The price of the magic pills

Greg Mankiw’s forays into debates are always a great read because they are a great write. Today’s NYT piece on health care reform is no exception. He illustrates the issue of who pays for medical innovation:

Imagine that someone invented a pill even better than the one I take. Let’s call it the Dorian Gray pill, after the Oscar Wilde character. Every day that you take the Dorian Gray, you will not die, get sick, or even age. Absolutely guaranteed. The catch? A year’s supply costs $150,000.

Anyone who is able to afford this new treatment can live forever. Certainly, Bill Gates can afford it. Most likely, thousands of upper-income Americans would gladly shell out $150,000 a year for immortality.

Most Americans, however, would not be so lucky. Because the price of these new pills well exceeds average income, it would be impossible to provide them for everyone, even if all the economy’s resources were devoted to producing Dorian Gray tablets.

He then proceeds to ask the real death panel question: who will get the pills and who won’t and, importantly, who decides?

But the question highlights an assumption: where did the $150,000 a year come from? Suppose first (to make things simple) that it is a once off rather than annual treatment. Suppose that it is x/300m where x is the total R&D costs for the magic pill (risk adjusted). So if it was for everyone in the US, x would have been $45 trillion. Not only is that unaffordable, that isn’t the cost of any innovation ever! So, it should be pretty clear that if it had to be recovered from the top 10% of wealth holders, they can’t afford it either.

So the $150,000 is more likely what the inventor would charge as a monopolist. Let’s suppose instead that the cost of this was a more modest $50 billion. You could recover that from the top 1% of the population at a cost of $150,000 but I suspect that the inventor of this magic pill could get more sales than that. For instance, they might make $300 billion as a monopolist (6 times their risk-adjusted costs). In this case, it would only cost $1,000 per person to cover the whole US. Would people vote for that? Absolutely. Indeed, the issue would then be the remainder of the world and their access to the pills: a far trickier issue.

And is it impossible to conceive of decision-making rights that would generate this outcome. Yes, again. We have it here in Australia in the form of the pharmaceutical benefits scheme (see here). Problem solved.

4 thoughts on “The price of the magic pills”

  1. Mankiw’s price works if the actual cost of making a pill is $150,000. Seeing as these pills are magic, suppose they can only be made on Pluto; that should do it.

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  2. “the full price for drugs” – from the link back to the article on PBS.
    Josh – could you persuade the power brokers at the NHMRC to disclose their share holdings and other pecuniary interests?

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