David R. Henderson  

Great Moments in Health Economics

Obama's CEA on Adverse Selecti... Economic Naivete...

From President Obama's Council of Economic Advisers, "The Economic Case for Health Reform," June 2009:

In medicine, however, technological progress in recent decades has been almost exclusively cost-increasing, without generating a commensurate increase in value. Undoubtedly, provider incentives, which largely reward finding an expensive way of treating a previously untreated condition rather than finding a less costly alternative to an existing treatment, contribute to this trend. (p.20)

In other words, an example of technological progress that increases costs without generating a commensurate increase in value is a new expensive way to treat a condition, sometimes a disease, for which no treatment had existed. Like AIDS? Polio? Parkinson's? Alzheimer's? For virtually every disease, there was some point in time at which it was not treatable. And some of them are treatable. This is generally a good thing.

Surely, given the incentives in the insurance system, the CEA may be right to point to new ways to treat previously untreated diseases that, even though beneficial, are not worth it. But to cavalierly make the statement that curing previously untreated disease is not worth it is breathtaking.

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The author at Health Care BS in a related article titled When Smart Economists Say Stupid Things writes:
    David Henderson points out an exceptionally foolish assertion from “The Economic Case for Health Reform,” produced by¬†Obama’s Council of Economic Advisers. Here’s the CEA money quote: In medicine, however, technological progres... [Tracked on October 20, 2009 8:51 PM]
COMMENTS (11 to date)
Yancey Ward writes:

Whoever wrote that should be embarrassed to have that in print, but I suspect that they really didn't understand what it is they were writing.

Elvin writes:

Wouldn't the cost of treatment before the technology be infinity? Didn't you praise Greg Mankiw a couple of months ago for pointing this out?

Jason Briggeman writes:

You seem to be reading "previously untreated" as "previously untreatable," but I interpret "a previously untreated condition" to mean a treatable condition that a patient had not been treating, e.g., because s/he hadn't yet had it diagnosed. In my interpretation, the writer is saying that providers have more incentive to diagnose and treat additional patient conditions than to replace already-implemented treatment regimens with cheaper alternative regimens.

Jacob Oost writes:

Hmm, my first read of that quote paragraph left me with a different impression. I thought "previously untreated" things referred to more trivial and less life-threatening health doohickeys, like baldness, impotence, etc.

David R. Henderson writes:

You wrote:
Wouldn't the cost of treatment before the technology be infinity? Didn't you praise Greg Mankiw a couple of months ago for pointing this out?
Yes on both. You're a careful reader. I thought of mentioning this but I wanted to focus on the thing I focused on.

Sheldon Richman writes:

The horribly written passage reminds me that the patent system rewards slight but expensive tweaks in drugs simply to keep maintain the monopoly for drug companies. I don't suppose the CEA was calling for the elimination of the patent system. Now that would be something to cheer.

Pete writes:

Please be careful - in your last line you say "curing previously untreated disease is not worth it", when the CEA never says anything about cures, at least in the part you excerpt. This one-word switch - curing instead of treating - changes my understanding of your post.

Nonetheless I agree with your overall point... if we are developing new treatments for diseases we are certainly doing a service to the public at large.

gnat writes:

I read the study as saying that without productivity -increasing technological change in healthcare, e.g increasing GDP per capita cost, cost increases will outrun income. Treaments for AIDS, Polio, Parkinson's and Alzheimer's might well be productivity-increasing.

Mr. Econotarian writes:

If you are paying with your own money, you will be less likely to purchase treatment whose cost is greater than your own benefit.

Dr. T writes:

"In medicine, however, technological progress in recent decades has been almost exclusively cost-increasing, without generating a commensurate increase in value."

This is an example of the "Big Lie" spoken of in Nazi Germany propaganda discussions.

I guess that we in the medical field just invented and used expensive new ways to achieve the same outcomes as in the 1970s. Apparently, modern "demand" pacemakers aren't better than the old ones that had just one pace, laparoscopic surgery through small incisions is no better than opening bellies or chests, transplanted organs are no better than slow deaths from organ failures, costly chemotherapy with 90% cure rates is no better than chemotherapies with 40% cure rates, smashing kidney stones with ultrasound is no better than doing open surgery, replacing wrecked hips with artificial ones is no better than leaving patients wheelchair-bound, etc.

And the provider incentives statements also are crap. Yes, there is money in devising a therapy for a previously untreatable disease. (And, why shouldn't there be?) But, there is also heavy competition for lowering costs of existing treatments. Eye correction surgery today costs much less than in the 1990s. So do CAT scanners. There is much competition in the development and marketing of cheap generic drugs. Routine laboratory tests cost substantially less (on a fixed dollar basis) than thirty years ago due to new technologies and automation.

The Council of Economics Advisors seems to be a group that will spit out the highly biased "reports" that Obama wants. I have seen nothing objective and rational from this CEA.

TDK writes:

I really hope the author of that article did not mean that research on curing new diseases has a higher opportunity cost than trying to find cheaper alternatives to medicine that already exists. Obviously both are important especially with the rising health care costs and unemployment the way it is. But to infer that lower costs are of greater importance than saving lives is unbelievable.

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