An Economic Eye

Entries categorized as ‘Health Econ’

Determining the Optimal Subsidy for Antimalarials

May 25, 2009 · Leave a Comment

mosquito

The optimal size of a subsidy for ACT anti-malarials subsidy has been discussed extensively. The subsidy’s optimal form, however, has been less thoroughly analyzed.

The subsidy could be a fixed-dollar subsidy (e.g. subsidize each dose of CT $1)

Pro: The subsidy would be spread across the maximum number of doses. There would be competition among the producers of the CTs , keeping prices near competitive equilibrium;  the subsidy would not be a windfall for drug companies.

Con:  Note that “the use of two ACTs was more effective and averted more deaths than the use of a single ACT at the same subsidy level” (Laxminarayan, 2006). A fixed-dollar subsidy would not equalize prices across CTs. The least expensive CT would thus be used in greater quantity; this would, in turn, place greater selection pressure for parasites to become resistant to that combination, resulting in increased resistance to the least expensive CT and suboptimal per-dose effectiveness. ACTs are most effective  if at least two CTs (i.e. at least two sets of two therapies) are used in conjunction as use of multiple CTs delays resistance to any one therapy.

President Clinton recently (July 2007) launched a pilot ACT subsidy program in Tanzania. His program makes a single ACT — a combination of artemether and lumefantrine — available to a national drug wholesaler at 10% of the current market price. This pilot subsidy program would not be directly applicable on a global scale, however, as it fails to incorporate a combination of ACTs and would thus result in a speedier evolution of resistance.

Alternatively, the subsidy could be a fixed-price subsidy (e.g. subsidize each dose of CT as necessary in order that the market price is $0.30 per dose)

Pro: Prices would be equalized across CTs facilitating equal consumption across CTs and resulting in minimal resistance to any one therapy. This would yield maximum per-dose effectiveness of each CT.

Con: A fixed-price subsidy would require negotiations between the subsidizer and the drug companies. Ideally, the subsidy would be the difference between the “competitive” price and the fixed-price. However, given imperfect price-signals, drug companies may reap additional profit from the subsidy. This would result in a suboptimal number of doses.

The optimal form of the subsidy, then, depends on the magnitudes of multiple variables, which are discussed in a document available via the following link: Optimal ACT Subsidy

Categories: Health Econ
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This Little Kidney Went to Market, This Little Kidney Stayed Home

May 25, 2009 · Leave a Comment

piggie

As Adam Smith once noted, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner (. . .)” Why, then, must we rely solely on benevolence for a potentially life-saving kidney? The 1984 National Organ Transplant Act (NOTA) prohibits the allocation of organs by “valuable considerations,” assigning the market for kidneys a zero price ceiling and reducing both efficiency and equity. The supply of kidneys is perfectly elastic up to the quantity altruistically supplied and perfectly inelastic thereafter. The demand curve has low price elasticity because almost all transplants are covered by third-party payment and dialysis is a relatively poor substitute. Since kidneys cannot be purchased, the quantity demanded vastly exceeds the quantity supplied. The few kidneys that are altruistically donated are imperfectly allocated by waiting lists, which fail to distinguish among the marginal rates of substitution (MRSs) of potential recipients; sixty-five thousand Americans are currently on such lists. The shortage creates not only deadweight losses, but also equity issues; those who can afford the black market’s artificially high price are predominately wealthy while those induced to sell their kidneys illegally and with limited information tend to be poor.

According to Coase’s theorem, voluntary trade between two parties improves joint welfare. Government intervention thus necessitates market failure and the potential for increased efficiency or equity in line with society’s welfare function. I argue that a market for kidneys will be more efficient than NOTA’s zero price ceiling and allocation by waiting lists; many of the current information failures will be remedied by price mechanisms. I then refute the equity arguments in favor of NOTA; the option to trade kidneys will benefit not only the wealthy, but also the poor. The indifference curve model’s assumption that people know their own best interests will better hold in a well-regulated legal market than in the black market brought about by the current shortage. A legal market will also provide additional avenues for altruism and third-party payment, thereby increasing low-income individuals’ access to kidneys. Finally, I analyze one source of the perpetuation of today’s inefficient and inequitable system: the political clout of the medical services providers that profit from the economic rents and low competition resulting from a restricted supply of kidneys.

The full article can be accessed via the following link: This Little Kidney Went to Market, This Little Kidney Stayed Home

Categories: Health Econ
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Sexonomics: From Asymmetric Information to Positive Externalities

May 24, 2009 · Leave a Comment

sexonomics

Good information about sexual health could lead to better — or at least safer — sex

Good sex might be priceless, but there’s still a market for it. Ideally, such a market doesn’t involve money—but demand is rampant, supply plentiful, and the exchange goes on every day in every way.  It involves a good bit of utility, but also, as with any investment, a certain amount of risk. And, just like every other market (aside from those in the fantasy world of economics textbooks), the market for sex is imperfect.

Most importantly, asymmetric information pervades the market for sex. With an endless variety of desires, any individual knows more about his or her own sexual habits than any would-be partner: Is he actually interested? Does she like to mix things up? Will he want to cuddle after? Asymmetric information can be exciting.

But in the age of HIV/AIDS and the list of other STDs that permeate the contemporary love market, secrets about sexual health can be dangerous mysteries. And since no one wants to contract a sexually transmitted disease, whether herpes, syphilis, or, of course, HIV, it is in each healthy individual’s best interest to choose healthy partners. But how?

Asymmetric information pervades the market for sex.

Abstinence or protection is not enough. Without the anchor of a soul (or sole) mate, Americans are sleeping around, creating many vectors for disease. According to a 2004 ABC News survey, the average American sleeps with 13 partners before settling down. More partners means more risk; and despite whatever condoms, gels, and blind faith people are relying on to protect them, the Center for Disease Control (CDC) estimates that 19 million new infections still occur each year.

Proper testing is a prerequisite to stemming the spread of STDs. Yet even the most conscientious currently have only limited incentive to get tested, especially for diseases that may have no noticeable symptoms. Most syphilis cases, for example, are transmitted by individuals oblivious to their infection. And while some who do get tested carry around their lab results, most do not. The current lab printouts are cumbersome and there is a stigma associated with even bringing up the topic. This creates a serious information problem.

The solution to this problem of viruses, trust, and lust may be for potential lovers to view their exchange not as an act of passion, but rather as one of market economics. Like any profitable transaction, if done correctly both parties benefit, and no one suffers negative externalities. While there’s no way to force rationality on sex any more than on any other good, one solution for those of us willing to put dispassion before passion is, for lack of a sexier description, a medical identification card. The card would be far more credible than a mere “Baby, I’m clean” and far less cumbersome than sharing a full lab printout. It has the potential to increase trust and reduce the stigma of talking about STDs in the heat of passion.

Every time someone chooses to get tested for an STD, the lab can record on a wallet-sized card the patient’s name and the dates on which he or she last tested negative for various diseases. The card proves the individual’s medical status, and then each can choose to share—or not to share—his or her card with potential partners. Since every person is in control of his or her own information, this system raises no privacy concerns. It is even consistent with the infamously stringent Health Insurance Portability and Accountability Act (HIPAA).

Anyone with a shred of responsibility and the slightest intention of sowing his or her wild oats should get tested frequently and learn to share his or her card with potential partners before the candles are lit, or the last Cuervo shot poured. More important still, those who do share must expect reciprocity. Anyone who has been sexually conservative, or practiced safe sex, will be eager to get tested and then to share his or her card in order to be “rewarded” with similarly healthy partners. This will encourage frequent testing and card-sharing, thereby creating a self-enforcing equilibrium among healthy individuals.

Granted, anyone who has already contracted an STD will hesitate to share results. But withholding the card, in and of itself, is still good information. Even though we’re supposed to respect people who “plead the Fifth,” choosing not to share could reasonably be interpreted as a signal of higher risk. The message would be obvious, and the would-be partner could decide in turn whether or not to withhold sex.

Interestingly, individuals who already suffer from STDs will also be better off. They will benefit directly by being able to identify partners who share their disease. Some of the most conscientious of those suffering from STDs currently self-select similarly infected partners through internet dating sites like stdmatch.net. More generally, with additional incentives to get tested, curable STDs can be caught and treated in earlier stages, thereby reducing the likelihood of serious complications including infertility, cancer, and higher susceptibility to the ravages of HIV (S.O. Aral, “Sexually Transmitted Diseases: Magnitude, Determinants, and Consequences,” International Journal of STD and AIDS 12, no. 4 (2001): 211-215).

This system would also engender positive externalities, benefiting more than just those directly involved in the coupling. First, reducing the spread of STDs will reduce the risks not only for couples who choose to share cards, but also for every one of their future potential partners—and, of course, for each of those future partners’ future partners, ad infinitum. Second, notwithstanding the incalculable reduction in human suffering, the card system will reduce the medical costs of treating STDs, both because the rate of infection will fall, and because more testing will catch STDs at earlier stages, when they are generally less expensive to treat. The Center for Disease Control reports that the national cost of treating STDs is currently about $14.1 billion annually—all for diseases that are, in theory, 100 percent avoidable.

When it comes to our sexual health, we should all be risk averse. Thus, by reducing unnecessary and unwanted risk, this system will boost utility. In a world that approaches sex as rationally as it approaches business, the best new pickup line just might be, “Show me your card, and I’ll show you mine.”  Now that’s sexy.

Categories: Cosmo Econ · Health Econ
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Linking Depressed Earnings to Adolescent Depression

May 24, 2009 · Leave a Comment

Depression and Sorrow

In this study, I analyze empirically the ways in which adolescent depression depresses earnings in young adulthood. I test the prominent assertions that adolescent depression is predictive of young adult depression and of lower educational attainment, both of which are, in turn, predictive of lower earnings. I then expand upon the current literature by testing the assumption that those depressed in adolescence would benefit from staying in school. To that end, I first estimate the relationship between adolescent depression and returns to education. Since one relevant alternative to educational attainment is work experience, I then estimate the relationship between adolescent depression and returns to work experience. Finally, I compare the returns to educational attainment with the returns to work experience for individuals depressed in adolescence relative to the returns for their non-depressed peers; I make this comparison first using the full sample, and then using subsamples distinguished by gender, race, and socio-economic status (SES).

The results of this study corroborate previous findings that the negative correlation between adolescent depression and young adult earnings works through adolescent depression’s positive correlation with young adult depression and its negative correlation with educational attainment. They also, however, call into question the assumption implicit in the assertion that to maximize human capital, individuals depressed in adolescence should continue in school. Although I find that individuals depressed in adolescence have positive returns to education equivalent to those of their non-depressed peers, I also find that on the aggregate they have higher returns to work experience than do respondents not depressed in adolescence. In particular, I find that the higher returns to work experience among those with severe adolescent depression are most pronounced among women, non-Hispanic whites, and individuals of high SES. Interestingly, the literature has found that it is precisely white, affluent females who experience the strongest negative correlation between adolescent depression and educational attainment.

The full paper has been published in the Undergraduate Economic Review and is publically available online.

Categories: Health Econ
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Valuing Organs — Literally

May 24, 2009 · Leave a Comment

A Case for Donor Compensation

kidney

A horror rock opera with Paris Hilton? The emphasis must be on “a horror.”

Indeed, the futuristic musical, announced by the Associated Press, is about a dystopia in which characters must purchase new organs if they are to survive a plague. It foreshadows the most visceral fears of a market-based organ procurement system – right down to the fear that the organs, once transplanted, could later be repossessed.

Given an ever growing wait list – and death toll – among patients in need of a kidney, such an unrealistic plot risks diverting Americans from the real question: How can we solve the kidney shortage?

The 1984 National Organ Transplant Act (NOTA) prohibits the exchange of organs for “valuable consideration” – cash or in-kind payments. It assigns the market for kidneys a zero price ceiling and almost surely reduces potential supply as a result. Meanwhile, demand for a transplantable kidney is high because the only alternative is dialysis, a relatively poor substitute. The combination of short supply and high demand leaves the wait list at over 72,000 – and growing rapidly. Last year alone, the wait list grew by 5,400. And that growth captures only half of the tragedy. In the next 24 hours, an average of three patients on the wait list will become too sick to transplant; another twelve will die while waiting.

Real solutions to this dire shortage are at hand. Among them are presumed consent for deceased donors and tax relief or other financial incentives for living donors. Advocates of these solutions face an uphill battle against the notions that presumed consent or incentives would undermine human dignity or exploit donors. But even the most vocal of opponents – the National Kidney Foundation prominently among them – acknowledge that donated kidneys save lives.

Enter Mary Ann Baily, a bioethicist with the Hastings Center, who challenges the very foundation that transplanted kidneys save lives.

She recently presented her eye-catching views in The Bioethics Forum, a popular, online blog on which she scoffs at “the many proposals for obtaining more transplantable organs.” After all, she notes, “the number of living donors is growing.”

Baily’s faith in the increase in living donors is woefully misplaced. The number of patients in need of a kidney is growing far faster than the number of donors. Since 2000, the increase in deaths off this waitlist has averaged nearly ten times the increase in living donations. In the last decade, the number of living donors has grown by 75% over the 1995 level; meantime, the number of deaths off the waiting list has grown by a miserably larger 125%.

It’s misleading to tout the rise in living donors, but it’s flat-out wrong to assert that “more living donors are providing organs to people they don’t know.” According to the United Network for Organ Sharing (UNOS), the number of unrelated, anonymous donors has been falling consistently over the last three years. Although there were a mere 84 unrelated, anonymous donors in 2004, there were only 77 in 2005, and 72 in 2006. The unrelated, anonymous donors comprise but 1% of all kidney transplants.

And, like her facts, Baily’s fears are off-base. She criticizes the “rule of rescue,” which relies on a perceived duty to save endangered life in all cases. The problem? Apparently a donor kidney is not a gift of life. She implies that there’s no limit to the length of life on dialysis – the substitute for a kidney transplant. Moreover, Baily fears that the phrase “a gift of life” could “convince society to ignore concerns about whether routinely using living people as organ sources is a good thing.”

But a donor kidney is agood thing — and a gift of life.

What Baily fails to mention is that dialysis is a distinctly imperfect substitute. A study published in The New England Journal of Medicine analyzed over 200,000 patients under age seventy treated for ESRD over a five-year period. The study found that, even after correcting for differences in health before treatment, a transplant recipient lives an average of twenty additional years as compared to a patient put on dialysis. And while the annual death rate in wait-listed patients – most of whom are put on dialysis – is 6.3%, the annual death rate in transplant recipients is just under half as large. As long as an additional twenty years of life – or a near halving of the annual likelihood of death – is considered a substantial contribution to life, living kidney donors are, contrary to some bioethicists’ interpretation, truly giving the “gift of life.”

Interestingly, Baily herself concedes that those “who get kidney transplants do have a longer life expectancy than people who stay on dialysis.” So either her argumentation is inconsistent – in which case readers should be skeptical of her claims – or she excludes higher life expectancy in her definition of “giving life” – in which case she would need to exclude not only kidney donors, but also bone marrow, heart, and lung donors.

Without offering any solutions to the kidney shortage, Baily asks, “Do those advocating for living donation realize how many other ways there are to improve quality of life and increase life expectancy that do not require a step as extreme as surgically removing a living person’s kidney?”

Yet cost-benefit analysis reveals that there are far fewer than the optimal quantity of kidney donations. In fact, the marginal costs to additional kidney transplants would likely be negative:Additional transplants save money as compared to dialysis – estimates range from between $60,000 to $250,000 per patient over a five-year period. In all, Americans currently spend about $11.1 billion annually on dialysis. Even with the low-end estimate, if the over 72,000 renal patients on the waitlist could each receive a kidney, the ESRD program, which covers treatment costs, would cut costs by nearly half – saving Medicare over $4 billion.[1][1]

And while it is true that some burden would inevitably be borne by the donors, they could – and should – be compensated for their donation. These costs would average markedly less than the money saved with each transplant.

The only qualm with using the expression “gift of life” to describe donor kidneys ought to lie not with the word “life,” but rather with the limiting word “gift.” As evidenced by the unnecesarily long waitlist for kidneys alone, the “gift” of life does not incentivize enough living donors. The “gift” must thus be complemented by other mechanisms, including valuable consideration. Ms. Hilton’s character may portray incentivized kidney donation as horrific, but the true horrors lie with the thousands of annual deaths that could – and should – be averted.

Categories: Health Econ
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Snacks that Slim — Starting with Your Pocketbook

May 24, 2009 · Leave a Comment

Why your future self will appreciate those smaller, seemingly overpriced treats.

oreo

While the snack industry grew a mere three percent last year, the 100-calorie pack industry within it swelled nearly ten times as much, with annual sales reaching $20 million.

But the snack-pack attack cannot be attributed to value. Sweet or salty, the small servings are sourly priced. On a per-ounce basis, the Oreo 100-calorie packs sell for almost three times as much as regularly packaged Oreos. And while 100-calorie packs of Sunshine Cheez-Its go for $11 per pound, a pound in traditional packaging is a relative steal at only $4. Compared to a 6.5-ounce tube of Pringles, the 100-calorie pack has more than a 200 percent premium on a per–pound basis. A pound of lead and a pound of gold understandably sell for different prices. But how does mini-packaging magically transform lead into gold?

The higher price of snack packs cannot be attributed merely to higher packaging costs. Although individual packaging certainly boosts manufacturing costs — and imposes additional costs on the environment — consumers pay more than enough to swallow the differences. On single-serving packs, snack companies are left reaping 20 percent higher profits.

So there must be something else in those little packs that gives consumers big utility.

The higher price of snack packs cannot be attributed merely to higher packaging costs.

Is it convenience? As one report put it, people “pay extra for products they perceive as making their lives easier.” It’s true that we buy salmon or beef steaks instead of whole animals and “baby carrots” or broccoli florets instead of whole vegetables. After all, our time is valuable.

But American bloggers consistently report that it’s not just laziness keeping them from doing the portion control themselves. As one blogger admits, if forced to bag single portions, “I’d probably be tempted to snack while I bag.” Why would he be tempted to snack if he’s clearly portioning for weight loss?

Enter the theory of time inconsistency. Time inconsistency assumes that an individual has different preferences at different stages of life. My future self, for example, wants me to eat at most two Oreos this afternoon because she doesn’t want to suffer from obesity, hypertension, or low self-image. Yet my present self craves the sweet sensation and subsequent sugar-high of mindless noshing.

This wouldn’t be a problem if we could perfectly balance the interests of our present and future selves. Yet economists have found that individuals tend to put a disproportionate amount of weight on their present utility – and thus on their hinnies. This leaves us occasionally binging on Oreos; and, on the aggregate, it leaves us worse off.

The time inconsistency model can be applied not only to weight control, but also to procrastination and to addictions, such as smoking. Although a smoker’s future self does not want lung cancer, his present self craves the nicotine high. Eighty percent of American smokers want to quit. Yet because most individuals tend to overvalue their current desires, many who want to quit don’t. And this comes at a high cost to the smokers themselves.

Herein lies the rational for an excise tax. Even putting aside the negative externalities of second-hand smoke, cigarette taxes can benefit society by helping smokers find the will to quit: the higher prices of taxed cigarettes may provide additional incentive to overcome their addiction. Surprisingly, then, excise taxes on cigarettes may actually make smokers better off. Data from long-run surveys in the U.S. and Canada say that smokers have a self-reported greater well-being when cigarette taxes are raised. And state representatives are listening. As of August 1, Delaware raised its tax rate on cigarettes to $1.15 per pack, putting it just above the overall states’ average of $1.07.

Similarly, countless American bloggers report being better-off despite having to pay more for snack packs. On The Consumerist one blogger writes, “Buying the 100 calorie packs has helped me curb my overeating habits tremendously.” How so? Another blogger explains, “The experience of ripping open another package really hammers home that you’re eating more and more.”

A two-hundred percent premium seems like a hefty price to pay for slimness. But what’s the relevant comparison? Perhaps the diet and weight control supplements on which Americans spend over $1.3 billion each year; or the over $2.4 billion spent annually in America treating obesity; or the $9 billion annual indirect costs of obesity (including lost work productivity and unemployment). Paying higher snack prices for smaller servings may be a form not only of self-control, but also of preventive medicine. If we splurge on the snack packs today, our future selves may thank us.

Seven years ago, DC joined the rest of the United States in eliminating its snack tax. But does the time inconsistency model imply that the states should return to taxing snack food just as they tax cigarettes?

Not necessarily. It’s not clear that it’s the higher prices – as opposed to the smaller portions – that are making snack packers practice moderation. Therefore, without the portion control, there’s no reason to assume that snackers’ consumption would fall with rising price. To the contrary, the ballooning sales of snack-packs – and waistlines – amid ballooning prices indicate that the demand for snacks isn’t very sensitive to price after all.

And snack taxes have their downsides, mainly that they’re terribly regressive. In 2004, households with annual incomes below $10,000 spent 12 percent on snack food, while those with annual incomes above $70,000 spent only 1 percent. That means that a snack tax would hit the poorest hardest. So until we figure out the extent to which higher snack food prices could discourage overeating and prevent obesity, we’d be wise to continue to keep state snack taxes at bay.

In the meantime, though, feel free to tax yourself. Spend big on those little packs. It just may slim you – in addition to your pocketbook. After all, as any Pringles eater well knows, “Once you pop you can’t stop” – at least not until you reach the bottom.

Categories: Health Econ
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