economy’s resources were devoted to producing Dorian Gray tablets.

So here is the hard question: How should we, as a society, decide who gets the benefits of this medical breakthrough? Are we going to be health care egalitarians and try to prohibit Bill Gates from using his wealth to outlive Joe Sixpack? Or are we going to learn to live (and die) with vast differences in health outcomes? Is there a middle way?

Comments

We set a minimum age for taking the pill (say, 45-50 years of age, unless you have a serious medical condition pop up earlier), and then we set a maximum age cut-off for the pill pending a drop in pill cost due to mass production (and it will be mass-produced). The bill is almost self-reinforcing, since if Bill Gates is suddenly living beyond the cut-off, people are going to notice - and the minimum age helps to minimize the size of the population taking the pill.

Anything else will cause massive social instability.

Joshua Gans has some questions about Mankiw's R&D technology:

http://economics.com.au/?p=4355

Perhaps the point of this example was to highlight issues with public health insurance. But I think that's an easy issue: if you can't afford to provide it to everyone, don't provide it. If rich people want to pay out of pocket for such a pill, that's their right.

But I think there is a deeper issue here. I think what the example really accomplishes is to set up a situation where income inequality *really* matters. Before this pill existed, I didn't mind so much that people less intelligent, less hard working, etc, than I am made much more money. But if this difference now because the difference between immortality or not, I care very much. My feelings that, for instance, taxes should compensate for what seem like market vagaries, become much stronger.

In fact I think such a pill would dramatically alter society. In our world, many people "settle" for lower wages because of psychological benefits of their work. For instance: teachers, professors, maybe nurses and social workers, primary care physicians (relative other MDs), politicians, and more. However, the immortality pill suddenly adds tremendous value to earning income above a certain threshold, and people who would have settled for lower wages would not. It could very well be that this sparks a migration of talent into those fields that we tend to think are "overpaid," and lowers their wages. In the end the existence of the pill might reduce income inequality so much that no one can afford the pill anymore!

Another effect would be that those who are disadvantaged would care a lot more about equal opportunity. Inner city schools, for instance, perform very poorly, but at least to some extent this is because their poorer students don't value education very much. To some degree they are willing victims of unequal opportunity. But the immortality pill adds new meaning to becoming successful, and likely many of these people will more acutely recognize or care more about the injustice of society.

All of these can have immediate ramifications because democratic government can quickly reduce income inequality via taxation, if only there is enough popular support.

I don't think this example is particularly useful. It doesn't seem to be very plausible. So this pill costs $410 each? That means that to produce it costs somewhere around there (let's say the patent has already expired, or Congress, responding to massive pressure, has canceled it). How is that really possible?

First you make the pill available for sale to anyone who wants to buy it.

Second, you put term limits on the Supreme Court.

Third, you set up a system of taxes and subsidies for the pill, basically to price discriminate based on wealth in order to allow more people to get the pill. The tax will generally increase with age and/or number of years taking the pill, at least beyond a certain point.

What if the marginal value of producing the Dorian Gray pills was nearly zero? Would using the state's power to make the Dorian Gray pill more affordable through fiat, collective bargaining, and subsidies from confiscatory taxation be acceptable. I'd say yes. The rules governing the most fundamental scarcity ever being upended. But what of HDC? Without the windfall profits from the Dorian Gray Pill will not Hypothetical Drug Company lose its incentive to create ever more amazing hypothetical drugs. Will we want to live forever in an imaginary world without Dylar and Soma?

Typical Mankiw.

He's never taken a marketing course and doesn't understand monopoly pricing. A monopolist would never restrict supply so much to limit it to $150k a year. Wouldn't maximize revenue.

Ask yourself what is an analog: would it be drugs for aids, drugs that eliminate a deadly disease. You already have analogs. They ain't $150k a year, or if they are, they are small populations.

Starting from the wrong premise brings you to a fairyland of make believe.

Did he also hypothesize how many angels could fit on the head of a pin?

how much would the development of this pill cost? probably a heck of a lot more than it cost to develop statins. i think bill's point aout marketing is right. i can't imagine the world where it's profitable to expend (presumably) tens of billions of dollars researching this drug and then trying to recoup the money inside the life of the patent without any subsidy from insurance companies. the incentive for employees at the drug company to leak the formula would be HUGE, and wages at the company would have to rise to such high levels profits would be wiped out.

If the assumption is that the pill price is $150,000 per year, we still know nothing about what the marginal production cost is for a monopoly producer with limited production capacity. If a third party, public, private or non-profit, is willing and able to invest in large-scale mass production, it is entirely possible that that the original monopoly producer can realize a larger return by selling (auctioning) a production and sale licence to the third party without itself having to suffer the opportunity cost of increasing its own production capacity. The final consumer unsubsidized price will likely be greater than the third party marginal production cost, but this still will likely be orders of magnitude less than $150,000.

Regards, Don

Compulsory egalitarianism is profoundly antihuman, as Murray Rothbard pointed out in his essay "Egalitarianism as a Revolt against Nature."
This applies to compulsory healthcare egalitarianism, as well as any other type.

Of course, anyone who wants to be liked and linked to by the most thuggish economist alive and by the fattest economist alive, won't say this.

Poor Mankiw, he constructs an interesting and important hypothetical- a hypothetical that is, in fact, not hypothetical for almost any real-life, cutting edge medical technology, and people waste almost every comment trying to poke holes in the construction of the hypothetical. Good grief, people- deal with the consequences of the hypothetical! Take it as a given that the price is the marginal cost of production.

I'm not aware of any real-life system which would deny Bill Gates the right to spend $150,000 of his money on a pill. Even in Britain about 1/7th of the expenditures are private.

So I have to agree it's a false hypothetical. But if I have to answer, I'd say we're willing to give everyone a 1 in 6 chance of winning a lottery which pays off with the pill, with those who have the money being able to buy it. Using the lottery would be a way to convert Mankiw's all or nothing choice back to a reasonable curve.

I wrote this on a blog to which I contribute--againstmonopoly.com

Medical Care we can't afford?
N. GREGORY MANKIW writes on health care reform, asking the question can we afford it link here. He builds his case on a hypothetical pill that costs $150,000 a year. He doesn't really answer the question because he doesn't say how many people will require that pill. But he strongly implies that clearly we can't afford it. So we ration care. A short think piece in the Sunday paper doesn't allow him to expand and he asks a valid question until you start thinking about it.

If he had, he would need to look at why we have insurance. So long as a finite proportion of the covered require the pill and other diseases don't cost comparably high amounts, we can afford it because the premiums are sufficient. That is the point of insurance.

He also kisses off the gains from removing waste in the health system. They are conjectural at this point, but there is too much evidence. Why does that pill cost $150,000 a year? One must doubt it is because it contains a rare chemical or that its marginal cost of production is so high. Rather one comes back to monopolies, like those on patents on pills and medical devices. Then we have the issues of waste that occur because of the irrational organization of medical care. Hospitals with machines that are grossly underused because the hospital has to have them in order to advertise end up creating enormous excess capacity. Doctor services are often required when nurses or practitioners could do it at much less cost. Failure of different specialists to compare notes on the particulars of a case and find the best way forward add enormous amounts to the bill.

There is a lot more. One place to see it spelled out is a book, Money Driven Medicine; The Real Reason Health Care Costs So Much by Maggie Mahar. Have a look.

Thank you Yancey Ward and a student of economics.

oh, and related to this.

can i cut the pill in half and live for half forever?

This is a false dichotomy. Ignoring the kinds of social issues it would raise negate the power of the argument, because health-care access is about social equality and the idea that contributions to society are not merely fiduciary - as somebody above mentions, how much do we lose if Mother Theresa dies, vs. Bill Gates? It's not really quantifiable in the way the argument presupposes. It also doesn't represent the reality of healthcare expenditure choices, which has as a key factor the fact that, on any given day, most people do NOT cost the system anything - we're talking about repairing car crashes, not paying for everybody to have a car.

Oh, and: one way to even things out? if you want to have kids, both parents have to stop taking the pill. Then it becomes about more (or less) than mere income.

Please read a) Nozick's Wilt Chamberlain story, and b) the responses to it.

I know that they are only 25 years old, but perhaps an truly informed discussion could build upon what people had already discussed.

In any scenario in which any large population of people end up not getting this pill, and "the rich" do, the people who don't have it will not try to figure out ways to get it, they will figure out ways to deny it to everybody. Widespread violence would ensue, or a military state dedicated to protecting the rich.

We see examples of this response every day. Scarcity of a "vital" resource breeds war.

Certainly opening it up for competition would reduce the cost.

So long as it's rationed, either by fiat or by a price high enough to exclude say, 30% of the population, elected officials and employees of the federal government should be forbidden from taking it. (Especially if it is by fiat.)

I'm really disappointed this go-around by most the commentators. Of course it's simplistic. That's the point. It's like "guns and butter." You can't say, "well we should just be innovative and make it cheaper" or, "let the patent expire." That defeats the point of the exercise. Now going on...

If there is something that makes someone better off, and I don't have access to it, is it only fair if I don't know about it? For all I know this pill already exists and it is being used by a few individuals (Bob Barker has looked the same age a long time), but I'm happy as long as I don't know about it. If I learn about it, does it suddenly become unfair? I can't afford $150k, but I think it's perfectly fair for me to grow old and die. In fact, as long as there are no direct negative externalities imposed on me by their consumption, I believe it is EXTREMELY unfair for me to protest their consumption.

How can I honestly consider it right to tear away these life saving drugs out of someone's hands just because I can't afford it? Should I go on a shooting rampage if I learn that I have aggressive pancreatic cancer?

Mankiw is trying to simplistically make the point that if medicine is provided in a social context, medicine will have to be rationed. If, instead of a pill, it was the cost of care for each of us after 65 $150k, would we ration care, or would we pay the bill.

This is a false choice. We do what we can do within a budget constraint and always have. We don't use extraordinary means to extend life, because children and parents realize there is prolonged pain at the end of life, and we don't have a magic pill. But, if we are trying to reasonably ration care, we can ask that we don't save Terry Schaivo, but that is probably not what Mankiw had in mind when he proposed his magic pill problem, but it is the same problem phrased a different way; so let me propose it since it really is part of the same question.

Suppose we have class of society who insist that all the resources of our society be spent on saving them in their senile dotage at the expense of others who would say, "Do not use extraordinary means." Should these persons pay a premium for medicare, or should those costs be assessed on the rest of society, future generations, or only their family for their decision to extend life at all costs and without regard to the wishes of the person who failed to sign a living will.

I can also pose Mankiws problem a different way, but in a way he probably did not intend since it is very much a real problem.

Before Medicare, elderly persons financed their healthcare out of their own pocket or estate, and if they depleted it, their children would be asked to foot the bill. In all cases, the estate would be depleted first.

With medicare, we have spared the elderly persons estate, and the children have had more inheritance and are the beneficiaries of medicare. On top of that, with changes in inheritance taxes, children of wealthier parents have made out like bandits; the estates have not been depleted by medical costs. Those with low or no estates die without an estate, as they did before.

So, my question to Mankiw is: should we raise inheritance taxes to cover medicare expenditures over a certain amount.

Bet he never expected these questions. Its just looking at the problem from a different perspective.

People aren't focusing on the Dorian Gray aspects of the Dorian Gray pill. Immortality is secondary.

Unless I missed it in the comments would it not be inevitable that the state would compel its population to take the expensive pill and then work them hard for the eternal supply of taxes this action would produce.

Using the extreme case has only confused many posters. It is real that statins, such as Lipitor, produce an average of one year of life per $150,000 spent. It is real that this is the price for Lipitor, even after being on the market for many years. The price charged has nothing to do with the marginal cost of production. The many who are paying, at the $150,000, rate are giving PFE and other drug companies the cash flow needed to pay for finding the next "big winner". Billions will be spent in 2009 searching for the next cancer "cure". Last year, 2 of about 5,000 new cancer treatments were approved. If a government plan forced PFE to provide Lipitor for everyone at the cost of production, the short term benefits would be substantial. Healthcare cost would go down and life expectancy would increase, but the next great pill would not be discovered.

Well everyone would like to have this magic pills but due to it's cost it made possible only for extra high income people but there should be some laws made for the beneficial for the other group of people so that they can also have a chance to have this pill...

The use of cryonics would explode.

Take as a given that the marginal cost of the pill will always be $150k/yr in absolute terms.

However, the average income per person is steadily increasing (thank you productivity gains!).

Thus if you (or society) lacked the income now to support the price, at some point in the future we could afford it.

Cryonics have been decreasing in price (I think about $80k now) and is more of a one-time cost, which is affordable now (when only allocated to those facing death now). So freeze now, wake up later when being an indentured servant with the pill is feasible.

I think this question is analogous to a classic economics academic exercise where you have an outbreak of a fatal disease on a spacecraft and only enough medication to cure half the crew. How do you decide who gets the medicine? That is the question that this Dorian Gray exercise is asking. While the nominal cost may be a $150k per year, the real cost of this is literally eternal youth or death. How is it possibly just to allocate this scarce resource based on who has the necessary wealth to afford it? That would be like putting a price tag on the medication for the space crew. Money would become meaningless and I think any such miracle pill would so drastically change economics that it would become de facto currency since any wealth would be spent in pursuit of this drug.
I think a good way to distribute the pill would be to say that everyone gets the same dose amount regardless of their individual monetary input. The rich would then spend vast amounts of their wealth to increase their own lifespan, while simultaneously increasing everyone else’s. While no one would achieve immortality, everybody’s life span would be increased without jeopardizing our entire political and economics systems. While this may be overly idealistic and never work in practice, it is at least a just option.

The lending idea is interesting. A simple calculation, however, yields that in order for an annual $150.000 payment of perpetual debt the present value is $60.000.000 at current fed funds rate and $3.000.000 at 5% interest rate. The banks will be lining up to lend everyone.

Its a thought experiment, don't just assume away the cost when that is a key component. Sheesh.

This is why this debate is so hard. We have some people trying to talk about tradeoffs, and we have other people spinning sci-fi stories about immortality pills and soylent green.

erik at Sep 20, 2009 4:42:55 PM is correct. Forget supply, demand, marginal costs, etc. The only outcome that has any chance of being attained through a peaceful political or economic process is universal access. Otherwise, and maybe even then, we are in for some serious violence.

If there is no universal access then we will end up with a privileged class using a very strong police state to keep the mortal masses under tight control.

If 150,000 $/yr is the actual marginal cost of the pill, then the pills should be allocated by the market mechanism, as the only mechanism which provides truly universal access. Keep in mind that most people will gladly pay 75,000 $/yr to double their life expectancy, or even 15,000 $/yr to extend it by ~10%.

Oh, and did Mankiw forget to mention something else about Dorian Gray? It's people. Dorian Gray is people!

but if the rest of you want to talk about trade offs, go right ahead..

Wouldn't the use of this pill greatly reduce the other costs that a person places on our health care system? Wouldn't it essentially end catastrophic illness costs?

Realistically the government would almost certainly ration out such medication. Politically there simply would be no other way. Even the most devout of libertarians isn't going to sacrifice their own chance at practical immortality for the sake of a political ideology.

The government would almost certainly outlaw private sales of the magic pill as the wealthy would be willing to spend considerably more than that to attain immortality. Thus the black market would go through the roof.

This seems more interesting as a philosophical question on society than a hypothetical question about the limits of social health care.

It seems that the vast differences option _is_ a middle way. One extreme is to not allow anyone to do it if not everyone can. Another extreme is to force everyone to do it. A compromise is to enable everyone to do it (with ranges of how we enable this). A different compromise is to enable some to do it (with ranges as to the criteria -- those who can pay? those who 'need' it, those who are productive, etc.).

FWIW: 150,000 * 300,000,000 = $45,000,000,000,000. But I'm with those who question the premise that competition and scale won't somehow make the cost of this thing cheaper ;) Or we just charge the rest of the world a fortune for it!

Kurt9 - you missed the crucial point about Lipitor: it's $150,000 per year of life added. That seems to say that Lipitor (et al) aren't very effective, if taking it for a year only adds 2.4 days to the average person's life.

If this question were posed in this form to every American, I think most of them would concur that the Dorian Gray pill is a luxury available to the super-wealthy, and that Joe Six-Pack is not entitled to have his bought for him by the taxpayers.

However, recast the story in the following way. The DGP, at a cost of $150,000/yr, has the ability to immediately reverse any illness, and to restore the patient to perfect health. However, the patient, to ensure the permanent reversal of their condition, must continue to take the pill as long as they wish to live.

If you did a study group, I bet a LOT more people in the second one would give Joe Six-Pack public access to the pill, without necessarily working through any kind of rationale. This, unfortunately, is also reflected in the pervading American attitude toward preventative healtcare spending vs. corrective/therapeutic healthcare spending. The former has an astronomically higher ROI, but it just doesn't tug on the heartstrings in the same way as a sick person who can't afford care.

I imagine what would actually happen is that the work week would skyrocket. You'd have tons of people working 80-100 hours a week to push their income high enough to afford the pill. Since every year you work hard enough to afford the pill isn't a wasted year of youth, people would be far more willing to work extremely hard until they had built up enough savings and human capital to afford to work more normal hours. The average age to get married would get pushed back by a decade or two among the wealthy. People would also become much more paranoid about car accidents. There is a huge migration to cities where higher wages becomes much more important than the higher cost of living. Also, cities are good for single workaholics who hate cars.

And to answer Mankiw's hypothetical: obviously we can't give it to everyone, so it will just have to be something people pay for out of pocket. Note, by the way, that he's rolling up two issues into one. The first is obviously the "what if medical care becomes too expensive" question. The other one is how we feel about extending life vs fixing something that went wrong.

I would say Greg Mankiw's question concerning the eternal life pill was not focused on the pill itself. Instead it focuses on the situation in health care today. I love how everyone attacks the price of the made up situation. The price could have been $1 million. What matters is health care will be out of reach for some if we are to keep current level of developing and researching in the medical world. Research and development of medicine is not cheap. First off, it takes many years of a person’s life to just become educated in the medical field. Not to mention the high price tag of graduate school. Thus, to lower the cost of health care would harm the incentive to become a researcher or doctor. Who would want to spend 4-10 years in school and $100,000's to just get paid the same amount as a nurse. Should we provide universal health care to the public at the expense of the rich?
The pill question reaches an ethical question. Should the rich get to live longer than the poor? The answer is life is not fair. I don’t think raising taxes to pay for the one who can't afford it is the answer and lowering the overall price of health care is not. People die now because they don't have enough money to afford the health care they need. Just because there is a procedure does not mean it has to been done. What about the time when there was not a procedure? I know it is different when it is your loved one but the fact of nature is people will die. We just prolong the inevitable death of a loved one. As for the debate about the eternal life pill, we already live in a world with such pills. They grow cheaper as times passes. This would happen to this $150,000 pill as well.

The pill lives in the millions who would die without the vaccinations, antibiotics, and surgical procedures we have today. I think saving millions of lives could be considered the eternal life pill for those who would have never even made it into the world.

As the physicists say...

"Assume a spherical cow..."

It's a good analogy. It lays bare the fact that liberals believe letting you buy your own medicine is "socializing" the cost.

Comments for this post are closed