Are health economists naughty or NICE?
By Arnold Kling
The lead story in today’s Wall Street Journal reports
If a treatment helps people, should governments and private insurers pay for it without question? Or should they first measure the benefit against the cost, and only pay if the cost-benefit ratio exceeds some preset standard?
The U.S. generally follows the first course. Even the most cost-conscious insurers say they’ll pay the price if a drug works and there aren’t other options. Britain openly and unapologetically adopts the second course. If a drug or type of surgery costs a lot and helps only a little, it says no.
A British health commission, with the acronym NICE, evaluates the cost-effectiveness of treatments. They determined that certain medications for Alzheimer’s only offer limited in benefit in a minority of cases, so they disapproved the medication.
I like the idea of using cost-benefit analysis to evaluate health treatments. If individuals were making the decision about whether or not to use the medication, then such information would be helpful. Of course, under the British system, most decisions are effectively made by government.
My instinct is that this particular outcome is inhumane, because I suspect that the cost-benefit calculation is distorted by the high price of the medication. If the medication were sold at marginal cost (i.e., the cost of manufacturing and administering the drugs), my guess is that this cost would be even less than the low benefits.
What the cost-benefit calculations tell me is not that people should be denied the drug, but that the drug company is pricing the drug too high relative to its benefits. Maybe at a lower price the company cannot recoup its investment in research and development. But that is how the market ought to work.
If American insurance companies and Medicare are willing to pay high prices for the drug because it provides a benefit that is greater than zero, then to me that illustrates how American health care has gotten into its fix. That is what I call in “gray area medicine” in my forthcoming book.