Category: Medicine

Are we spending our health care dollars effectively?

(I am quoting from Randall’s email here, Typepad won’t let me indent beneath the fold…)

"A) For anyone who is dying the lack of FDA approval should not prevent the use of a treatment.
   While I would favor complete revocation of FDA ability to keep drugs off the market that is not going to fly politically. But selling a more limited change where those with, say, a projected 12 month or 24 month life expectancy get a basic "I’m free of the FDA tyranny" card would accelerate drug development. Phase I and Phase II drugs would be more widely available….

D) The coercive power of the state should force a percentage of all income to go into medical spending accounts.
   The goal here is two fold:
      – Decrease the number of people who need state medical funding.
      – Also, increase the amount of medical treatment purchases that are paid directly by patients. That will increase market forces in medicine.

E) Self-employed people should be able to buy medical insurance pre-tax.

F) People should be able to make tax deductable donations into medical spending accounts for their future children before the children are conceived. Then the money should be usable to buy medical catastrophe insurance against the possibility of birth defects and also for more mundane medical care.

G) People should be able to bring their own medical insurance policies with them to a job and have their employers pay on those policies rather than on the employer’s group policy.
   That way a person could move around between jobs and never reach a state where their COBRA runs out and a pre-existing condition makes them uninsurable (assuming they can even afford to make COBRA payments while unemployed). The way things stand now the tax law forces people to go uninsured between jobs. When you have no income coming in you suddenly have to try to get coverage. That problem must be fixed.

H) Medical records should be made electronic and more widely shareable by researchers that most medical patients effectively become enrolled in "virtual" medical trials."

In praise of impersonal medicine

Many people complain that medicine is too impersonal.  I think it is not impersonal enough.  I have nothing against my physician (a local magazine says he is one of the best in the area) but I would prefer to be diagnosed by a computer.  A typical physician spends most of the day playing twenty questions.
Where does it hurt?  Do you have a cough?  How high is the patient’s
blood pressure?  But an expert system can play twenty questions better than most people.  An expert system can use the best knowledge in the field, it can stay current with the journals, and it never forgets.

Consider how many people die because physicians forget the basics. Gina Kolata reports on a Medicare program to rate hospitals on the quality of care provided in the treatment of  heart attacks, heart failure and pneumonia – these three areas chosen because there are standard, clinically proven, treatments that everyone agrees are highly beneficial.

At Duke University’s hospital, for example, when patients arrived
short of breath, feverish and suffering from pneumonia, their doctors
monitored their blood oxygen levels and put them on ventilators, if
necessary, to help them breathe.

But they forgot something:
patients who were elderly or had a chronic illness like emphysema or
heart disease should have been given a pneumonia vaccine to protect
them against future bouts with bacterial pneumonia, a major killer.
None were.

All bacterial pneumonia patients should also get antibiotics within four hours of admission. But at Duke, fewer than half did.

doctors learned about their lapses when the hospital sent its data to
Medicare. And they were aghast. They had neglected – in most cases
simply forgotten – the very simple treatments that can make the biggest
difference in how patients feel or how long they live.

…[Similarly, the] hospitals were asked how often their heart attack
patients got aspirin when they arrived (that alone can cut the death
rate by 23 percent). When they were discharged, did they also get a
statin to lower cholesterol levels? Nearly all should, with the
exception of patients who have had a bad reaction to a statin and those
rare patients with very low cholesterol levels. Did they get a beta

Once hospitals learned their score, it was up to them what to do.
Over the next year, ones that improved in these measures saw their
patient mortality from all causes fall by 40 percent. Those whose
compliance scores did not change had no change in their mortality rate,
and those whose performance fell had increases in their mortality rates.

"Those are the most remarkable data I have ever seen," said Dr. Eric
Peterson, the Duke researcher who directed the study and has reported
on it at medical meetings.

Unfortunately, we (doctors and patients) have a model in our head of the nearly omniscient doctor carefully attending to the needs of every patient on an individualized basis – medicine as craft.  Instead what we need is medicine by the numbers.  But doctors don’t like being told what to do.

"We tried to come up with a standardized order set," with all the
measures that Medicare was asking about, Dr. Gross said. "But the
doctors didn’t want to use the sheet," insisting they would just
remember those items. Then they forgot.

The solution, Dr. Gross said, was to assign specially trained nurses
to see what care was provided and remind doctors when important steps
were omitted. The result was immediate improvement, Dr. Gross said,
even in items not on Medicare’s list.

The nurses, in effect, are being trained to follow standardized procedures, just as does an expert system.

Thanks to the John Palmer, The Econoclast, for the link.

Paying for Kidneys

In a new paper, Gary Becker and graduate student Julio Elias estimate that for a price of $15,000 the shortage of kidneys could be eliminated from live donors.  The risk of death to a live donor is no more than 1 in a 1000.  Combine this with a value of life estimate of $3 million and add in some costs for time off work and so forth and you get the Becker/Elias figure of $15,000.

$15,000 seems too low to me but it probably would since my income is above average. As a robustness check, the authors note that in India a kidney can be had for about $1000 and US per capita income is about 15 times that in India so $15,000 looks to be in the right ballpark.  A similar calculation from Iran, where kidney sales are legal, is also consistent.  In anycase, even if they are off by a factor of 2 the point is well taken that for a modest sum many lives could be saved.  (In fact, dollars would be saved also because transplants are cheaper than dialysis.)

Becker and Elias have a useful response to (so-called) moral objections. Take any argument against kidney sales and apply it to the volunteer army.  Do kidney sales "commodify the body?"  Perhaps, but then the volunteer army commodifies life.  Would kidney sales eliminate altruistic donation?  As the example of Pat Tillman and many others demonstrate people still volunteer for the military for non-monetary reasons.  Are there difficulties for donors to calculate risks?  Again, perhaps, but these also apply to joining the military (and if so we could allow for a cooling-off period for both donating an organ or joining the military, as we do in some states for auto purchases).

If you are not in favor of the volunteer army then Becker and Elias don’t have any knock down arguments but I suspect that many people who are against kidney sales also favor the volunteer army and for these people Becker and Elias are posing a consistency challenge.

The new plan for health care reform

Replace the tax deductibility of health insurance for the wealthy and middle class with tax credits for low-income individuals to buy health insurance.

Andrew Samwick explains here and here, try this excerpt:

Who benefits from this deductibility [of insurance]? …the average family with $100,000 or more in income receives a benefit of $2,780. Compare this to an average benefit of $1,231 for a family with $30,000 – $39,999 in income. Because tax rates are higher at higher income levels, and those with higher incomes are more likely to have coverage, the benefit goes up with income…

The portion of this disparity that is due to the progressivity of the tax system is ridiculous. Subject it all to tax, and take some portion of the $100 – $200 billion saved and use it to provide refundable tax credits to purchase health insurance, whether through an employer or an individual policy. The credits should phase out at higher income levels. 

Brad DeLong signs on as well.  R. Glenn Hubbard and co-authors endorse a related but not identical idea in Wednesday’s Wall Street Journal.

The core rationale is simple.  Employers would substitute toward plans where beneficiaries care about costs at the margin.  At the same time, the uninsured would have a greater chance of receiving coverage.

My take:  Whether I press the "yes" button depends on what we compare it to.  It sounds like a good package deal, especially if done in revenue-neutral fashion.  The distributional change is compelling.  It looks less good when broken into constituent parts.

People at the upper end will face higher insurance costs; I suspect at the margin many will be pushed out of group plans into higher-premium private plans.  (I’ve never been convinced that the tax subsidy for insurance, while costly, is the fundamental problem in the health care market.)  Why should we favor this, except as a revenue-raising measure?  On this part of the plan I vote "no."

What about the newly created benefits at the lower end of the income distribution?  Well, I can think of many worse ways for the government to spend its money.  But for me the proposal is neither a first nor a second best.

Many of the uninsured are linked to recent immigration.  But if we are willing to spend money in this fashion (I am), I would rather spend the money taking in more immigrants.  That helps the people who need it most and brings significant health benefits to many, including the recipients of remittances.  (Admittedly emergency room budgets will take a whacking.)  I also would prefer a more targeted program to address the behavioral obstacles that keep many of the poor, insured or not, from seeking preventive care.  So on this second part of the plan I vote "maybe."  It is not my favored way of spending government money, though it is an above-average way of spending the money.

Nobody has a really good health care plan.  This idea remains in the running, and might make sense as a "best politically feasible package plan."  But it is not my first or second best choice, and as a blogger I will demand license to dream.

Me-Too Three

Today I tie up some loose ends (here is post 1 and post 2 in the series) beginning with an argument in favor of me-too drugs that I do not like and then moving on to an attack on Marcia Angell’s book The Truth About Drug Companies.

Many people argue that price competition is a benefit of me-too drugs.  But recall the point I made yesterday, me-too policy is patent policy.  If you think lower prices are a good idea then you really think that weaker patents are a good idea.  Indeed, as far as price competition is concerned the ultimate me-too drug is a generic so the logic suggests we should get rid of patents.  For obvious reasons, that is not a good idea.  (Our current policy is actually quite good – strong patents for about 12-15 years of effective life followed by very sharp price competition from generics.   Note that since profits are discounted the future competition doesn’t reduce R&D very much.)

I dislike Marcia Angell’s The Truth About Drug Companies not because of her conclusions but because it isn’t serious research.  She has lots of citations to newspapers, for example, but not a single citation to Frank Lichtenberg the premier researcher on the value of new drugs.  (I don’t agree with everything in Jerry Avorn’s Powerful Medicines, and he doesn’t cite Lichtenberg either, but I learned something from his book.  If you are interested in these issues I recommend it highly.)

Concerning me-too drugs, on page 90 Angell says "there is little evidence to support the notion that…if one drug causes side effects, another one won’t."  That’s odd because on page 81 when discussing the me-too statin’s (Zocor, Lipitor, Pravachol etc.) she notes "Bayer’s Baycol had to be removed from the market because, at the approved dose, it caused a deadly side effect."  Hmmm.  Similarly, early tests suggest that Celebrex may not have the same side-effects as Vioxx, despite the fact that both are Cox-2 inhibitors.

Angell is also skeptical that me-too drugs can have different effects in different people.  Frankly, I was shocked at this argument. Every clinical trial that has ever been run demonstrates that the same drugs have different effects in different people – it’s hardly a surprise that different drugs have different effects.  And me-toos are different – different enough not to violate the patent on the innovator drug almost certainly means different enough to have different effects in some people.  My local supermarket carries at least a dozen different styles of peanut butter, a fact of which I approve, but Angell thinks two angiotensin-converting-enzyme (ACE) inhibitors may be one too many (p.90).  Give me a break. 

Finally, it’s important to recognize that small changes can actually make for important improvements.  What could be more me-too than a once-a-day pill replacing a twice-a-day pill?  Yet, to dismiss this change is to overlook the people factor.  A once-a-day regime that people stick to is much better than a twice-a-day regime that people fail to follow.  Forget the chemical structure the economics says a drug that people actually take is a better drug. 

Me-Too Two

Yesterday I introduced the gold-mine model.  Today, I want to look at some solutions but also ask whether the model fits the pharmaceutical market.

Recall, the problem is that I discover a gold-mine, you undermine my profits by digging on nearby land.  Society loses because instead of searching for another gold-mine you spend resources trying to exploit what has already been discovered.  Applied to me-too drugs the idea is that firm A innovates and earns big profits, firms B,C,D try to imitate and grab some of the profits rather than search for innovations of their own. 

In the gold-mine model one solution is to give the miner who first makes the discovery the mining rights on all nearby land.  The miner won’t exploit these rights but will prevent others from wasting resources through undermining.  How does this apply to me-too drugs?  Critics of the pharmaceutical
industry will probably be upset to find that the analogous solution is to grant stronger patent rights.  In particular, the problem with me-too drugs is companies investing resources in R&D that will end up producing a drug with similar effects through somewhat different means.  If patent rights were broader then the costs of undermining would be higher and the me-too problem reduced.

Thus, me-too policy is patent policy and now we begin to see why the problem is complex.  Broader patents, for example, have costs as well as benefits.  Selden’s auto patent, for example, was originally held to be so broad that it almost finished Henry Ford.  (For more examples see my paper Patent Theory versus Patent Law (email me if you can’t get access) or the new book Innovation and Its Discontents.)

Moreover, we have been assuming that the innovating firm strikes gold and then other firms rush onto nearby land.  But that’s not the way most pharmaceutical innovation works.  More often, there is some basic research, often done in a university lab, which suggests a possible drug target or mechanism.  The research is public knowledge so a number of pharmaceutical firms begin the long slog of trying to turn an idea into a drug.  Think of the original research as a prospector shouting "there’s gold in them thar hills," – the firms then rush into the hills to start researching/digging.  One of them may strike gold first but the others are close behind.

The key point is that the R&D used to develop the me-too drugs was not spent to undermine the innovator it was spent in an effort to become the innovator.  Think about it this way.  Ten people are in a race to deliver a letter.  Critics of me-too drugs complain that the runner coming in second is wasting society’s

Now it is possible to have too many firms racing to be the innovator – perhaps we should only have 8 firms in the race not 10.  But critics of me-too drugs don’t argue that there is too much R&D, which at least would be consistent, they argue that there is too little. 

Although it is possible to have too much R&D, I find the argument especially difficult to believe in the pharmaceutical industry.  First, even in the best scenario the returns to the innovating firm are less than the social returns so "too much" R&D may simply make up for this defect.  Second, there are many positive externalities to drug research.  A substantial fraction of the increase in life expectancy over the past thirty years has been due to pharmaceuticals and the value of this reduction in mortality is in the trillions.  Third, research indicates that the R&D efforts of different firms is in fact complementary – when you drain your mine of water my costs of mining fall.   

Tomorrow I will wrap up with some final comments, Why me-too for you may not be me-too for me.

Me-Too Drugs

At Tyler’s prompting I will have several posts this week on me-too drugs.  It’s a difficult area but one that I have been thinking about.  Why are me-too drugs bad, even though competition is ordinarily good?  The reason is that when an industry is characterized by market power and price exceeds marginal cost the private returns to innovation may exceed the social returns.

Here’s a simple model.  I own a profitable gold mine.  You buy some land nearby and begin to dig but instead of finding your own gold you tunnel underneath my land and steal my gold – you undermine my profits.   Now this may be very profitable to you but as far as society is concerned your digging is wasted effort.  You expended resources not to increase production but simply to transfer profit from me to you.  The prospect of stealing my gold attracts too much entry (and the threat of this may in turn cause me to invest less in the first place).

A patent on a blockbuster drug is like a gold mine.  Me-too drugs undermine the profit from the blockbuster.  The R&D that goes into the me-toos is thus a social waste.

The gold-mine problem is the economic case against me-too drugs.

The gold-mine model leads to some surprising insights.  Me-too drugs are bad because resources are used to undermine someone else’s profits.  But a firm won’t undermine it’s own profits.  Thus, a firm’s own "me-too" drugs are not an example of the gold-mine problem.

AstraZeneca introduced Nexium just as their drug Prilosec was going off patent.  Nexium is very similar to Prilosec and for almost all patients it offers few additional benefits – it is widely cited as a me-too drug.  The Nexium problem, however, is quite different from the gold-mine problem.  The Nexium problem is, Why do people buy the expensive brand when the cheap generic would be just as good?  The Nexium problem is that customers think, or act is if they think, that Nexium is not a me-too drug. 

In contrast, in the statin market there is Zocor, Lipitor, Pravachol, Lescol and Crestor.  Even if consumers thought these drugs were me-toos, each of them would still have a market.  Here the problem is, or appears to be, the gold-mine problem.

Solutions to the Nexium problem, such as better informed patients or getting consumers to pay a larger share of their drug purchases, do not necessarily solve the gold-mine problem.    

In a future post, I will look at some solutions to the gold-mine problem.  I will also look more closely at whether the pharmaceutical market fits the assumptions of the model.

The unhealthy price of textbooks

Henry over at Crooked Timber wants to know why some books are so expensive.  The answer is that the books he has in mind are textbooks and the person choosing the textbook isn’t the one paying the price.  In effect, the professor is buying the book but with someone else’s money.  Hmmm, does this remind you of any other markets?  Here’s a hint, the 3rd edition of Health Economics by Charles Phelps is $122.60.  Here’s another application.

Addendum: Mark Steckbeck has a nice post explaining one reason why textbooks prices have increased in recent years.  The internet has made resale easier thus adding to the book’s value and, as publishers realize that demand has increased, to the book’s price.   Interesting possibility mentioned by Mark is that increases in nominal prices are consistent with decreases in real (after resale) prices.

In praise of me-too drugs

Today’s Op-Ed in The Financial Times defends me-too drugs:

There is a tendency among the medical fraternity to tut-tut about the proliferation of drugs as unproductive and unnecessary. Marcia Angell, a former editor of the New England Journal of Medicine, argues in her book The Truth About Drug Companies that me-too drugs are symptomatic of Big Pharma’s intellectual bankruptcy.

Dr Angell says there is "almost no evidence of price competition in the me-too business" and trials "almost never compare me-too drugs with one another for the same condition at similar doses". One or two drugs would do: "I know of no rationale for, say, the seven brand-name Ace inhibitors that are sold to treat high blood pressure and heart failure."

There is something to her critique. One of the attractions of me-too drugs has been that pharmaceuticals companies have been able to market them heavily in the US – spending $3.3bn (£1.7bn) on direct-to-consumer advertising in 2003, and giving $16bn of free samples to doctors. This makes them look more like branded consumer goods companies than research-based scientific organisations.

But there are already signs of drug proliferation leading to falling prices. In Europe, the existence of alternative treatments has helped governments to cap prices. Pfizer is fighting a German proposal to pay the same for all cholesterol drugs, cutting the sum it gets for Lipitor by a third. Even in the US, drug companies increasingly have to compete to get their drugs on to approved prescription lists.

That means direct comparisons on both price and effectiveness. Despite the industry’s traditional resistance to "head-to-head" trials, they are becoming more commonplace. Bristol-Myers Squibb financed a head-to-head study of Pravachol and Lipitor in an effort to displace the market leader, only to find this year that Lipitor worked better.

…This may all sound terribly wasteful to a doctor, but it is the same thing that is good for consumers in other markets: open competition. The problem until now has not been too much of it, but too little. The last thing that a patient should want is a choice of only one drug. As the Vioxx withdrawal shows, me-too pills may inspire little affection, but they would be missed if they were not there.

Why have me-too drugs been so prevalent?  Are they an inefficient form of product mimicry?  An artifact of bad patent or FDA policies?  The long-run path to affordable medical care?  I don’t have the expertise to answer these questions, so in my spare time I bug Alex to write more about them.

New York City fact of the day

1 out of 3 New Yorkers is on Medicaid:

…the states set the level of Medicaid spending, but the Feds match the states dollar for dollar. New York State decided that a good way to soak up extra Federal money was to require the local governments to match the state, dollar for dollar. Since the Feds match all state and local spending, this had the effect of doubling Medicare spending in the state of New York, at no cost to the state, other than the psychic anguish of its highly taxed citizens.

By the end of 2004 Medicaid spending will cost $1650 per person in New York City.

My Arnold Kling-like question: If every distortion of this kind were eliminated, how much would the price of medical care fall?

Thanks to Jane Galt for the fact (and here is a rare photo)…

Seeing is believing (in the free market)

Everywhere we look it seems that health care is more expensive: prescription drug prices are increasing, costs to visit the doctor are up, the price of health insurance is rising.  But look closer, even closer, closer still.  Don’t see it yet?  Perhaps you should have your eyes corrected at a Lasik vision center.

Laser eye surgery has the highest patient satisfaction ratings of any surgery, it has been performed more than 3 million times in the past decade, it is new, it is high-tech, it has gotten better over time and… laser eye surgery has fallen in price.  In 1998 the average price of laser eye surgery was about $2200 per eye.  Today the average price is $1350, that’s a decline of 38 percent in nominal terms and slightly more than that after taking into account inflation.

Why the price decline in this market and not others?  Could it have something to do with the fact that laser eye surgery is not covered by insurance, not covered by Medicaid or Medicare, and not heavily regulated?  Laser eye surgery is one of the few health procedures sold in a free market with price advertising, competition and consumer driven purchases.  I’m seeing things more clearly already.

Thanks to Jonathan Van Loo for research assistance on this post.

Prizes for vaccines for the poor

One way to structure a vaccine comitment would be to guarantee a price of, say, $15-20 per person for the first 200-250 million people immunized, in exchange for a commitment from the developer to subsequently drop the price in the poorest countries to a modest markup over manufacturing cost.  A commitment of this size would offer firms an opportunity for sales comparable to those available in commercial markets.  It would be extremely cost-effective, saving more lives than virtually any imaginable health expenditure.

That is from Strong Medicine, by Michael Kremer and Rachel Glennerster.  The authors have an excellent book and a noteworthy idea, but I have some worries.

Some poor countries, such as Ghana, have quasi-functional government.  But other governments won’t allow this to proceed unhindered.  Remember when some Nigerian states banned the polio vaccine for (supposedly) spreading sterility and AIDS?  That is an extreme example, but how about this?

In Africa, for example, it is estimated that only between 2-15% of children slept under bed-nets in 2001-a simple, effective and proven method to prevent malaria.   

If the cure for AIDS were a single glass of clean water, millions of the infected still would die.

This is why economic development is so hard and so resists formulaic treatment.  Correcting any single screwed up incentive won’t bring as big a payoff as you might think, given how many other things are screwed up.  We have to go one step at a time, but every step brings both short-term costs and political opposition, while not showing much in the way of immediate benefits.

Prizes work best when the prize-giver is aiming at a well-defined end, where success is easy to measure.  This fits "inventing a malaria vaccine" better than "distributing a malaria vaccine."  I would be willing to try this scheme, given the high upside returns.  But it is quite possible we could go ten years or more without seeing much in the way of tangible results, even once something is invented.

The Pregnant Mare’s Lesson

Here again is Avorn:

The former colony is the United States, the time is now; the drug is the family of hormone replacement products that include Prempro and Premarin (manufactured from pregnant mare’s urine, hence its name.)  For decades, estrogen replacement in postmenopausal women was widely believed to have "cardio-protective" properties; other papers in respected medical journals reported that the drugs could treat depression and incontinence, as well as prevent Alzheimer’s disease.  The first large, well-conducted, controlled clinical trial of this treatment in women was not published until 1998; it found that estrogen replacement actually increased the rate of heart attacks in the patients studied.  Another clinical trial published in 2002 presented further evidence that these products increased the risk of heart disease, stroke and cancer.  Further reports a year later found that rather than prevent Alzheimer’s disease, the drugs appeared to double the risk of becoming senile.  The studies resulted in a reduction, but not an end, to the long-term use of these products.

Some thoughts on health care

I had prepared a post on health care for the ongoing on-line debate, but the topic was changed to fiscal policy.  Here is what I had in mind:

Most plans for greater government involvement cite the large number of uninsured Americans, over 40 million at last count.  The number is taken out of context, as many of these individuals are otherwise covered, choose not to purchase insurance, or are recent immigrants; read more here.

I doubt if insurance will disappear as the dominant means of payment in the health care industry.  The risks are too high and the anxieties too great.  So we need to improve the workings of private health insurance. It remains a mystery, why private health insurance has performed badly in holding down costs.  Companies compete fiercely to shed costly patients but they do less to invest in reputations for reliability and trustworthiness.  Similarly, it is a puzzle why HMOs don’t do more to invest in good reputations; lately Kaiser has moved in this direction.

Nobody has a truly good health care plan at this point.  But we do know that competition for quality service has been the driving force behind the benefits of modernity.  We need to figure out how to bring this to bear on health insurance.  In the meantime we need to control Medicare; I suggest means-testing, here is another worthwhile proposal.

Bush’s plan encourages health savings accounts (HSA).  HSAs give you a tax-free account for medical expenses but requires purchase of a high-deductible health care plan (above $1000 for individuals and $2000 for families, in most cases). And when age 65 comes, you can use the money for Medicare premiums or simply pull it out and pay standard rates of taxation. The accounts are now rising in popularity, although they remain small in absolute terms.

The plan has some admirable economic elements.  It provides a tax-free vehicle for savings; most economists agree that capital income should not be taxed.  But it is less of a health care plan.  Most of the potential beneficiaries from HSAs already receive excellent levels of care.  In sum, I like the idea of market incentives, but do not believe that HSAs will do much to make us healthier.