Health issues are in the news, many with some interesting economic aspects that prompt reader questions. Let’s look at a few.
1. What are the economics of President Donald Trump’s anti-opioid proposals?
On the surface, Trump’s proposed measures are not bad in that they address demand as well as supply issues in opioid abuse. Conservative economist Milton Friedman would approve. Friedman noted that if you try to reduce illegal drug use only be curtailing supply, you are doomed to failure. Reducing supply increases prices, thus increasing profits for the suppliers still in the business. Reducing demand reduces prices.
The problem is that it is politically more popular to blame a drug “epidemic” on evil drug suppliers — illicit drug dealers and big international pharmaceuticals — and not on the much larger group of our neighbors and relatives in the general public who buy and abuse drugs. Moreover, reducing demand with punitive measures against users — making it a law enforcement issue rather than a public health one — has never been successful.
Unfortunately, reducing demand through education and treatment programs is messy, time-consuming and expensive. Successful treatment programs are labor intensive and addiction recovery is a years-long, often lifetime, process for many. Moreover, past public education programs, as in commercials comparing a frying egg to a brain on drugs, have a poor track record. Some have actually made drugs more attractive to teens rather than less.
Getting into details, the much-ballyhooed capital punishment for suppliers is a feel-good measure for some of the electorate. But making crimes capital ones has limited effectiveness in past practice. And taking out any drug dealer creates space for his competitors.
The recently signed budget bill more than triples federal outlays for treatment, but from a very small base, particularly in comparisons to the millions of Americans caught in the problem. Ramping up treatment programs is somewhat like increasing aircraft production in World War II. It takes a couple of years to really get things going.
So the administration’s program is OK in very general terms, but inadequate in its specifics.
2. Is the proposed opioid tax in Minnesota a good measure? Is it an example of a tax on external costs that economists advocate?
Yes, on the surface, a tax on opioids — drugs with important legitimate uses but with large external costs — would be exactly what economists would call for. But the devil is in the details. Alcohol is another substance that millions of people consume with pleasure that also has enormous social and economic costs. We tax alcohol, but unlike for cigarettes, the tax rates are so low that they are not much of a disincentive to consumption. Alcohol taxes would have to be increased tenfold or more to be a real disincentive, but society prefers to let their real cost erode with inflation.
A tax on opioids is similar and faces the additional complication that the drug reimbursements in varied health insurance plans interpose a filter that obscures the real cost of drug prices to many consumers. I have a vial of hydrocodone right beside my keyboard that I was prescribed after foot surgery a few weeks ago. As someone with both Medicare and Tricare, the military health plan, for coverage, I paid $3.54 for my 30 pills. So adding a nickel or even a quarter to the price of each pill would not be a huge disincentive for many of us even if it all was passed along to the consumer. But those without coverage might get hit hard.
Moreover, there are some people with pain problems for whom opioids still are vital. Many of them cannot work because of their problems. Imposing an excise tax on something as necessary as pain relief seems inhumane.
This is much like the tax on medical devices that was imposed as part of the Affordable Care Act. If it was fully borne by manufacturers, it would not be regressive nor greatly contrary to public health. But neither the device tax nor an opioid tax would be borne only by producers.
So the rationale must be that it raises money to fund needed abuse reduction efforts and that these funds are not available from general tax funds. That may be the practical reality, but one that reflects very poorly on our society. More people now die each month from opioid abuse than from foreign terrorists over the last 20 years combined. If that is not worth raising taxes to limit these effects, what is? And economists know that one-off excise taxes, whether on pills or pacemakers, have a very high “excess burden” in which the total cost to society of the tax is much more than the revenue raised.
In sum, it is a tax with a good purpose but with many drawbacks in its details.
3. Drug prices are a concern to many people and Trump is talking about measure to reduce them. But be health insurers like Cigna are trying to acquire companies like Express Scripts that are drug benefit managers. Aren’t such mergers or acquisitions anti-competitive and contrary to lowering costs?
A cynical answer would be that such mergers are indeed anti-competitive but that no one in government today or in either political party gives a hoot about control of monopolistic activities anymore. A more orthodox response would be that administering health insurance plans is a different business than filling prescriptions. We would not worry if Ford started making lawnmowers, even though cars and mowers both have engines, and we should not worry if an insurance company buys a drug store company even though both are health-related.
I think the first answer is much more realistic. In our modern economy, you do not need a traditional horizontal merger to engender some degree of monopoly. There already is precious little competition at many levels of health provision or administration and, in my view, putting more functions under one corporate roof has great potential to create some monopoly power. But anti-trust enforcement, as we long knew it, is effectively dead. And the large insurers and benefit managers alike are adept contributors to political campaigns. Don’t expect anything to happen that would halt this trend.