When it comes to health care, economists ignore their own rules
Dean Baker
Fundamental economic principles tell us that goods should be sold at their marginal cost of production—the cost of producing one more unit of the good. If a company needs to pay twenty dollars for the material and labor used to produce one more shirt, then shirts should sell for twenty dollars plus a small profit–earning markup. The price–equals–marginal–cost principle maximizes economic efficiency and limits opportunities for fraud and corruption. Building on this principle, economists also strongly advocate globalization: the elimination of trade barriers allows consumers to buy goods and services from where they are cheapest, thus maximizing global efficiency and output.
Unfortunately, when it comes to health care, these principles are routinely violated. Prescription drugs that could be manufactured and sold profitably for a few dollars per prescription may instead sell for thousands. Performing one more high–tech scan or other medical test may require just a few cents of electricity and a couple of hundred dollars worth of a technician’s or a doctor’s time. But diagnostic procedures can be billed at several thousand dollars a shot. Prices are often well above marginal costs, yet economists involved in health care reform rarely recognize this as a problem.
Nor do they show their usual zeal for trade. Health care may have features that make it place–specific, but globalization offers clear opportunities for gains. Specifically, the health care system can take greater advantage of foreign doctors and highly skilled medical professionals, who can be trained at far lower cost in the developing world than the United States. And it is simple to design mechanisms that increase the number of trained personnel by an amount sufficient to supply both the United States and developing countries with more doctors and health care professionals. We should also consider that globalization offers people ways to get health care where it is cheaper, which is already happening to some extent with the growth of medical tourism.
Too–often ignored, the basic economic principles of marginal–cost pricing and gains from trade have much to offer in the area of health care. They need to be brought into the discussion.
Suppose a family member is diagnosed with a rare and typically fatal form of cancer. She is 80 years old and in otherwise good health. A new drug with no major side effects but an uncertain success rate costs $200,000 for a year’s dosage (the actual price for some newly developed cancer drugs). Should the family struggle to come up with money for the treatment, or alternatively, should an insurance company or the government be forced to pick up the tab? Should treatment be withheld?
This question has no good answers. The decision to allow a family member to die when a possible cure exists would haunt the family for years to come. However, as individuals and as a society, we know that what we can spend on health care has limits. Suppose we spend the $200,000 and the patient dies anyway in 6 months. Is that a good use of money—ours or anyone’s—in a world where poor children are going without decent housing, childcare, or even food everyday?
Now change the story slightly. A year’s dosage costs $200, and the calculation becomes suddenly far less difficult. With a reasonable hope of benefit, we would, of course, expect an insurance company or the government to pick up the tab, if it is not paid out–of–pocket.
Economics textbooks are filled with graphs showing how trade barriers that raise the price of shirts or shoes above marginal cost make the economy as a whole less productive.
Reducing the price to $200 is neither slight of hand, nor wishful thinking; it is marginal–cost pricing. Brand drugs, selling at hundreds or thousands of dollars per prescription, are not chemically distinct from the ones on Wal–Mart’s shelves for four dollars. Few drugs are expensive to manufacture and distribute. A year’s dosage of a cancer drug sells for $200,000 because the government grants the drug’s developer a patent monopoly as an incentive to develop new drugs. Without that monopoly, the latest drug could be one of thousands of low–priced generics.
Continued>>>
http://bostonreview.net/BR34.3/baker.php
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