Monday, November 13, 2006

"Price" vs. "Cost:" The Case of AIDS Treatment

by Tom Bozzo

An item inside yesterday's NY Times reported the remarkable progress made towards making HIV infections a treatable chronic disease — for the rich world, anyway. The lede:
An American found to have the virus that causes AIDS can expect to live for about 24 years on average, and the cost of health care over that time is more than $600,000, new research indicates. [emphasis added]
This is an occupationally-driven pet peeve, but the use of "cost" there is malapropos. With two-thirds of the "cost" driven by antiretroviral drugs, the price of care has relatively little connection with its cost.

As Dean Baker often notes, if drug patent monopoly markups were taxes, economists all over the political spectrum would be manning the barricades over the resulting tax distortions. That the markup covers desirable research expenses is only a partial defense, since Baker also observes that the private research yield for drug markup dollars is pretty low: those dollars are also competing with general corporate overheads, reminding relatively well-to-do middle-aged men of their options for erectile dysfunction treatment, etc.

Then there's the late fashion of pricing life-saving drugs as the market will bear — i.e., the brink of revolt by desperate patients and their insurers. You can see this practice defended because the effects of the drugs are so great, or perhaps because it's reflecting "market valuations" of the products. But the ability to charge what the market will bear is not a market outcome, so arguments via free-market "justice" don't apply.

What's interesting is that the price of the basic HIV drug cocktail is within sight of what's bearable given typical health insurance premiums (which are pretty unbearable). The underlying economic cost looks to be no worse than that for various other common chronic conditions, once you figure that the $1,000/month price of the cocktail is almost all markup.

Another interesting thing in the article is that it says that only about 45% of U.S. HIV patients actually got the antiretroviral cocktail per a 2003 survey. Thus:
“This is really an optimistic [treatment] scenario” in the study, and the true cost is probably lower, said Jennifer Kates, director of H.I.V. policy for the Kaiser Family Foundation. [Emphasis added.]
It would seem that drug pricing makes it appear to be cheaper to get AIDS and die sooner than to have an extended period of relatively good health on the drug cocktail. I leave as an exercise whether the true (social, economic) cost of state-of-the-art HIV treatments really is higher than that of non-treatment.
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