Irreversibility occurs when treatment in the current period alters the efficacy of treatments in the future. A paper by Zivin and Neidell (2010) give the following simple example:
Examine the following table. In the first scenario, the individual has disease X in two periods. If he takes treatment 1 (T1) then he will recover 6 units of health in each period; if he takes treatment 2 (T2) then he will recover 4 units of health in each period. Because 12 is bigger than 8, the person should take T1 in this case.
However, scenarios 2 shows how irreversibility may affect the optimal treatment chosen. Let us assume that the person still has disease X in periods 1 & 2, but can contract disease Y with probability p. When this disease occurs, the individual loses 8 units of health. He can be cured with only one type of treatment (TY). However, TY is only effective for patients who have not previously received T1. Thus, if there is a high probability that the individual contracts disease Y, it is likely optimal to treat patients with disease X with T2. Irreversibility has affected the optimal choice for X, since the option value of T2 is high when the probability of contracting disease Y is large.
Real world examples include the following: “
- “…treatment of certain types of cancer patients with a bone marrow transplant and massive doses of chemotherapy will reduce the patient’s ability to tolerate and respond to chemotherapy in the future, should some form of cancer recur.“
- “Drugs that are subject to resistance are another example.“
- “Indeed, these concerns may help explain why there is still no consensus about when to start therapy in HIV patients. Some advocate the ‘hit hard and hit early’ approach, which suggests the initiation of complete treatment at the time of diagnosis in order to prevent the disease from progressing. Others are concerned that starting therapy at early stages, when T-cell counts are high and viral loads are low, may lead to the development of viral resistance to these drugs and related compounds.“
Failure to consider the option value of drug treatment can make drugs that seem promising in clinical trials actually perform poorly in real world situations.
- Zivin and Neidell (2010) “Medical technology adoption, uncertainty, and irreversibilities: is a bird in the hand really worth more than in the bush?” Health Economics, v19(2):142-153.