[travwms]

I have a question about economic calculation by healthcare entrepreneurs. It seems likely, even if it’s admittedly cynical and perhaps simplistic to suggest it, that healthcare entrepreneurs would determine that profit can be better enhanced through maintenance of a disease rather than curing it.

A patient who remains more or less healthy while maintaining the disease through the services of a pharmaceutical enterprise and medical specialists is more likely to continue to be a source of revenue for the companies and doctors than someone who is fully cured. This seems to be likely in both a hampered and unhampered market economy, though I believe a hampered market economy would exacerbate the problem as a result of government subsidies for health insurance. What is your take on this problem?

[jmherbener]

In the market economy, entrepreneurs are free to innovate to attract customers and customers are free to accept or reject their products and services. Given that there exist a variety of treatments with differing results, prices of outputs and inputs will adjust to economize the use resources devoted to each treatment.

Suppose there are two treatments for some neurological disease. One cures it completely with no recurrence in a single treatment. The other requires annual treatments for life, but it dramatically slows the progress, of the disease extending the patient’s life by several decades as the symptoms worsen steadily. There would be more demand by patients for the first treatment and, consequently, its price would be higher than that of the second treatment. In fact, because patients could borrow money against their future incomes, the price of the first treatment would be related to the present value of the stream of future payments made for the second treatment. So, its not obvious that a lifetime treatment would bring in more revenue than a onetime treatment. Regardless of which treatment generates greater revenue, the rate of return on investment would tend to be the same for either one. If the second treatment had a higher rate of return than the first, then investors would bid more for the resources to attempt to expand production. As a result, the price of the second treatment would fall and the costs would rise, both of which reduce the rate of return. When the rate of return in the two treatments is the same, then resources are efficiently allocated. Of course, if the costs of the first treatment are lower than that of the second treatment, no one will provide the second treatment.

[travwms]

Thank you, Jeff. My dad was recently diagnosed with ALS. Your example is perfect and the answer makes me feel much better about it. I had not considered high demand pushing up the cost of providing the cure to everyone who would want it.

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