April 2006

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Male chauvinist pig of a discipline

April 30, 2006 in Miscellaneous

Not everyone is like me and enjoys employing the discipline of economics in their research. On the Gendergeek blog, the author claims in her Geek-onomics post that:

It worries me that so much of the heavily gendered distortions of modern economics, in conjunction with its methodological fetishism, is unnoticed or ignored. Economics could turn out to be the new morality and it needs to be exposed for what it really is: a male chauvinist pig of a discipline, suffering from severe monomania. In Freakonomics, its flawed methods are pointlessly applied to “everythingâ€? resulting in an agreeable, but ultimately meaningless encounter. It deserves to sell (I guess) but not to be taken so seriously.

NFL Draft and Physician Diagnosis

April 29, 2006 in Miscellaneous

Yesterday was the NFL Draft. It is a day of hope where teams can look to their future and see a potential Pro-Bowl individual joining their cadre of players. For instance my favorite team, the Green Bay Packers, selected linebacker A.J. Hawk from Ohio State University. The team was considering trading their number 5 pick and multiple other draft picks for the No. 2 pick to select Reggie Bush from USC. Would this have been a wise choice?

A recent 2005 working paper by Cade Massey and Richard Thaler suggest that teams are overconfident in their ability to predict the sucess of a given player in the draft. They hypothesize that teams who trade picks to move up in the draft ‘overpay’ for the value they receive. To quote the article:

“Our findings suggest the biases we had anticipated are actually even stronger than we had guessed. We expected to find that early picks were overpriced, and that the surplus values of picks would decline less steeply than the market values. Instead we have found that the surplus value of the picks during the first round actually increases throughout the round: the players selected with the final pick in the first round on average produces more surplus to his team than than the first pick, and costs one quarter the price!

“Our modest claim in this paper is that the owners and managers of National Football League teams are also human, and that market forces have not been strong enough to overcome these human
failings.”

Massey and Thaler believe that the excessive self-confidence can also be applied to physicians.

“…even professionals who are highly skilled and knowledgeable in their area of expertise are not necessarily experts at making good judgments and decisions. Numerous studies find, for example, that physicians, among the most educated professionals in our society, make diagnoses that display overconfidence and violate Bayes’ rule (cf. Christensen-Szalanski & Bushyhead, 1981; Eddy, 1982). The point, of course, is that physicians are experts at medicine, not necessarily probabilistic reasoning. And it should not be surprising that when faced with difficult problems, such as inferring the probability that a patient has cancer from a given test, physicians will be prone to the same types of errors that subjects display in the laboratory. Such findings reveal only that physicians are
human.”

Cost to bring drug to market: $802m

April 29, 2006 in Academic Articles, Medical Studies | 7 comments

According to the PhRMA (Pharmaceutical Research and Manufacturers of America) U.S. drug companies spent $39.4 billion on research and development in 2005. Much of this money goes towards the clinical trials necessary for FDA approval. But how much does it cost to bring a drug to market?

In order to bring a drug to market, a firm must go through a variety of phases for FDA approval. There are pre-clinical trials on animals. Next, in phase I, a small number of healthy volunteers are tested in order to establish safe doses and to gather information on the compound. In phase II, 100-300 individuals with the disease are selected in order to determine safety and efficacy. Phase III repeats phase II, but instead uses a sample of 1000 to 3000 individuals and examines the long run health effects of the drug as well.

DiMasi, Hansen and Grabowski (2003) estimate the cost of bringing a drug from phase I to market. Their data come from the Tufts Center for the Study of Drug Development (CSDD). The firms included in their survey represent 42% of all pharmaceutical R&D expenditures in the U.S. The authors found that the time from the start of clinical testing to marketing approval was approximately 90.3 months. This figure is in addition to any development time which occurs before phase I clinical trials. The authors take into account the cost of money used to finance the R&D using a 9% real cost of capital estimate. The final estimate is that it costs–including the expense of failed drugs–$802 million to take a drug from phase I trials to approval. Over 50% of this figure is the cost of capital needed to finance the R&D over such a long period.

Some observers would say that reducing FDA restrictions would reduce the price of drugs consumers face. I do not believe this to be the case. After the R&D is spent, firms price their drug to maximize profits subject to consumer demand. Reducing R&D costs will reduce the sunk costs, but not the marginal costs for pharmaceutical producers. What reducing FDA restrictions will do is increase a firm’s incentive to invest in drug development, because the revenue threshold to make an adequate return on capital will be reduced with a lower cost of gaining approval.

DiMasi, Hansen, Grabowski (2003) “The price of innovation: new estimates of drug development costs,” Journal of Health Economics; Vol 22, pp. 151-185.

The Greying of China

April 28, 2006 in Health Care in Developing Nations

It is a great achievement that China has one of the highest life expectancy rates (72.6) of any country in the developing world. However, the CIA World Factbook reports that “One demographic consequence of the ‘one child’ policy is that China is now one of the most rapidly aging countries in the world.” The Demography Matters blog reports “Beginning around 2015, China’s post war baby boom generation will reach retirement age, and because of the one-child policy implemented since 1980, working-age population will start to shrink. By 2050, China will lose 18% of its workforce, assuming a fertility rate of 1.8, or 35% assuming a fertility rate of 1.35“

The greying of China is a serious matter. As the future comes nearer, there will be less workers to pay for huge costs of elderly medical benefits. Continued rapid economic growth is one cure to this problem, but economies of the world are inherently volatile. Allowing immigration of younger workers in the future could also help to alleviate the fiscal burdens. We can see that the ‘one child’ policy, in addition to reducing the individual liberties of China’s citizens, has also created a serious fiscal problem for China’s future.

SSDI “$1 for $2″ Reform

April 27, 2006 in Academic Articles, Public Policy

Currently the Social Security Disability Insurance (SSDI) program covers almost 8 million Americans. The program is designed to help those who need assistance the most: those who cannot work due to disability. These individuals are entitled to approximately $830 per month.

One feature of SSDI is that it has an implicit 100% tax on earnings. If an individual is on the SSDI rolls and makes somewhat of a recovery and is able to work part time, any earned income will reduce the person’s SSDI benefits dollar for dollar. Thus, these individuals have no incentive to work even if they make a recovery.

Benitez-Silva, Buchinsky and Rust (2006) estimate the impact of a reform in which those on SSDI could keep 50% of their earnings from part time work. For instance, if an individual made $200 in a month, his or her SSDI benefit would be reduced by only $100 to $730 instead of being reduced by $200 under the status quo.

No work Work (status quo) Work ($2 for $1)
Earnings $0 $200 $200
Benefit $830 $630 $730
Total Income $830 $830 $930

One problem with this reform is that it may attract applicants to SSDI and increase the cost to the government. Since the reform would allow individuals to earn more money than the $830 cap, some individuals who are not disabled may fraudulently apply for the entitlement. The Congressional Budget Office (CBO) estimates that the reform would cost $410 million over five years and increase the number of individuals awarded benefits by 1.2%. The Social Security Administration (SSA) estimates are that the costs would be closer to $5.1 billion and SSDI rolls will increase by awards by 6.4%.

The authors of the study use Health and Retirement Survey (HRS) to conduct a more life-cycle simulation model. Taxes, social security benefits, application waiting times, continuing disability reviews (CDRs) are all incorporated into their model. They claim that 50% of all SSDI participants will eventually experience at least a partial recovery. Their major findings are as follows:

  • After the reform, SSDI awards will increase 2.2%. Other estimates: 1.2% (CBO) and 6.4% (SSA)
  • There will also be a modest increase in disability awards, rolls, and expected discounted costs.
  • For those who are on SSDI, pre-tax income would increase 9.3% over the status quo.
  • Currently, only 9.5% of all workers decide to return to work while on SSDI. These individuals can return to work either by leaving SSDI or working for 9 months under the Ticket to Work program (TWP). Participation in TWP, however, increases the probability of a disability review. After the reform–and assuming a constant disability review rate for those working–48.9% of individuals will return to work at some point while on SSDI. This does not mean that 50% of the individuals are not truly disabled, but that 50% of the individuals will have the ability at some point in time to return to (usually) part time work.
    The authors conclude that the welfare benefits of the reform to those on SSDI will more than offset the induced entry costs to society from having more applicants to the program. The authors give this program the thumbs up.

    Benitez-Silva, Buchinsky, Rust, (2006) “Induced Entry Effects of a $1 for $2 Offset in SSDI Benefits“

Physician Assistant Data

April 26, 2006 in Medical Studies, Nonphysician Clinicians

The concept of the Physician Assistant gained its inspiration from 17th century Europe where feldshers were used in the 17th century Russian Army. In the 1960s, China employed over 1.3 million “barefoot doctors” to improve delivery of health care, especially in rural areas. Not until the mid 1960s did the U.S. begin to use Physician Assistants to deliever medical care due to a shortage of primary care doctors.

In the United States, Physician Asssitants (PAs) must be associated with a physician and must practice in an interdependent role. The partner physician, however, does not need to be physically present during a PA examination of a patient. PAs routinely deal with uncomplicated sprains, strains, hypertension, bronchitis, depression, allergies, asthma, gynecological problems, family planning and trauma. Approximately 55% of all physician assistants practice in primary care.

In order to become a Physician Assistant, the average PA spends 25 months studying an intensive core curriculum. In 2001, there were 130 training programs in universities, medical schools, colleges, and the armed forces. PAs learn the broad topics related to primary care and rotate through the major specialties. Nurse practitioners, on the other hand, traditionally are trained in one specialty (pediatrics, women’s health, etc.).
The following are some summary data for Physician Assistant which comes from the American Academy of Physician Assistants 2005 Census.
Number of Physician Assistants by Disorder in 2005

BY PRIMARY EMPLOYER

Single-specialty physician group 30.6%
Other hospital 14.9%
Solo physician practice 13.5%
Multi-specialty physician group 12.3%
University hospital 7.5%
Community health center 6.1%
Self-employed 3.1%
HMO 2.3%
Other 9.7%

BY GENERAL SPECIALTY PRACTICED

Family medicine 28.4%
Surgical subspecialties 21.9%
Other 10.5%
Internal medicine subspecialties 10.3%
Emergency medicine 9.7%
General internal medicine 7.6%
General surgery 2.8%
General pediatrics 2.5%
Obstetrics & gynecology 2.4%
Occupational medicine 2.3%
Pediatric subspecialties 1.5%

ANNUAL INCOME (Full-time workers only)

Mean $81,129
10th percentile $60,184
25th percentile $67,128
Median $77,402
75th percentile $90,402
90th percentile $106,705

AAPA 2005 Census

Mittman, Cawley, Fenn; (2002) “Physician Assistants in the United States,”British Medical Journal, Vol 325, 31 August 2002.

SCHIP expansion in Minnesota and New York

April 25, 2006 in Econometrics, Medicaid/Medicare

Under the Balanced Budget Act of 1997, the Federal government established the State Children’s Health Insurance Program (SCHIP), which was aimed at reducing the number of uninsured children in the United States. States were given a variety of options of how to implement this program. Nineteen states decided to operate the SCHIP program as an extension of Medicaid (M-SCHIP), fifteen states operated stand-alone programs (S-SCHIP) and 17 states used both approaches.

Researchers often use a variety of regression methods to test for the impact of government programs on various variables. A common approach in this case is to use an ‘eligibility’ variable to test for a change in insurance coverage. However, a Rosenbach, Ellwood, Czajka, Irvin, Coupe and Quinn (2001) paper gives one pause as to the effectiveness of such a simple approach.

For instance Minnesota’s M-SCHIP program extended insurance benefits to less than 100 individuals. New York’s S-SCHIP program had an enrollment of over 500,000 children. What accounts for these differences?

Prior to Title XXI–the SCHIP legislation–Minnesota already had a generous public insurance benefit for children under their Medicaid system. Children at or below 275% of the poverty line were eligible for Medicaid insurance prior to the national legislation. After the legislation, a child had to be at or below 280% of the federal poverty line–an insignificant change.

New York also had a children’s insurance benefit (CHPlus) before Title XXI came into effect. CHPlus granted insurance to children below a less generous threshold, ranging between, 100% to 192% of the federal poverty line. The state, however, rolled over all CHPlus participants (over 170,000 individuals) into their new S-SCHIP program.

Thus, it is imperative that a researcher not assume that pre-SCHIP benefit levels in each state are comparable, or else one will reach erroneous conclusions.

Markets at work: LASIK

April 25, 2006 in Supply of Medical Services

According to the Marginal Revolution blog (“Seeing is believing“):

Laser eye surgery has the highest patient satisfaction ratings of any surgery, it has been performed more than 3 million times in the past decade, it is new, it is high-tech, it has gotten better over time and… laser eye surgery has fallen in price. In 1998 the average price of laser eye surgery was about $2200 per eye. Today the average price is $1350, that’s a decline of 38 percent in nominal terms and slightly more than that after taking into account inflation.

Why the price decline in this market and not others? Could it have something to do with the fact that laser eye surgery is not covered by insurance, not covered by Medicaid or Medicare, and not heavily regulated? Laser eye surgery is one of the few health procedures sold in a free market with price advertising, competition and consumer driven purchases. I’m seeing things more clearly already.

Certainly, the major advantage of a free market system is that it gives the best incentives for innovation. Those who first preformed LASIK surgeries found that there was high demand for the procedure and their profits were large. However, other physicians soon gained the necessary training on how to perform LASIK and with the increased competition, prices fell.

There is no doubt that the free market is the best system to motivate the creation of innovative health care procedures. Whether the free market will maximize welfare for the more routine procedures delves into the equity-efficiency trade-off apparent in all spheres where the government interferes with the market.

Blogs as a marketing tool for economic departments

April 24, 2006 in Economics - General

The Mises Economics blog notes how George Mason University professors have been using blogs for the past few years. In addition to any individual gain the professors may receive from writing, the blogs give prospective graduate students a way to find out more about the professors with whom they will be colleagues in the upcoming years.

For anyone interested in the UC-San Diego Economics Department, Jim Hamilton’s Econbrowser blog is a great place to start.

Markets at work in rural India

April 24, 2006 in Current Events

What happens to farmers in developed nations when they or their family members get sick? Typically, much of a farmer’s savings is tied up in illiquid assets (land, crops, fertilizer, etc.) and the farmer turns to the town money lender. Since there is less competition for loans in rural areas, the money lender can charge the farmer exorbitant interests rates. If the farmer’s crops would happen to fail, the farmer can be pushed into a debt cycle which is difficult to escape.

The Indian Economy Blog looks at the success of Yeshasvini (a self funding micro health insurance scheme). Yeshasvini wisely tried to avoid the perils of adverse selection by constructing membership as follows:

“The Yeshasvini Health Scheme was open to people who were together for a purpose. Be it as a co-operative society, a grameen bank or quite simply for a reason other than health. This criterion was of paramount importance for the success of the scheme, because opening the scheme to everybody would have resulted in only people with diseases becoming members. This in turn would make a self-funding scheme unviable.”

We can see that even in rural India, helping markets to work more efficiently–instead of replacing them with government run systems–can lead to superior outcomes.

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