Tuesday, June 30, 2009

Must Read Interview

by Andrew Gillen

This Minneapolis Fed interview of Kevin Murphy is full of great bits. I've excerpted two points he makes (about health care) that have implications for higher ed.

This first quote illustrates the importance of value added measurement (to make rational cost-benefit decisions).
Let’s say we have our War on Cancer, and we’re going to spend $100 billion. And we have a 50 percent chance of being successful in finding a 10 percent reduction in cancer. So we have a 50 percent chance of getting a $5 trillion return, a 50 percent chance that we’ll discover nothing. Okay?

Now let’s say there are two cost scenarios, to make it really simple. One is that the treatment is nearly free; it’s a really low-cost treatment. The other one is it costs $10 trillion. If each of those happens with 50 percent probability, well, as you can quickly realize, the expected gain is now zero. We’re going to discover this treatment with probability one-half, in which case we get $5 trillion in gains. But we have $5 trillion in expected cost, and so the net expected payoff is zero. I set it up that way to make the algebra simple.

Now let’s say we had a sane health care delivery system that didn’t use treatments that cost more than their benefits. Well, now your probability of failure is 75 percent, since half the time you discover nothing and half the time you discover something that is too costly to use. But rather than being lower, your expected gain is now $1.25 trillion. Half the time, you’re going to discover it. Of that, half the time it’s going to be low-cost. So a quarter of the time, you’re going to get $5 trillion, so you’ve got a $1.25 trillion expected gain for a $100 billion investment.

By rationalizing the care system, we’ve changed what was a zero, or actually negative, net return investment into a hugely positive net return investment. We didn’t make science better. We didn’t make the probability of discovery better. All we did was rationalize our care system so we don’t overspend.

This second quote illustrates the danger of third party payment.
I see that disconnect between the payers and the developers as being a major problem... in the private market, we don’t worry about people developing TVs that are too expensive. People have no incentive to do that. In the medical area that’s not true. In the current system, people have the incentive to develop things for which the costs could outweigh the benefits. As long as they’re still going to get used, people are going to supply them. So research is going to respond.
And just for fun, here are the top 10 facts about Kevin Murphy.


capeman said...

"let’s say we had a sane health care delivery system that didn’t use treatments that cost more than their benefits."

For example: we could refuse to treat the suicidally depressed; we could refuse to treat the aged. We could refuse to treat low-IQ mothers-to-be; instead we could encourage (force?) them to have abortions.

This shows what happens when you listen to economists who are (a little) too bright for their own good, but lack the gene set that goes with such things as "human feeling".

~ said...

We try not to egg on our most fanatical critic by defending ourselves, but since he's not attacking us per se, I thought I would go ahead and respond.

Lucky for me, the liberal Mark Thoma posted on this very question yesterday: http://economistsview.typepad.com/economistsview/2009/06/an-ethical-dilemma-in-end-of-life-care.html

Even doctors, who as non-economists presumably have some human feelings, are saying that "We cannot ignore the cumulative costs of the tests and treatments we recommend and prescribe."

Choices confront us, regardless of how we feel about them. Using the example from the link, if we spend 440B on a cancer treatment, that is 440B we don't have to do other things, like improve education, or put into research to find more effective treatments. All of these may be desirable, but at some point, we're going to have to choose among them. To attack those who point this out as having no heart is indicative of a willful blindness to reality.

capeman said...

"We try not to egg on our most fanatical critic by defending ourselves, but since he's not attacking us per se,"

~ "since we're not in our article accusing our distinguished critic of being a prostitute, a pimp, a crook as part of a general class, we'll call him a fanatic personally, thereby making a purely ad hominem attack of it".

Well, maybe they're responding because I'm about the only one who bothers to post on their stupid website.

So I'll give them the honor of a further response.

Of course, doctors cannot completely ignore the costs of their services (especially if they reach a point where society will no longer pay them for said services, as is happening now).

Nobody is going to say, e.g., let's spend $100 million to try to cure that cancer patient. (Unless that somebody is somebody like Michael Milken or Steve Jobs perhaps paying out of his own pocket.)

That is a far cry, however, from an answer to the examples I gave.

And it's no answer to my general point: that not everything can be evaluated according to the cramped values of economists.

As somebody once said, "not everything that can be measured is worth measuring. And not everything that is worthwhile can be measured."

Here's anotther example. I don't know if liberal economist Mark Thoma is a churchgoer. But if he is, I wonder how he would measure the effectiveness of his church.

Does he go by how many souls have been saved?

That would be a pretty good measurement to be able to pull off.

Cowboy said...

When off-the-wall, thoughtless comments were made "back in the day", Bryan O'Keefe would challenge the commentors. It is good to finally see that one of his legacies lives on.

Thank you CCAP.

I wish there was a cure for cancer. It is very near and dear to me. Research is making progress on a number of fronts. But the progress is slow.

Cowboy said...

For capeman:

"...I'm about the only one who bothers to post on their stupid website."

That doesn't make sense.

And why you come to this website, day after day, to post insidious and insolent comments shows that you are deranged.

The fact that you continue to visit a "stupid website" on a daily basis and that you continually ruminate over the rhetorical humor of prostitutes and and pimps (or watever it was that is forever stuck in your craw), gives me a high level of confidence that you suffer from OCD. Everyone else has moved on and your anger festers inside of you as you live in the past with no ability to resolve internal conflicts.

I am very happy that I am not you - or like you.

You simply have nothing to offer.

capeman said...

Cowboy, thanks for sharing! You are the only other person who bothers with this place. You must be pretty obsessed to keep coming here to read my posts and comment on them. Comments on comments. Congratulations!

Cowboy said...

Actually capeman, I come to this website to read the blogs by CCAP. I know that in your visions of grandiosity and delusional self importance, you would like to think the world revolves around you, and thus, people like me come to this site to read your comments.

With that said, I do read your comments with the hope that someday you might grow up and become an adult who can put together a rationale argument, and to a lesser extent, a coherent sentence.

Trying to reason with you, or expect you to be rationale is like asking an albino to "lighten up".

capeman said...

Cowboy, you really make my day.

"a rationale argument", very good!

I hope you take Composition 101 when you work toward that master's degree.

Cowboy said...

capeman - "suicidally"

Cowboy said...

capeman - "anotther"

capeman said...

Cowboy, "suicidally" is perfectly correct.

I had an obvious typo mistake on "another".

I still think you need to learn the distinction between rational and rationale.

Centenial College said...


I have read it !
It's nice & thanks for sharing with me

Nice Post !


Toronto education is good for me.