Take this post by Uwe Reinhardt, as leading a leading authority there is on US health economics. He shows us this rather typical graph portraying the number of Quality Adjusted Life Years (QALY’s, a measure that consolidates all health impacts into a single metric derived from utility theory) people can enjoy as a function of how much they spend to get it. A low-cost medical intervention buys us one year, the next year requires a little more cost and so on until the marginal cost of providing a bit more healthy living zooms up out of sight.
He’s interested in seeing to it we position ourselves at an efficient point along the curve rather than one above it, and he also raises the question of how far along this curve we should be willing to travel:
Is there a maximum price above which society no longer wishes to purchase added QALYs from its health system, even with the most cost-effective treatments (e.g., Point C)?This issue is crystallized for him a recent report from an insurance advisory panel in California that determined a new hepatitis C drug “low value” compared to older drugs even though it is somewhat more effective—because it is being sold by its producer at $1000 a pill. Here, says Reinhardt, is an example of society, or at least a portion of it with MD’s and financed by the insurance industry, saying enough is enough; we can’t climb that cost curve all the way to the top.
Just one problem though. Reinhardt’s graphic is about cost, presumably social cost. As we should have learned in our first econ textbook, this refers to the opportunity cost and disutility entailed in producing a good or service. The $1000 charged for a single pill, while it covers resources consumed in R&D and direct production, in all probability has a hefty element of monopoly markup. That’s the whole point of the patent system, after all. And this markup is a transfer, not a cost. We could well be on the flatter, left end of Reinhardt’s cost curve even as we shell out vast sums for this latest medical marvel.
Now I suppose you could argue that such transfers are needed to induce people to take up medical research as a profession, other people to provide their labs, etc. That was apparently the topic of a debate between Reinhardt and Dean Baker, which Reinhardt refers to in his post. But that’s a separate question. It does not overturn the wise judgment of elementary economics on the distinction between a cost and a transfer. It’s amazing that I even need to write this.