The Marginal Benefit and Marginal Cost of Drugs and Other Treatments

Dean Baker and Mark Thoma separately point to two discussions with a common theme. Dean points to an article by Barnaby Feder that suggests stents may be no more effective than certain drugs at keeping coronary blood vessels open:

Angioplasty with stenting generally costs $25,000 and up. The latest drug-coated stents cost $2,200 apiece and are especially effective at preserving the channel created by angioplasty.

I chose to emphasize the cost differential as Dean chose to write:

Many people, even in the United States, do not take the medically optimal mix of drugs because they are expensive. They often do without drugs that are needed, or don’t take them in the proper dosage. This leads to substantial inefficiencies in the form of sickness and unnecessary death. As I have written here and elsewhere, there are alternative mechanisms for financing prescription drug research. What I can’t understand is, given the enormous stakes involved, why isn’t half of the economics profession examining this issue?

He’s correct that the price of drugs is often many multiples of the marginal cost for producing such drugs. Of course, defenders of the patent system will argue that examining production costs ignores the tremendous cost of R&D. But let’s turn to Mark’s article, which was written by Daniel Costello of the Los Angeles Times:

On Tuesday, the Food and Drug Administration approved GlaxoSmithKline’s Tykerb, a once-a-day pill for late-stage breast cancer patients that costs nearly $35,000 a year. It’s the latest of half a dozen new cancer therapies with names such as Avastin and Tarceva that can run as much as $100,000 for an annual supply. Although the medications work much longer in some patients, they help extend the lives of most for only a few months. The drugs’ sky-high costs compared with their relatively small health benefits have sparked arguments among policymakers and medical professionals about what to do with the growing number of people who are depleting their life savings on the drugs or, worse, who can’t get them at all.

This example raises the point Dean is trying to make quite clearly. Mark’s comments sort of go back to the stent controversy:

My family faced this choice a couple of weeks ago. I wasn’t part of the decision, but my observation from listening to those who were is that they fell ill-equipped to evaluate the benefits of treatment and there was considerable uncertainty over what choice was best … More generally, to me life is not just another good to be allocated by the price system and it bothers me that how long you live may depend upon how much wealth you manage to inherit or accumulate.

Whether or not to keep the patent system and whether families are well equipped to make decisions as to which medical treatments to purchase are not exactly questions well answered by the Econ 101 notion that laissez faire is best.