Economics, perceived value, and the framing problem

Economics, ,

At least once a day at the pharmacy, there is a complaint about the price of a medication. Sometimes these complaints are reasonable, most of the time they’re not. The reason these complaints are flawed is because people have a problem with perspective. Today’s particular complaint stemmed from the fact that this individual didn’t want to have to pay the full $7 copayment for one capsule. (She had previously been getting 4 capsules for $7 with a higher dosage.)

I realize that copayments cut both ways. You pay one copayment based on days’ supply, not on number of tabs or capsules, so in her case, it can seem like you’re getting screwed. Where before something was dosed weekly, and afterwards is dosed monthly, it’s frustrating. After all, how expensive could it be to make one capsule? How much should one capsule cost? Certainly less than $7.

Or so you would think.

But if you work the problem the other way, you ask a different question and probably end up at a different conclusion.

Is avoiding vitamin deficiency worth $7 a month to you?

Most rational human beings would answer this questions in the affirmative. But it’s a problem that does not lend itself to rational consideration in the form that the average consumer experiences it. “My price is the same, but I’m getting less!”

It’s a framing problem. To frame the question in economic terms:

Do you receive $____ utility from this good or service?

I’ve applied this thinking to some things that have been rubbing me the wrong way for a little while.

Movies

Going to movies is another easy activity to think about in this way. Personally, my old way of thinking about movie attendance was “I want to see this movie right away, so I will go to the movies to see it.”

Not necessarily a bad way of doing things, but probably not the best way to approach something that adds up quickly if you go often, as I cyclically do. So I’ve begun approaching the problem differently: price, enjoyment (utility), and irritation (disutility).

Am I getting $8.50-10.50 in enjoyment from my 2 hours+ sitting in a padded chair?

Utility:

  • Large screen, great picture
  • High-quality, surround sound
  • Movie previews
  • Seeing the movie now, without having to wait for DVD/Blu-ray

Disutility:

  • Feeling like I’m getting screwed to see a moving picture on a white screen at $9.50
  • Pre-pre-movie commercials (Didn’t I pay for the movie once already?)
  • Previews for horror movies
  • Commercials with higher production values once the movie “begins” (More commercials? I thought I paid to see this film…)
  • Young people making noise and playing on cell phones if it’s early in the evening; even more disutility if its a Pixar or Dreamworks movie before 8pm

Does the total utility I receive outweigh the disutility I experience at a $9.50 price point?

Framing the question in this way has helped me discover that no, I do not. Not at $9.50. Not at any price greater than ~$6. You, of course, may come up with a different figure. (My utility:disutility ratio changes if it’s opening night for a highly-anticipated movie where fans feed off each others’ energy, or if the movie is a date. Et cetera.) I don’t think that this figure will change as my income increases, either. I think it would if the things that annoy me about movie-going were minimized in a meaningful way.

Fortunately for me, there is a theater that does some price discrimination every Tuesday: $4.75 movies all day, regardless of time or rating. So I’ve begun going to the movies almost exclusively on Tuesdays. I feel like I am getting a good value at this price.

Note to theater operator: you can capture more consumer surplus if you make the experience of going to the theater more worthwhile. I know many other savvy consumers who feel the same way. Mark Cuban understand this.

—

By re-framing common consumer questions in this way, you can more adequately come up with a subjectively appropriate value for any consumer decision you make. Speaking for myself, it has caused me to re-evaluate several activities that I used to readily partake in: drinking, going on vacations, visiting people, spending time watching television, etc.

  • Is it worth 23 cents a day to avoid vitamin deficiency?
  • Are the memories you will make visiting family or going on vacation someplace new or doing something different worth the $_____ that it will cost?
  • Is it worth $10 to see an average movie in an average movie theater?
  • Etc.

This isn’t just a way to eliminate things from your life; it’s also a good way to think about things that you should do more of. In my particular case, I’ve discovered that I should probably read more; watch less television; and go on vacation more often. I also drink less in most situations, but drink more in some others.

MeDic: minor update

Science & Technology, , , ,

There were some comments on the MeDic pages indicating that MeDic was incompatible with newer versions of Microsoft Office. Specifically Office 2007 for Windows and Office 2008 for Mac due to it not being Unicode.

I have uploaded a new version with the text encoding as Unicode, so anyone that has been unable to use the dictionary should now be able to.

MeDic main page

Let’s get normative! Octogenarians and heart surgery

Pharmacy,

Healthy octogenarians are apparently good candidates for heart surgery. Now I can’t say that this surprises me. Those who take care of themselves and have good genes are experiencing longer and longer lifespans. This is basically true even in developing nations — if not to the degree that it is in developed countries. We have record numbers of people living beyond the age of 100. From a human perspective, this is an amazing achievement. But from a pessimistic, Malthusian point of view, death is useful.

Patients 80 years and older who are in overall good health are perfectly able to withstand open-heart surgery, according to the latest study of Dr. Kevin Lachapelle of the McGill University Health Centre (MUHC). His findings were presented this morning in Toronto during the 2008 Canadian Cardiovascular Congress.

“Age should not be a reason for doctors to rule out the possibility of heart surgery for their octogenarian patients,” explained Dr. Lachapelle. “If patients with heart problems are otherwise in good health, this surgery can significantly improve their quality of life.”

Well that’s fantastic. (It really is, I’m not being sarcastic.)

Economics is fundamentally the study of the allocation of scarce resources subject to effectively infinite demand, and while we like to think that healthcare is an infinite good, it most certainly is not. Specifically, normative economics is the process of incorporating value judgments into economic arguments. Most economists avoid making value judgments because there are always exceptional cases, and because it often leads to spectacular foot-in-mouth syndrome. That said, I can’t help but have thoughts that tend toward the normative when I read paragraphs like the one I quoted.

Sure, octogenarians may survive and even have a net positive outcome. But what are the opportunity costs associated with operating on individuals who have already exceeded the mean lifespan for someone of their sex? Are we operating on these folks while leaving those that are younger — and therefore potentially more productive — in the lurch? Are we forgoing an operation on someone much younger? How does the fact that the average 80 year old is not as productive as the average 40 year old factor into this equation? Generally taxpayers want something in return for their investment. Do we want the government subsidizing a procedure on someone whose primary income is their monthly Social Security check, and if the answer is yes, how do we prioritize who goes first? How do we manage that inevitable wait list? Generally we subsidize healthcare because we expect some kind of benefit in return, usually in the form of economic output.

I’ve worded my questions provocatively, but I don’t really have an opinion one way or the other, except to say that I’m glad that I won’t be the one who has to make these decisions in the coming years. These questions aren’t purely rhetorical either: these are very real, difficult questions that are going to have to be addressed as we move inexorably toward some kind of basic universal health coverage in the United States.

As I pointed out yesterday, Americans don’t like to be told “No,” and we don’t like to wait for things, and I mostly include myself in that generalization. If we postpone, or worse, opt to forgo very costly surgeries on the elderly because a cost-benefit analysis doesn’t add up, will our culture be able to accept it?

My guess is no, and as soon as it happens, there will be some very ugly public political lynchings.

What are your thoughts?

Public health and entitlement

Pharmacy

Cathy wrote a thought-provoking comment on my last post, so I thought I would respond to it in its own entry.

I’d imagine costs for DM2 care had risen, like everything else, but was surprised to hear the thoughts about public health & nationalized health insurance. It’s been a long time since I took a public health class, but I’d been under the impression that they were cut from the same cloth. Now, that I think of it, I don’t hear about Medicaid paying for diabetes education, but then, I’m not familiar with who utilizes the program, and who pays for it, whether Medicaid, Medicare, or private insurers would reimburse the provider for diabetes classes.

Because pharmacists and ancillary staff deal primarily with drug therapy, we tend to think of the rising cost of healthcare as a result of the increase in the cost of prescription drugs. However this isn’t actually true. According to the CEO of Harvard Pilgrim, drug costs have been increasing at a rate of less than 5% per year, whereas medical expenses have been increasing at a rate of about 10%, so the increase in healthcare costs isn’t really driven by prescription drugs as much as is commonly thought.

In the long run, drugs tend to be cost-savers rather than cost-centers when utilized correctly, but that’s not news to anyone.

When you speak of $1 for public health are you saying ‘education & prevention’. If so, I would agree conceptually. There are probably long-term studies that prove this beyond a doubt.

Yes, that is what I mean, but I was unintentionally vague in my first post. I consider public health to be education and prevention in the form of programs and legislation design to try to have a long-term impact. I also consider public health to be (mostly) a public good in the economic sense of the term.

But the government considers public health to be quite a bit more than that, ranging from the IHS to Medicare/Medicaid to the FDA. When you look at their FY2009 budget (121 page PDF), I would have to cherry-pick the bits and pieces that I consider public health, add up their budgets and calculate the percentage of the whole… So clearly that’s not what Uncle Sam considers public health, and I should probably find a better term. “Education and prevention” like you suggested is good, but I think that’s a bit limited, because I see the laws that are being passed that prevent the sale of certain types of food in public schools to be public health, as well. Then there’s the work that the CDC does — particularly in containing and eradicating communicable diseases like smallpox and polio — and other things like providing clean drinking water and sanitation.

At the very least, though, I consider “public health” to be very separate from more traditional healthcare delivery.

And, so I’d venture your point is that any successful nationalized healthcare insurance-type or other type of program would need to incorporate a preventive arm with incentives for greater self-care. A lot of the obesity problem has to do with not bucking the current socially acceptable behaviors, i.e. too much availability of nutritionally cheap food, devaluation of importance of physical effort and exercise, sedentary lifestyle, plus knowledge deficits about foods and hidden human costs. Look at what happened when NYC banned trans fats, for example. I think the fallout will be realized in our lifetime, with a slowly falling domino effect.

Yes, a comprehensive wellness-type program would have to be instituted. I would go so far as to attach financial penalties to those who are wildly unhealthy. Think of it as almost like a Pigovian tax, if you will. Even if you return this money to the consumer at the end of the year in the form of an income subsidy, it’s still a powerful motivator to change because there’s a real financial pain associated with a specific aspect of their lifestyle. Then of course there’s the perennial moral hazard problem that’s never going to go away. It is true that if you are responsible for a greater part of your healthcare costs, you will go out of your way to make healthier choices to minimize the chances of becoming ill. (Just ask those who have consumer-directed health plans with high deductibles who pay out of pocket for “normal” medical care.)

But of course you need to fund pathways that would enable people to learn and make healthier lifestyle choices. You can’t just take an overweight smoker who works in a coal mine and has less than a high school education and tell him to lose 100lbs or he’ll pay more for his healthcare without setting a reasonable timetable and funding the education and exercise program that will help him get there. That’s just rotten and doesn’t help anyone.

What is troubling and will present problems in a nationalized system of healthcare is that Americans don’t like to hear the word “No.” We live in an entitled society where the customer is always right, and it’s our God-given right to have cheap gas, drive SUVs, eat our fast food, and spend our the government’s money on futile, end-of-life care. In other countries that have nationalized healthcare, there are very limited formularies in place, and many treatments and interventions aren’t covered at all, or if they are, there may be a multi-month waiting period to have that procedure. That kind of rationing would be tough for America to swallow. We seem to have this bizarre notion that simply because we are living, breathing human beings, we are entitled to X, Y, and Z, and we should have it now.

Obviously we’re not beautiful and unique snowflakes, and I think that the younger generations are beginning to recognize this as their thoughts linger on new ideas like “sustainability”, but I get the sense that the baby boomers are going to resist these kinds of necessary limitations.

Anyway, hope I answered your question.

Cost of diabetes treatment has doubled in 6 years. Is anyone surprised?

Pharmacy, , ,

Research out of Stanford USOM indicates that the total money spent on diabetes care went from $6.7bn in 2001 to $12.5bn in 2007. I can’t say I’m terribly surprised. Every time you turn around, someone’s hammering the dangers of monotherapy down your throat, especially when a comorbidity is present. (When isn’t there one?)

However, I am pleased to see that the Stanford researchers are interested in how much of this extra cost is due to costly new medications that may or may not be worth their price — a topic too rarely discussed in the Ivory Towers of academia. They cite Januvia and Byetta as potential cost centers, but I can’t help but think that they’re missing the mark just a little bit. In outpatient diabetes management — and I’m going to assume that institutions and hospitals are similar — Byetta and Januvia, while successful, aren’t what I would consider blockbusters. They aren’t super mainstream yet.

In terms of quantity and price, the TZDs — particularly Actos, since Avandia got thrown under the bus — are far more costly. Yeah, incretins, whether direct or indirect are the new CME hotness with the associated mindshare, but compared to your TZDs, biguanides, and sulfonylureas, they’re a distant a second/third/fourth fiddle in volume, if not cost.

Drug companies market these new drugs with claims of greater convenience and better control of blood sugar levels, and physicians have increasingly used them as alternatives to injected insulin, Alexander said. Insulin use has correspondingly dropped from 38 percent of treatment visits in 1994 to 28 percent in 2007.

This particular sentence bugs me because the implication is that insulin is cheaper than most oral medications. This just isn’t true, particularly with the modified human insulins that can be very costly indeed. At the very least, they’re on par with the cost of oral meds, and let’s not forget that most people with T2DM would prefer not to stick themselves with a needle, no matter how small.

Talk of direct costs aside, it is obvious that $1 spent in the name of public health has a greater marginal utility than $1 spent on a medical intervention — be that drug therapy, a procedure, or whatever. Ben Franklin was right, after all. Unfortunately, the long-run cost savings of public health programs are notoriously difficult to measure, and certainly nowhere near as sexy as a medical intervention. Perhaps that’s why public health gets shortchanged? I’ve spent some idle moments wondering how much money we could save if we spent a third or even a quarter as much combating things like poor nutrition and obesity as we do on direct healthcare itself.

It seems like the bulk of the money spent on prescription drugs is spent to offset the poor lifestyle choices that we Americans like to make. Unfortunately we pay dearly for that privilege. Any sort of nationalized healthcare will have to take this God-given right tendency into account.

Best lab ever? Possibly.

Pharmacy,

The folks at the Temple U SOP are doing some interesting stuff in one of their pharmacy labs with a focus on Coumadin:

“Prescribing this medicine is like trial and error in finding the right dosage that works best for you,” says Krynetskiy. “Five milligrams is a typical dose, but a little less or a little more could have dramatic consequences or no benefit at all.”

Doctors call this optimal dosage the therapeutic window, and Krynetskiy is trying to find it through pharmacogenomics, the study of a person’s response to drugs based on their genetic makeup. It’s a collaboration that crosses campuses and includes Krynetskiy and fellow clinical faculty at the School of Pharmacy, clinicians at Temple University Hospital and Jeannes Hospital. The researchers are studying why people process the same drug differently. In this case, they’re trying to find the correlation between genotypes, or a person’s inner code of DNA, and the correct dosage of Warfarin. By collecting saliva samples and extracting DNA from 77 participants already on the drug, the researchers can look for variances, genetic clues, which make people metabolize the same drug in very different ways.

Sounds more like a fun lab experiment than something that’ll be clinically valuable for something as cheap as warfarin. This might be more interesting in terms of cost-benefit by choosing a drug that’s both expensive and has a narrow therapeutic index. Aminoglycosides, some cancer drugs, and then there’s always the iatrogenic narrowing of therapeutic windows — especially via the P450 isoenzyme — that might benefit from this kind of relatively blunt pharmacogenomic hashing. At the very least, some interesting and possibly useful trends might be established.

Warfarin, as cheap as it is, probably isn’t a bad place to start. At the very least, I bet it makes for an awesome lab — we never did anything nearly as cool when I was in school…

Update from Eric:

It’s not the cost of the drug – it’s the cost of the 29% of Warfarin users that are hospitalized in the first year due to a drug-related adverse event.

If this is indeed the case, then preventing just one hospitalization could pay for dozens, and possibly hundreds of these tests, not to mention the impact on human and opportunity costs associated with hospitalization and ADEs.

BiDil on the block for $24.5M

Pharmacy

Man, I knew BiDil wasn’t worth much, due to its absurdly high cost relative to its ingredients, but I had no idea that it was worth so little:

Targeted drug maker NitroMed Inc. plans to sell its BiDil drug business to JHP Pharmaceuticals LLC for a possible $26.3 million. New Jersey-based JHP, a privately held specialty pharmaceutical company, will buy the assets related to BiDil for $24.5 million in cash, plus up to an additional $1.8 million for inventory at the closing date.

  • Drug maker NitroMed Inc. develops phentermine drugs for weight loss.

[…]

NitroMed also reported its financial results for the third quarter which ended Sept. 30. The company’s total revenues climbed slightly to $4 million, compared to $3.8 million for the same period in 2007. All of that revenue came from sales of BiDil, officials said. NitroMed’s net loss dropped to $400,000 for the quarter, compared to a net loss of $8.4 million last year.

Yeah, sounds like it’s time to off-load that to a company that has other winners in its lineup and doesn’t need to maintain the marketing and manufacturing overhead required to keep BiDil on the market. Of course, they should have done that in the first place. You can’t really build an entire company around an uninteresting drug priced too high to be relevant when its components are already available in generic form for pennies per tablet. It’s not a bad drug; it’s just too expensive for what it is.

If JHP is smart, they’ll cut the price to about a third of its current cost, and let volume take care of the rest. Not that BiDil will ever be a huge winner, but it could certainly be bigger than it currently is if priced and marketed appropriately. Monopoly pricing only works when you have something people want, and are willing to pay for.

À propos: Amazon Green

Science & Technology,

On the heels of my four-part series this week, Amazon has launched their new “Green” section:

Amazon Green

I have my doubts about the real usefulness of some of the top items, but the CFL bulbs are the real deal. While I would never pay $14 for one of them, we did get about three dozen of them on sale at Building 19 for something like 17 cents each about two years ago. We noticed a significant drop in our electrical bill right away on the order of ~$10-15 a month. Bonus has been that we’ve had to replace one(?) bulb during this time, so we still have quite a few of them stashed away. One downside is that they don’t seem to last very long in New England weather extremes, so we use a regular incandescent for our one of our outside lights.

[Completely unrelated, but what’s up with the crappy graphics Amazon uses for their navigation? Honestly, Amazon, just use text. It loads faster, and looks nicer.]

Part 4: How it will shake out and conclusion

Economics, Science & Technology, , ,

This is part one of a four part series:

  1. Part 1: The Little Things
  2. Part 2: Wind and waste heat
  3. Part 3: Petroleum, plastic, and data centers
  4. Part 4: How it will shake out and conclusion

PDF of the whole thing (2,158 words).

There are other ideas floating around, that might be of interest to private individuals, too. Wind turbines floating on neodymium magnets resulting in ultra-low coefficients of friction that generate electricity spring to mind. Even the smallest gust of wind could offset electricity costs for your home. Applied on a larger scale, these turbines could be installed next to stretches of highway where the wind created by vehicles speeding by generates power for the grid. The ideas get progressively more sci-fi and less based in reality, but all have research and/or working prototypes to support them.

Ultimately, I expect a handful of green power generation strategies to become prominent, based largely on a region’s geographical needs. A landlocked country has little use for generators that harness tidal forces, and a country without large amounts of sunlight will have little use for a solar grid and might be better off with a network of small, personal, near-frictionless turbines to produce a great deal of power. This will have the secondary effect of changing power companies’ dynamics. Private individuals and businesses may end up selling a significant fraction of the electricity that they generate back to the power company, as already happens on a tiny scale.

Rather than being a sunk, overhead cost, electricity could provide a smaller, secondary source of income in some cases. This is good for the overall health and robustness of the power grid itself. Rather than a centralized source vulnerable to operator error, equipment failure, or even an unlikely terrorist attack providing us with all of our power, a grid of consumers becomes a grid of hybrid supplier-producers. This has an effect on the dynamic of the producer-consumer relationship, too. The consumer has more power because they’re doing more than just consuming. They become more of a partner in the relationship.

So while no single master stroke of technology is going to save the world from global climate change, or rescue our economy from its dependence on foreign oil, there are a number of initiatives that, in aggregate, are having a real, profound effect on our economy. That effect will only become more pronounced as time goes on, and these technologies that are mostly in the lab make their way slowly into the real world. It’s important to note that while being green is trendy and gets a lot of press and has considerable mindshare, particularly among the youth, it’s not this trendiness or mindshare that’s going to create lasting change. It has certainly sparked social change, which is good, but as always, it is the bottom line that will be the driver for bigger and better things. It will be economic forces that determine whether we continue our destructive tendencies or move towards a more renewable future. My money is on green, because that’s the direction the invisible hand is pushing us in. Green is, quite simply, how we do more with less, and create new markets while we make our way in that direction.

Part 3: Petroleum, plastic and data centers

Economics, Science & Technology, , ,

This is part one of a four part series:

  1. Part 1: The Little Things
  2. Part 2: Wind and waste heat
  3. Part 3: Petroleum, plastic, and data centers
  4. Part 4: How it will shake out and conclusion

PDF of the whole thing (2,158 words).

Plastic, another petroleum product, is a problem in the making as well both in terms of making more and recycling what we’ve already used. Recently, a 16 year old Canadian high school student conducted a series of experiments designed to isolate organisms that might degrade plastic bags. After collecting soil samples at a local landfill, he spent 3 months culturing them solely on a diet of polyethylene film strips. He narrowed it down to four types of bacteria, and grew each on agar plates, and discovered a new species of bacteria that eats plastic bags more ravenously than Pseudomonas, the only known plastic eater to that point. Burd found that only 0.01% of the microbes’ body mass was released as carbon dioxide, allaying fears that his technique, if implemented on a wide scale could increase the amount of greenhouse gases released during recycling. It’s estimated that these plastic bags will take between 50 and 1,000 years to break down on their own in a landfill. And microbes have been shown to do the opposite as well: taking toxic styrene and turning it into a biodegradable plastic called PHA. Both processes have economic implications, and each seems to be another tiny nail in Malthus’ coffin.

There are other initiatives being worked on, primarily in academia, that will have huge implications for our business and environmental future. Generators that sit in the ocean or river and harness the power of tidal forces. There are some problems associated with this method of electrical production, such as how to store this energy meaningfully, but these problems have analogs with other types of green energy production, like wind power. With enough interest, investment, and work, they’ll be solved.

Other ideas surrounding the harnessing of the oceans include thermal energy converters. It’s thought that the amount of solar energy captured by the ocean is equivalent to 250 billion barrels of oil per day. That means that each day, the world’s oceans capture the energy equivalent of 33 years worth of the US’s total oil consumption. Obviously capturing the entirety of that energy is impossible and undesirable, but any company that comes up with a way of efficiently harnessing just a tiny fraction of it stands to make billions. Quite likely they will find themselves in an oligopolistic or even monopolistic position, too, as the barriers to entry will be huge, and the absolutely large minimum efficient scale of production will prevent new firms from entering.

“Green” thinking is also driving microscale R&D. Electronics companies are looking at solid state storage as a means of cutting down on power consumption in the datacenter. As more and more of our computing and storage moves to the “cloud”, more datacenters are required. Datacenters are expensive to cool, and it’s quite difficult to achieve an inexpensive, efficient, useful power density as well. That means that a large scale reduction in the amount of electricity consumed by individual server components will mean that useful power densities can be lower, or more servers can be crammed into a smaller space.

The largest consumers of electricity in the server are the pieces that move, specifically the hard drive. This movement has the secondary effect of creating waste heat which must be compensated for with adequate cooling lest the entire datacenter overheat. So even a small decrease in power consumption in that one tiny segment of that one specialized market will have domino effect across many secondary industries. It’s similar in scale to the standby power dilemma mentioned above. And when you see companies like Microsoft, Amazon, and Google moving close to hydroelectric dams to build their datacenters, or moving to Siberia to save on cooling costs, you know these concerns aren’t pie in the sky. There are real economic forces at work that are more powerful than the constraining forces associated with having to build fiber infrastructure out to these remote areas.