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Home Publications Blogs Beat the Press Uwe Reinhardt on the Cost of an Extra Year of Life

Uwe Reinhardt on the Cost of an Extra Year of Life

Saturday, 29 March 2014 16:02

Uwe Reinhardt picked up on an earlier blogpost in which he asked how much should we be willing to pay for an extra year of life. I had objected to his framing since the high cost in the matter he raised was associated with the patent protected price for the drug in question, not actual resources from society.

The point is that the (possibly considerable) resources involved in developing the drug had already been used. The marginal resources in the form or producing additional units of the drug and administering the treatment would be fairly small. That would make the issues in this particular case trivial. It would not require much deliberation to say that it is worth $1,000 or $2,000 to extend a person's life by a year.

In this post Reinhardt acknowledges the point, and concedes that there could be better ways than patent monopolies to finance research into prescription drugs but adds:

"The alternatives to pricing new medical technology proposed by Mr. Baker and others whom he cites face huge political hurdles not likely to be overcome soon, if ever."

He certainly is right about the huge political obstacles, but given how much is at stake it certainly seems worth trying to press the discussion. After all, the idea of having large numbers of people needlessly denied medical care that could extend their life is a pretty big deal.

Comments (6)Add Comment
written by Brett, March 29, 2014 4:52
It's not that there aren't other methods for financing medical innovation, it's that they're not as good. Drug Patents, for all their flaws, have the massive advantage of providing an incentive for drug research in general as long as the pharma company thinks they can make a profit off of that particular line of research.

Most of the other methods have the major downside of trying to target a specific area and then focusing the funding on that, even when you don't know in advance which areas will be beneficial (sort of like how viagra started out as anti-cancer drug, but was repurposed when it turned out to be bad at treating cancer but good at treating dysfunction). So, for example, if AIDS, or heart disease, or cancer happens to be the Disease of the Hour with lots of public attention and popular support, then that type of research will get all the funding to the neglect of other potential areas. That's assuming the public doesn't just short-shrift medical innovation spending in general, which is entirely possible when you consider that the NIH doesn't really get that much money.
written by Brett, March 29, 2014 5:43
Derek Lowe over at In The Pipeline has a couple of good posts on this.
Define 'good'
written by Squeezed Turnip, March 29, 2014 5:45
Brett, if you're worried about there being "fashionable" diseases, then the current system succumbs all too heavily to that.

The patent method suffers from the same downside. It focuses on diseases that have a profit potential. Typically this would mean a wide-spread disease, such as erectile dysfunction or high blood pressure, all well and good. But the patent method also suppresses innovations in those areas: do you think Merck is going to let some cheap competitor innovate its way into a profitable market without a fight? lol, that will be the day.

The patent method also means that many diseases that have low incidence rate but high probability of a successful 'cure' may never get developed, unless there is a daddy warbucks or uncle sam to pay for annie's leukemia treatment. Some diseases aren't going to provide a sufficient profit margin for any private drug company to go through the clinical trials.

The patent system is antiquated and fit for a time of kings and noblemen, not a democratic society, nor even a purely capitalistic society. A strong case is made by Boldrin and Levine, I hope you read the paper found at the link.
Consumer Drug Costs
written by John Parks, March 29, 2014 7:39
I thought Dr. Reinhardt's essay was well balanced as usual. One thing that I thought was overlooked in the comments and the article both, when discussing the reasons for a $1000 dollar pill here in the US versus the same drug going for $10 dollars a pill in Egypt was simple fear.

The drug companies know that the consumers in this country have little alternative but to pay up or die. This business model is approved by their personal legislatures. Pharma does not have the same control over the many sovereign countries around the world (yet) and these nations can legally (as per United Nations) declare an emergency and produce their own drugs without interference from the patent burdens. Pharma must keep the costs down in these countries to such a level that that option is never considered.

We saw the implications with the AIDS drugs years ago. In Africa, once the threat of producing the drug independently was brought up, Pharma caved in, the US got involved (all the way to the Presidential level)and the drug costs were reduced to a fraction of their original cost. Of course the politicians and the drug manufacturers took credit for their generosity but it was that threat of a sovereign nation telling both the US Patent system and a multinational predatory corporation to go to hell that created the response.

That would have been an example to the rest of the world that neither Pharma or the US Gov. were the overlords they want us all to believe.
written by djb, March 30, 2014 5:04
I heard nih already funds all but very last stages of research.... then when drug looks very promising they give....don't sell....the patent to wall street owned drug companies....but I could be wrong
Let Creative Destruction Add More Years of Life for Everyone - Stop the Economic Predators
written by Last Mover, March 30, 2014 8:22

High-fixed low-variable cost is increasingly typical of the cost structure for infrastructure, public utilities, the internet, hospitals, pharma drug creation, medical devices, etc.

When these underlying basic costs are incurred and priced efficiently, they can provide a platform over which other costs - without high fixed costs - can be incurred and provided efficiently as well, including the cost of living for one more year.

The music industry is an example. After low cost copies and the internet came along (with high fixed costs) its traditional structure fell apart because of very low variable cost (and price) of providing and acquiring music.

Middlepersons in particular as resellers of music in between original producers and end use consumers were hit hard with losses as they were no longer needed.

They invoked intellectual property rights with a heavy hammer to maintain their market position, including detailed policing of the internet and confiscation of music rights at the individual level with prosecution.

This is no different than what big pharma or the medical device industry does now with patents, designed to load up what should be very low prices based on low variable cost, with high cost recovery loaded with monopoly economic rent instead.

In general, economic predators drool over the prospect of capturing anything with low variable costs, because they know they can load up those costs with monopoly economic rent and resell it under the fraud of "free market competition".

The brainwashing of the public on this issue by economic predators was successfully challenged far more in the music business than in the pharma and medical device field, because unlike big pharma and medical devices with full vertical integration combined with horizontal monopoly power, middlepersons in music didn't have the same extent of prior lock-down power on the market from the supply side after the internet arrived.

While the music business still practices heavy handed protectionism of intellectual property rights, its market power has been cracked open irreversibly with the creative destructive power of the internet, despite efforts by economic predators to stop it.

If the question was, What is the (true economic) cost of providing one more year of (already created) music, compared to one more year of life, the generally accepted answer for music would be (comparatively) much lower than for an extra year of life.

The public has come to understand at least for music, despite the propaganda backlash, economic predators don't add net economic value and actually take it from others - like they do in health care now.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.