Market Power

Repealing the Laws of Demand and Supply - Prescription Drug Edition

From the AP (ia Chris Tozzo).

Sen. Charles E. Schumer, D-N.Y., said he's proposing a bill that that would give the U.S. Department of Justice authority to crack down on "unscrupulous drug distributors" who sell hospitals life-saving prescription medicines in short supply at huge markups.

The problem has been growing this year, as shortages have dramatically worsened for normally cheap generic injected medicines that are the lifeblood of hospitals: drugs for cancer, pain, infections, even liquid nutrition and anesthesia for surgery.

The problem, of course, is there is a shortage of some medicines likely due to supply having decreased and when there is a shortage, the market price will rise.  If the price is not allowed to rise, then people will try to find some other way - another rationing mechanism - to get their medicine.  Rationing by waiting, black markets, and bribery are all common non-price rationing mechanisms that arise when prices aren't allowed to rise.  It's not at all clear that human behavior under these mechanisms is less "unscrupulous" than under the price system.  In fact, I believe all Mr. Schumer's bill would do if passed is make the problem worse, not better.

Smoking, Tobacco Taxes, and Obesity

Wesley Smith writing at Weekly Standard (via Craig Newmark):

No lifestyle crisis is complete without villains to punish. Just as global-warming fighters want to tax carbon dioxide-producing industries and activities, the anti-obesity campaign calls for taxes on tobacco, alcohol, and “unhealthy food and beverages.” And in places like the United States where it is difficult to restrict speech, “corporate tax deductibility of advertising costs for unhealthy foods” should be eliminated to prevent the obesity pushers from promoting their toxic wares to the helpless masses.

From the Mayo Clinic:

It's fairly common to gain weight after you stop smoking, especially in the first few months — but it isn't inevitable.

Smoking acts as an appetite suppressant and may slightly increase your metabolism as well. When you quit smoking, your appetite and metabolism return to normal — which may lead you to eat more and burn fewer calories. Also, your ability to smell and taste food improves after you quit smoking. This can make food more appealing, which may lead you to eat more. And if you substitute snacking for smoking, the calories may quickly add up.

So we want people to quit smoking so they'll lose weight, but if they quit smoking they'll gain weight.  If anything, obesity fighters should advocate cutting taxes on cigarettes to encourage people to smoke.

Related story:  my grandfather was a big man and a heavy smoker.  In the 60's, his doctor encouraged him to quit smoking so he would live longer.  But he gained so much weight after he quit that his doctor later told him to go back to smoking so he'd live longer.  He eventually died of a heart attack

Vaccines and Positive Externalities

Parents who decline vaccines may not realize that they're gambling with the lives of not just their kids, but all the children around them, says Patsy Stinchfield, director of pediatric infectious disease at Children's Hospitals and Clinics of Minnesota, where Landon was treated. Measles can kill by causing pneumonia, brain inflammation and other complications, Stinchfield says. Babies too young to be vaccinated and people with compromised immune systems, such as those with cancer, are especially vulnerable. They rely on others around them to keep the virus out of circulation, a phenomenon known as "herd immunity," which protects even those who can't be vaccinated, she says.

Story here.  The article notes that the incidence of measles, while still low in an absolute sense, has seen a spike this year.  There have been, so far, 152 diagnosed cases of measles this year.  Suprisingly, Minnesota leads the way with 23 documented cases followed by New York (21 cases) and California and Massachusetts (17 each).

In my Micro Principles class, I use vaccines against infectious diseases as examples of products with a positive externality.  The quoted paragraph above makes it clear why: when a person gets a vaccine against, say, measles, not only does he lower the chance he'll get the measles but he lowers the chance that someone else will get the measles

When a product has such an externality, there is an efficiency argument to be made for government intervention in the market for the product.  The intervention can take many forms, including the subsidization of the production/consumption of the product, requirements to consume the product, and government provision of the product.  What the most efficient form is depends on the particular situation.

HT to Christopher Tozzo for the link.

New Vaccine Blog

A high school classmate of mine, Karie Youngdahl, and one of her colleagues have started a new blog called The History of Vaccines Blog.  Here is the initial post:

 The History of Vaccines is an informational, educational website being developed by The College of Physicians of Philadelphia, the oldest medical association in the United States. A group of prominent Philadelphia physicians, including Declaration of Independence signer Benjamin Rush, established the College in 1787 “to advance the science of medicine and to thereby lessen human misery.”

Today, the College’s mission is to advance the cause of health, while upholding the ideals and heritage of medicine. All aspects of the College—its physician Fellows, its Historical Medical Library, and the world-renowned Mütter Museum—serve this mission.

The College is creating The History of Vaccines to provide a living, changing chronicle of the compelling history of vaccination, from pre-Jennerian variolation practices, to the defeat of polio in the Western Hemisphere, to cutting-edge approaches to vaccination for cancer, atherosclerosis, and addiction. This site will increase public knowledge and understanding of the ways in which vaccines work, how they have been developed, and the role they play in the improvement of human health.

A full-featured site will launch in late September 2010. Until then, this blog and our multimediahistory of smallpox vaccination timeline feature our ongoing work, show our intentions for the complete site, and communicate with our audiences.

For more information about the project, see About.

"Given this history, what reason is there to suppose that Obamacare is a good idea?"

I copy and paste an entire Don Boudreaux letter to two NPR reporters because it is so good:

Ms. Chana Joffe-Walt and Mr. David Kestenbaum
All Things Considered
National Public Radio

Dear Ms. Joffe-Walt and Mr. Kestenbaum:

Your excellent February 26, 2010, report on the history of how government officials chose the different methods that Medicare has used over the years to determine doctors’ pay is frightening because…

… in your report, Joe Califano, a chief architect of Medicare, admits that the first method of determining doctors’ pay was chosen for political reasons, namely, to buy doctors’ support for Medicare.

… you report that Mr. Califano, LBJ, and Congress were genuinely surprised by the rapid cost increases sparked by this first method.

… you reveal that much of the treatment that Medicare paid for was previously provided free by physicians; that is, Medicare crowded out a sizable chunk of private-sector philanthropy.

… you tell how attempts to change this first method of paying doctors were deeply influenced by skilled lobbyists working on behalf of doctors.

… in describing the development of the method currently used for determining doctors’ pay, you (perhaps without realizing it) reveal that this current method is the product of a comically childish labor-theory-of-value analysis – the same sort of analysis that is at the foundation of Marxian economics.

… your report ends with the admission that, because the current method isn’t working so well, Uncle Sam – 45 years after Medicare was launched – is still searching for a sound method for determining physicians’ pay.

Given this history, what reason is there to suppose that Obamacare is a good idea?

Sincerely,
Donald J. Boudreaux
Professor of Economics
George Mason University
Fairfax, VA 22030

Once such things get passed into law, special interests begin lurching out of the cracks in the woodwork and it becomes very difficult to get the legislation repealed.  Instead, we seem to look for band-aid approaches to fix what ails us. 

In a better world, doctors would be paid the same way that professional baseball players are paid:  with attention to what they do for their patients and how much their patients are willing to pay for the doctors' services.  We economists have a name for that:  Marginal Revenue Product.

"A Better Way to Reform Healthcare": Heed Milton Friedman Part Deux

In a recent post, I linked to a WSJ cloumn by John Cogan, Glenn Hubbard, and Daniel Kessler on market-based ways to reform healthcare.  In this post, I want to point out an extension of the recommendation I wrote about yesterday:  eeliminating the tax-preferred status of health care premiums paid by the employer.

The point of the previous post was that the employer-based insurance system used in the US today essentially health care expenditures off on third parties:  Milton Friedman's notion of "other people."  Since other people are paying the bulk of our health care consumption, we tend to use more of it than we otherwise would.  This pushes up the demand for health care, increasing the overall costs on health care.  Tom rightly noted in the comments that it's an example of the shared restaurant bill effect:  if I'm dining at the local restaurant and I find out that the cost of my dinner will be shared by me and everyone else in the restaurant, I'm going for the awesome T-bone!  Otherwise I might content myself with a sirloin steak.

Spencer critiqued that by making people pay their own way, that it would be more expensive.  Not necessarily.  The costs, as it now plays out, are mostly hidden from the health care consumer.  But they are no less there, in the form of longer waits in emergency rooms and office visits and mistakes by overworked pharmacy staff for example. 

Nevermind that much of what we use "insurance" for is stuff that really does not need to be insured against.  When we insure ourselves against something, we are insuring against some sort of unforeseen casualty:  a house fire, flood, or a car accident.  These events are difficult to budget and plan for because, well, they are unforeseen, and having insurance helps us financially prepare for them.

But health insurance is quite another matter.  Yes, we are insured against things like sports injuries and strokes.  But insurance pays for many things that are not in any way, shape, or form unforeseen.  I have heart disease in my family.  My grandfather, father, and uncle have all died from heart disease (my father at the age of 44).  I have been diagnosed with high cholesterol and high blood pressure.  Both are thankfully under control with the medication my doctor has prescribed.  The fact that I am going to  have to go to Walgreens and get a prescription refilled is not an unforseen event.  The fact that I have to go to the lab to have my blood tested is also not an unforeseen event.  I know well and good that it's going to happen and I could surely plan financially for my visits to Walgreens and my doctor.  But my insurance pays for the medication and my office visit, so it's really not insurance at all since it's not being used to pay for an unforeseen event.

But there is another thing that the employer based insurance system does that hurts the overall economy over and above the effect that it has on overall health care costs.  It tends to make us more tied down to our jobs.  How often have you heard people say that they don't want to leave their employer because they don't want to lose their health insurance?

One of the engines of economic growth is labor mobility.  Frictional unemployment is that type of unemployment when people are between jobs.  It's often thought of as a necessary type of unemployment because people never know if they will really like a particular job until they start the job.  By leaving one job and searching for another, people can match themselves better with their employer.  But while they are unemployed, they are said to be frictionally unemployed.  This is one reason why an unemployment rate of zero is not thought of as something a government should target.  It is better to give people the freedom to be able to leave their employers when they feel they have a better match elsewhere. 

But with the tax-preferred status of health insurance, people become more tied down to their jobs than otherwise.  They don't leave their jobs to find better jobs.  Moreover, the law keeps some would-be entrepreneurs from taking risks and setting up new businesses.  It's a shame if the only reason a person stays in a job is because of the insurance plan, but that's a shame we have to live with because of the tax-preferred status of health premiums.

Now I realize that it probably isn't practical to simply eliminate the tax bias on health premiums or to otherwise equalize the tax bias.  I also realize that it is likely that any politician who stumped with this in his/her platform would probably be portrayed as someone who wanted to take away people's health benefits, even though that is an unfair portrayal.  It's not something that is going to happen overnight, but it's something that needs to be considered.

In a more just world, that person should have the freedom to choose her own health insurance plan and one that fits her as well as possible.  But the tax-preferred status of health insurance premiums actually robs people of this liberty.  Where's the justice in that?

"A Better Way to Reform Healthcare": Heed Milton Friedman

John Cogan, Glenn Hubbard, and Daniel Kessler discuss market-based ways of reforming health care. 

One of Cogan, Hubbard, and Kessler's primary suggestions to control costs is to get rid of the tax-preferred status of paying people in health insurance dollars.  

Milton Friedman said that it's easier to spend other people's money on yourself.  This is exactly what the current tax-preferred status of health insurance premiums does.  We work and get paid partially in health care premiums because typical money wages are taxed and health care premiums are not.  When someone decides whether to go to the doctor, he compares the value the office visit gives him to his co-payment.  It doesn't matter whether the overall cost of the doctor's visit is $100, $1000, or $10,000. As long as the person's value of the visit to the doctor is more than the co-pay, he goes.  "Other people" pay the balance.

Taken society-wide, we probably tend to go more often than we otherwise would, putting more pressure on health care resources and pushing up costs more than is optimal.  The tax-preferred status of health care premiums have the effect of raising the demand for health care (assuming health care is a normal good).  Eliminating the tax-preferred status of health insurance premiums would be a useful way to bring these costs under control.

Congress Contemplates Legislation to Increase the Supply of Doctors

Rather than let the market work its magic, Congress feels that it needs to craft legislation that supposedly will help increase the supply of primary care doctors.

A handful of Democratic senators are pushing to change pending health-care legislation so that it would help increase the country's stock of primary-care doctors, heeding warnings that the bill may exacerbate the difficulty some Americans already have in finding a doctor.

More than 30 million Americans would get health insurance under the health-care overhaul that passed through the House and a similar bill moving forward in the Senate. If that does indeed happen, many previously uninsured people who haven't had a regular doctor before will need a primary-care physician. Demand would also likely increase for nurse practitioners and general surgeons.

Here's a thought:  how about getting their mitts out of the healthcare industry?  I realize that's a pipe dream, but its a pipe dream that needs to be noted.

Price Ceilings and Queues

It's well known in economics that when price ceilings are in effect, leading to shortages, other rationing systems come into place.  Queues are one example.  I ask my students if price ceilings help direct a good to people who can't afford it.  My answer is no, not necessarily.  I ask them what if the only non-price rationing system was a queue.  Wouldn't that ensure that the least fortunate (those with the lowest value of time) get the good.  My answer is no, not necessarily.  Why?  Because those with a higher value for time can (if they have the cash) can pay others to wait in line for them.  But does this really happen.

Um, yeah.

An unemployed Gatineau man has been doing a modest but steady business in the past week by standing in line at flu clinics for people who can’t line up themselves.

And he says the city’s security measures haven’t slowed him down.

For $15 an hour, the man who calls himself Johnny Z lines up for hours to get the ticket, or more recently the wristband, that entitles the wearer to a flu shot.

The person who hires him takes his wristband and comes to the clinic for a shot later in the day.

From Canada, hat tip to Tyler Cowen. I saw kids do this for World Series tickets for scalpers in Los Angeles many years ago (sorry, Angel and Dogder fans!) sometimes getting in line before midnight for a sale the following morning. The Canadian health system tried to switch from tickets to wristbands to restrict reselling, but Johnny's found a workaround for that.

Goods and services tend to go to those most willing and able to pay for them.  Limiting the ability of prices to ration goods doesn't change this tendency.  It drives people to find ways around the rules, just like water always tries to get around barriers keeping it from seeking the deep.

Why Is the H1N1 Vaccine So Slow to Market in the US?

While the H1N1 flu virus seems to be running its course here in Minnesota and in other parts of the US, the vaccine for the virus hasn't even hit the market.  It's quite possible that the course will be run before the vaccines even come out. 

Even though many will no doubt blame the private companies that are producing the vaccines for being so slow, Scott Gottlieb argues that it's the US regulatory process that is to blame for the snail's pace.  Part of this could be the fear that regulators will get much more blame for things that go wrong than they will get in praise if things go right.

I can't say for sure, but both of my kids had H1N1 flu-like symptoms - fatigue, fever (103.5 for one, 100+ for the other), persistent cough - three weeks ago.  My wife had mild symptoms soon after that.  My mom and I, so far, haven't had any symptoms.