MODERN Health LABOR Economics ECONOMICS 12 6 TH
MODERN Health LABOR Economics ECONOMICS 12 6 TH EDITION THEORY ANDCharles PUBLIC E. POLICY Phelps CHAPTER 14 Externalities in Health and Medical Care 03 March 2021 1
Learning Goals • Know the basic meaning of an externality and recognize its link to the definition and enforcement of property rights and the role of transaction costs in this problem. • Discover the multiple externalities arising from contagious diseases: • herd immunity • vaccine demand • vaccine supply. • • Assess the externalities arising from tobacco use. Learn how information creates external benefits. Assess the importance of basic research as a positive externality. Understand external costs arising from the nation’s blood supply. 03 March 2021 2
14. 1 Externalities, Property Rights, and the Control of Externalities • Property rights define the conditions under which a person may own, use, and transfer an “object”, whether that object is a physical item or intellectual property. • From an economic perspective, the most important parts of property law include those that define the ability to use the object, to exclude others from using it, to transfer its ownership, and responsibilities to others who use the object, including third parties. • For example, an automobile has little value if you cannot use it, exclude others from using it, and sell it to others. • Liability law also determines the responsibilities that you have if you let somebody else drive your car. • The same issues surround the invention of a new idea or device, and patent and copyright law protect the inventor’s rights similarly. 03 March 2021 3
14. 1 Externalities, Property Rights, and the Control of Externalities • Particularly in the case of the rights surrounding inventions (patents and copyrights), the exclusion of illicit users presents a difficult problem. • Industrial theft of an invention occurs commonly. • Illicit copies of products abound. • Even where property rights are well defined, they cannot always be enforced in a cost-effective way. • Externalities occur if and only if the system of property rights fails to define ownership and/or liability surrounding an event or object. 03 March 2021 4
14. 2 Externalities of Contagion • Contagious diseases and their control provide perhaps the classic example of externalities in health and medical care. • One person’s action (sneezing) imposes costs on others (increased risk of getting a cold) that are not fully accounted for in the first person’s actions. • Those actions range from the most simple (carrying a handkerchief) to more costly (buying and using decongestant medicines that reduce sneezing) and even to more costly still (staying home from work and losing a day’s pay). • If you sneeze into the air (which nobody owns), you create extra risks for others. • The law also might make you liable for health damage you impose on others, so they could sue you for lost work time if they catch a cold from you. • If property rights and liability were perfectly defined and enforcement costs were trivially small, people’s behavior regarding sneezing would change. • Suppose that by law everyone owned the air space within two feet of each person. • Then, not only would we all stay at least four feet apart unless given permission to trespass, but if you sneezed into other people’s air space, they could claim damages. 03 March 2021 5
14. 2 Externalities of Contagion • Coase (1960) showed that the same behavior regarding sneezing would occur whether we each owned two feet of air space or someone else owned it all, so long as transactions costs were trivially small. • The costs of enforcement would be prohibitively high, even if you “owned” the air around you. • In the case of sneezing, social customs and “manners” create society’s best control mechanism. • Sometimes these sorts of social controls fail. • You have less incentive to control your sneezing on a crowded public bus than you do in a classroom or office, even though you are more likely to inflict a cold on somebody else, since you are unlikely to see the same people again. • In some societies, such as Japan, social custom then takes precedent. • There, people wear surgical masks when they have a cold to cut down on the contagious effects of sneezing. • The emergence of such a custom in a crowded society such as Japan makes sense. 03 March 2021 6
14. 2 Externalities of Contagion More Serious Contagious Diseases • Some diseases have more serious consequences than the common cold, and we take more expensive steps to respond to them. • Some diseases (such as dysentery) are transmitted readily through water systems. • The famous case of “Aspenitis” involved the vacation town of Aspen, Colorado, where tourists and natives alike suffered common and serious intestinal illness. • Research into the causes of the disease finally determined that the town’s water lines and sewer lines, which ran parallel to each other through much of the town, had both broken and cross-contaminated each other. • The contamination in one direction (from sewers to water system) had more serious consequences than in the other direction (from water system to sewers). • However, the potential liability of the owners of the water system (the town, in this case) caused them to find and repair the break rapidly 03 March 2021 7
14. 2 Externalities of Contagion More Serious Contagious Diseases, continued. • The threat of poliomyelitis in the 1950 s caused dramatic changes in behavior. • Before vaccines became available, and even before people understood fully that a virus caused polio, they did understand that person-to-person communication of the disease was possible. • A common response during the height of the polio epidemic of the 1950 s was to close public swimming pools. • Some of this occurred by regulation (i. e. , by order of county health department officials) but some as a “voluntary” action by owners of swimming pools who might have been held liable for transmission of the disease. • The world has experienced two major new viral outbreaks of major concern to public health officials around the globe. • Ebola epidemic in western Africa. • Mosquito transmission of the Zika virus in Central and South America 03 March 2021 8
14. 2 Externalities of Contagion Vaccines and Vaccine Policy • Consider a society of 1, 000 inhabitants on an island confronting the risk of a contagious disease, carried to the island from elsewhere by a vacationing person: call this person Patient Zero. • Each Person j who comes in contact with Patient Zero has some probability πj 0 of contracting the disease from Zero, depending on the virulence of the disease and the nature of their contact. • Each Person j getting the disease also has a subsequent probability of transmitting it, πji. • Some people may be “naturally immune” to the disease, so their probability of catching and spreading the disease is zero. • Call the economic cost of getting the disease C (treatment costs, lost work, pain, etc. ). • Then Person i’s expected cost is CΣj≠i πij = Cπi, where πi is Person i’s probability of getting the disease—that is, πi = Σj≠i πij. • This cost avoidance creates each person’s private willingness to pay (WTP) for the vaccination, and adding the WTP for each person creates a demand curve for vaccinations. • Each person will rationally be vaccinated if the expected costs of the illness exceed those of getting the vaccine (including time, travel, fees, the pain of the vaccination process, and the expected side effects of the vaccine), which we can call Cv. 03 March 2021 9
14. 2 Externalities of Contagion Vaccines and Vaccine Policy, continued. • Two things appear immediately in this problem. • The first is herd immunity: • If any other persons in the society are immune—for example, if they have already become vaccinated—then Person i’s chances of getting the disease from any vaccinated Person k fall to πki = 0. • At the extreme, if everybody else in society had already become vaccinated, then that last person would never bother because Person i’s chances of getting the disease (πi) would fall to zero. • In the language of externalities, herd immunity creates a positive externality for Person i. 03 March 2021 10
14. 2 Externalities of Contagion Vaccines and Vaccine Policy, continued. • Second, we can turn the question around ask what private and social benefits occur if Person i is vaccinated. • Holding constant the number of other people who are vaccinated, Person i will decide to be vaccinated if Cv < Cπi. • However, the social benefit extends past Person i because, once vaccinated, Person i will contribute to the herd immunity for everybody else. • To be precise, the net benefit for the entire society is Cπi plus CΣj≠i πij because each Person j’s chances of contracting the disease from Person i fall from πij to zero. • Each person’s private WTP for the vaccine is Cπi, and the social WTP is Cπi plus the contribution to the herd immunity. The difference, CΣj≠i πij, is the externality benefit. • Figure 14. 1 (next slide) shows both the private and social aggregate WTP curves that vary with the proportion of the society vaccinated. • The vaccine cost Cv appears as a flat line in this diagram because (by assumption) the costs per vaccination do not vary with the proportion of people vaccinated. • 03 March 2021 11
14. 2 Externalities of Contagion Vaccines and Vaccine Policy, continued. • Private decisions will lead to N 1 persons becoming vaccinated. • If the number vaccinated exceeds N 2, then the cost Cv exceeds even the social benefit, WTPs, for the vaccine, and getting Person i vaccinated makes no sense from either a private or social standpoint. • Between N 1 and N 2 of the population vaccinated, a conflict arises between the private and social decisions to be vaccinated. • Economists would usually advocate for an optimal subsidy, reducing vaccine costs until the societally optimal number of people is vaccinated. 03 March 2021 12
14. 2 Externalities of Contagion Vaccines and Vaccine Policy, continued. • Although the idea of an “optimal subsidy” has clear meaning to economists, this almost never turns out to be the actual vehicle that public policy uses to increase vaccination rates. • Sometimes vaccines are provided free and at convenient locations, but compulsion commonly enters the picture as well. • Schools, often require that students have some set of vaccinations before they are admitted. • Every inductee into the armed forces goes through a standard series of vaccinations. • Overseas travelers (who may be exposed to a whole array of unusual diseases not prevalent at home) must present proof of vaccination against certain diseases before their government will issue a passport to travel to at-risk countries. • The government takes these steps in part to protect the traveler but, more importantly, to prevent the spread of disease to others—that is, in the name of “public health. ” 03 March 2021 13
14. 2 Externalities of Contagion Vaccines and Vaccine Policy, continued. • As with every compulsory act of government, some individuals may be harmed when such methods are used. • Some people’s religious beliefs prohibit their use of medicines. • Some vaccines also have side effects that occasionally strike the vaccinated person. • On occasion, these side effects prove fatal, as with the infamous swine flu vaccine involved in an influenza vaccine program personally promoted by the President of the United States. • One of the advantages of a “subsidy” program is that it induces those people who bear the smallest costs to be vaccinated because only those people who derive a net positive benefit (including the subsidy) from getting the vaccine will respond to the subsidy. • However, subsidies increase the “on-budget” costs of the government, whereas compulsion creates only “off-budget” private costs, which seems to drives many political decisions. 03 March 2021 14
14. 2 Externalities of Contagion Vaccine Supply as an Externality • In recent years, we have come to understand that vaccine supply also has aspects of a public good and hence deserves attention equal to or more than the demand-side issues. • The supply-side issues include at least the following: • Special financial risk because of mutating target organisms; • Medical–legal liability confounded by mass-vaccination strategies; • Production-line failures or insufficient supply (à la military stockpile). 03 March 2021 15
14. 2 Externalities of Contagion Vaccine Supply as an Externality—Financial Risk • The drug development process is expensive, time consuming, highly regulated, and risky. • Many drugs fail the development process, with an ultimate success rate of only 8 percent overall. • The world of vaccine development has several risks. • There is a risk of mutation of the target organism with any drug (vaccine or antibiotic) that works against a living organism. • Even if a vaccine succeeds against one generation of the target species, it might not succeed against later generations. • This mutation creates a drug development risk for antibiotics that does not exist with most drugs. • Demand is uncertain, particularly with “one-shot” vaccines for a seasonal influenza virus for which the target organism changes every year. • If early reports suggest that the seasonal flu will not be very aggressive, some people will choose to avoid vaccination. 03 March 2021 16
14. 2 Externalities of Contagion Vaccine Supply as an Externality—Medical-Legal Risk • By definition, the vaccine somehow is developed from the original target organism, which by definition is dangerous to human health. • One of the great biological “tricks” in vaccine development is to find a way either to alter the target organism so it is no longer dangerous or to find substitute biological components that trigger the immune response by “looking like” the virus or bacterium to the human immune system. • The optimal vaccination strategy for diseases that are highly contagious and can result in epidemics often requires mass vaccination in a very short time period. • One cost of the short time period is the loss of possible information about adverse side effects. • Usually there is a long post-approval process of data collection that helps track down side effects, but this may not be possible if people must be vaccinated quickly. 03 March 2021 17
14. 2 Externalities of Contagion Vaccine Supply as an Externality—Production Line Risk • Vaccine production often entails using “brews” of biological substances, often a fragile process. • Periods of vaccine shortage for influenza vaccines in recent years have occurred because something affects the vaccine production process in one of only a small number of manufacturing plants making it, causing a failure to elicit the desired immune response. • Distributing the vaccine production across multiple sites and even across multiple companies has real advantages, but economies of scale in vaccine development favor sole-supplier markets. • Thus, finding a way to distribute the production (and hence reduce societal risk of a supply failure) represents another form of supply-side externality. 03 March 2021 18
14. 3 Solutions to the Externality Problem Vaccine Injury Compensation Program • The national Vaccine Injury Compensation Program (VICP) was created in 1986 to help encourage vaccine production and distribution in the U. S. by reducing the financial risk to vaccine manufacturers from fault-based personal injury lawsuits. • VICP established a no-fault compensation system for people who receive specific vaccines and then exhibit specific injuries or illnesses. • VICP also removes much of the cloud of litigation hanging over vaccine producers, thus leading to the second goal: stabilizing and enhancing vaccine supply. • The VICP pays for all associated medical costs of a harmed person up to $250, 000 for pain and suffering costs and up to $250, 000 for a vaccine-associated death. • A $0. 75 charge on each dose of vaccine administered through VICP funds it. • Trust fund administered by the Department of Health and Human Services, • Some tort risk remains, however, because individuals can refuse the settlement offer and sue the vaccine manufacturer. 03 March 2021 19
14. 3 Solutions to the Externality Problem Permanent Demand Support • An Institute of Medicine (IOM, 2003) report proposed six alternative plans to expand stabilize vaccine demand. • Eventually recommended an approach that would mandate vaccine payment in all health insurance plans. • Added a voucher system for populations who are economically disadvantaged. • The PPACA bans any copayments for routine immunizations as recommended by the Advisory Committee on Immunization Practices of the Centers for Disease Control and Prevention. • These proposals affect the supply of vaccines only indirectly by ensuring steady demand for the product. • The most powerful alternative proposal—to mandate that health insurance cover vaccines—would provide the widest market and hence the strongest assurance to vaccine suppliers. 03 March 2021 20
14. 3 Solutions to the Externality Problem Other Options • The IOM proposals still leave an intertemporal risk to vaccine manufacturers because vaccine R&D can take years before the product can be marketed. • There is a political risk that a vaccine might not be included on the list of approved products, or at least not completely. • Solved in some cases (e. g. , malaria vaccine) by establishing escrow arrangements or other “precommitment” strategies to credibly assure vaccine manufacturers of the future revenue stream they want in order to commit to the R&D. • Grabowski (2005) has proposed federal–private partnerships for drug development to help reduce the supplier risk. • Project Bioshield (enacted in 2004) creates government stockpiles for anthrax vaccine (demand pull) and new National Institutes of Health (NIH) support for research on various bioterrorism-related risks (supply push) enhances vaccine production. • Also authorization for the government to prepurchase drugs up to eight years before expected FDA approval. • Solves the time inconsistency problem of the lag between R&D costs and eventual product sales. 03 March 2021 21
14. 3 Solutions to the Externality Problem Other Options, continued. • The Orphan Drug Act also creates incentives for pharmaceutical manufacturers to pursue drug development for small-market drugs by offering tax incentives and streamlined clinical trial and approval processes. • Tax credits and other approval streamlining processes have the potential to enhance permanent vaccine supply reliability. • Risks of failure at a given manufacturing site for vaccines can be mitigated by requiring multiple-site production resources in exchange for such things as tax credits and/or R&D support. 03 March 2021 22
14. 4 Solutions to the Externality Problem International Disease Transmission • Rapid international transmission of contagious diseases has become an issue of concern in the modern jet age. • The SARS epidemic of 2003 shows some of the potential concerns and public responses to a highly contagious and lethal disease. • At the peak, SARS had infected more than 8, 000 people in 27 countries, and at least five cases of transmission by international aircraft travel have been documented. • Contemporaneous estimates of the case-mortality rate ranged from 5 to 20 percent, a level of lethality seldom seen in infectious diseases such as this. • Final estimates placed the case-mortality rate at just under 10 percent. • SARS arose in China, and midpoint in the epidemic cycle that country hospitalized and quarantined all patients with disease symptoms. • At the peak of the cycle, China closed primary and secondary schools for two weeks and many public venues. • The WHO issued travel advisories banning noncritical travel to and from “hot-spot” areas (mostly in the Far East but including Toronto). 03 March 2021 23
14. 4 Solutions to the Externality Problem International Disease Transmission, continued. • Most major drug companies and the NIH immediately began developing vaccines against SARS, and the prototype was developed within a year of the disease outbreak. • Clinical trials began in 2006, but no vaccine is yet commercially available despite massive international efforts to produce one. • Travel restrictions have the potential to limit the spread of diseases like SARS, but to be wholly effective, there must be travel bans from all affected areas, not just at major hubs. • The economic issue of a travel ban, of course, is to balance the value of forgone travel to those prevented from traveling to and from hot-spot areas against the public good of preventing disease spread. • The issue obviously involves many potentially conflicting values, including the rights to travel freely and to avoid unreasonable search. • A good travel policy will be more stringent whenever: • The virus exhibits high rates of transmission across humans (or other species to humans) • The lethality of the disease is high • The costs of treating affected individuals (even if the disease is not highly lethal) is high. 03 March 2021 24
14. 4 Solutions to the Externality Problem International Disease Transmission, continued. • Avian influenza (“bird flu”) has some special characteristics that cause concern. • Avian flu is mostly confined to wild bird populations, sometimes infecting domesticated flocks and then transmitting to humans. • The greatest concern is the coexistence of human and avian flu viruses in which the exchange of genetic information between the viruses could create a new strain that is highly communicable and lethal to humans. • Many experts use phrases such as “when, not whether” in describing the risk of such species crossover. • That the major carriers include wild migratory birds exacerbates this problem, since a travel ban for flying birds cannot be enforced. 03 March 2021 25
14. 5 Externalities From Tobacco • Another important externality affecting health arises from the widespread use of tobacco products, primarily cigarettes, throughout the world. • The smoke itself is unpleasant to many people, and for persons with hay fever and asthma, any irritant, including tobacco smoke, can set off allergic reactions that are at least unpleasant and for some, potentially fatal. • Many cities and states have enacted regulations that limit the areas where smokers may smoke in “public” buildings. • Some companies have totally banned smoking on their premises and offered to pay for smokingcessation programs for their employees. • Numerous hospitals have totally banned smoking by patients, staff, and visitors, not only within the hospital itself but also in surrounding areas. • Congress has banned smoking on all flights entering, leaving, or flying within the U. S. • The logic for a regulatory approach to control smoking in public buildings arises directly from the “random” nature of access to such buildings, which means that the transactions costs of reaching agreements in some other way would overwhelm the problem. 03 March 2021 26
14. 5 Externalities From Tobacco • The second and more serious externality arising from cigarette smoke has now become more carefully understood—even nonsmokers’ health risks increase when they spend considerable time in close proximity with smokers. • A series of epidemiology studies has emerged over the past several years showing substantially heightened risks of lung cancer, heart disease, and other lung diseases from nonsmokers who live in a house with at least one smoker. • One study demonstrated that even the dogs of smokers had a 50 percent increased risk of dying from lung cancer compared with dogs whose owners did not smoke. • The magnitude of secondhand smoke morbidity and mortality is yet to be fully determined, but evidence continues to accumulate that this is a more serious externality than had previously been recognized. • Many studies have shown the serious health consequences of secondhand smoke. • Even with incomplete information, it seems safe to say that tobacco consumption does create an important health externality, certainly for those within the household, and possibly in other surroundings as well (e. g. , the workplace). 03 March 2021 27
14. 5 Externalities From Tobacco Private Taxes on Externalities • • Sometimes liability law supplants legislative action as a way to control externalities. With major public intervention for nearly half a century now, tobacco consumption has fallen substantially. Taxes on tobacco sales have increased steadily, and much advertising has promulgated information about the risks of smoking. Smokers, former smokers, or their families have brought a number of private lawsuits against tobacco companies. • Most of these centered on a “defective product” approach to liability, but the legal setting in each case would come through the law of torts. • These suits have generally failed in the courts or on appeal because of several common defenses by the tobacco companies, mostly hinging on the idea that the dangers of smoking were well known, particularly after the mandatory federal requirements for posting warning labels on tobacco products and advertisements. 03 March 2021 28
14. 5 Externalities From Tobacco Private Taxes on Externalities, continued. • The major shift in the legal environment came when state governments began to sue tobacco companies to recover the costs of treating Medicaid patients with tobacco-related diseases. • Several consecutive successes in the courts led to a major settlement agreement in 1998 between every state in the country and the major cigarette manufacturers. • The states promised not to sue again for health-related costs. • The tobacco companies have promised a stream of payments of nearly $0. 25 trillion to the various states. • The costs of these payments will, of course, become part of the production cost of manufacturing cigarettes, which should in turn drive up the price of cigarettes, just as a legislatively created tax would do. 03 March 2021 29
14. 6 Information as an Externality • The production of knowledge creates a beneficial externality because the marginal costs to disseminate the knowledge are small compared with the marginal costs to produce it. • Once produced, knowledge should receive widespread distribution and be limited only when the marginal costs of dissemination finally match the incremental benefits. • The production of knowledge itself is likely to be undertaken too little in a society with less than perfectly functioning property rights to knowledge, creating a government role for the subsidy and/or production of knowledge. • Another issue arises in the categorization of externalities from such things as alcohol and tobacco use. • The pure economic model views consumers as being fully informed about the risks and benefits of consuming any commodity and making their decisions accordingly. • If this is true, the logic for government intervention to reduce smoking and drinking rests solely on the external damage produced by these activities. 03 March 2021 30
14. 6 Information as an Externality • Another way to think about the problem suggests that at least some of the private costs of these activities represent an externality. • Consider a hypothetical demand curve for tobacco or alcohol by a fully informed consumer. • Now contrast that demand curve with that of a consumer who is the same except (to pose an extreme case) for having no knowledge of the risks of the activity. • The “uninformed” demand curve will exhibit (at every quantity) a higher willingness to pay, and at any price, the uninformed consumer will consume more than a fully informed consumer with otherwise identical tastes and circumstances. . • The welfare loss arising from the lack of information appears area A. • Adding up welfare triangles such as triangle A across the entire population represents the maximum possible value of the information necessary to move all persons from the uninformed to the informed demand curve. 03 March 2021 31
14. 6 Information as an Externality • In the example of tobacco, the case can be made that information arising from nearly half a century has produced just this sort of change in behavior. • A major study in 1964 by the surgeon general of the United States on the health risks of smoking, essentially new information, precipitated the steady decline in smoking rates. • Projections of what the smoking rates would have been in the absence of the information campaign would show steady upward increases. • Cigarette consumption by 2010 had fallen to one-third of the peak levels in 1965 before the surgeon general’s report. • The reduction in tobacco use is now paying health dividends, and soon will cease to be the leading cause of death in the U. S. • Note also that once produced, information creates a long stream of benefits, the present value of which must be offset by the cost of producing the information. • If the information has a very long life, one can approximate the present value of the long stream of benefits dividing the annual benefit by the interest rate. 03 March 2021 32
14. 7 Research as an Externality • The production of “basic research” is a problem filled with externalities. • Production is costly, but dissemination of research to others is relatively cheap. • Difficult to establish property rights to ideas unless they are embedded either in a specific product (which can be patented) or a manuscript (which can be copyrighted). • An important example is the production of knowledge about how various medical interventions “work. ” • There is widespread variability in use of many medical interventions, which create a significant welfare loss because of the variability alone. • Another approach to studying the same phenomenon looks at the cost-effectiveness (CE) of investment in randomized clinical trials—research projects that study directly the production function that turns medical care into health—in the same way that one can measure the CE of various medical interventions themselves. • Recall that CE studies analyze the number of healthy years (measured in quality-adjusted lifeyears [QALYs]) gained from using a medical intervention and the added cost of that intervention. The ratio of added costs divided by added QALYs describes the CE of an intervention. . 03 March 2021 33
14. 7 Research as an Externality • Detsky (1989, 1990) analyzed whether the production of new knowledge, as accomplished through randomized clinical trials, is a good investment using CE criteria (likelihood that a new therapy would work better, life-years gained, and rate of implementation of the new therapy). • Showed that many large (and expensive) clinical trials have had a very low cost per lifeyear saved. • Although many medical interventions themselves have CE ratios of tens or hundreds of thousands of dollars, Detsky showed that clinical studies showing the efficacy of various interventions have CE ratios as low as $2– 3 per life-year saved to a high of $400– 700 per life-year saved. • All of these CE ratios are much, much more favorable than almost all of the actual medical interventions undertaken in the U. S. . • Suggests again that we continue to have a major underinvestment in research about the clinical effectiveness of various medical interventions. 03 March 2021 34
14. 8 Reasons for Such Little Research on Medical Effectiveness • Why have modern societies underinvested in this type of research? • Answer appears to lie in the incentives and property rights issues associated with such research. • There are incentives to develop new drugs, because there is patent protection that allows the company to (potentially) sell the drug for profit, recouping the costs of both production and research. • The economic gains to the study of effective ways to treat a disease that don’t involve a specific product such as a drug or medical device are generally very small. • Prestige from publication of studies • Tenure and promotion at medical schools • Not sufficient to generate the socially optimal level of research • Better economic incentives are needed. 03 March 2021 35
14. 9 Infusion-Induced AIDS and Hepatitis • Another important externality in the health care system arises from the transmission of dangerous and/or fatal diseases through transfused blood. • Even though screening tests have been available (since 1985) to test donated blood for HIV antibodies, problems of transfusion-induced disease persist. • The AIDS test is imperfect because some persons donate blood while infected but before their antibody levels become detectable • Other diseases, notably hepatitis, continue to pass undetected into the blood supply system and create major health problems. • Thinking about blood supply policy in the context of property rights and liability has a long history. • Titmuss (1972) argued that the nature of a country’s blood supply was in many ways a key indicator of its moral character. • Opposed using a commercial blood supply, at that time the main source of whole blood in the U. S. , and sought to promote a wholly voluntary (unpaid) donor supply. • Many have argued for a voluntary supply on the grounds that it is allegedly safer. 03 March 2021 36
14. 9 Infusion-Induced AIDS and Hepatitis • Economists strongly disagreed with this idea. • Kessel and others asserted that the real problem with blood supply in the U. S. was not that it was overcommercialized but that it was undercommercialized. • The discussion turns closely on the question of the “liability” side of property rights law. • In donated blood, the donor never acquires any liability for the blood’s damage (if any), and, in fact, neither does the supplying agency (most predominantly, the American Red Cross and its affiliate agencies). • Because of this failure to acquire liability, Kessel argued, agencies that collect and distribute blood have too small an incentive to worry about the safety of that blood, and hence we have too much infection through the blood supply. • If property rights were complete, suppliers of blood would have the strongest incentives to guarantee the quality of their product, to promote information about that quality, and to take all necessary steps to prevent legal liability if tainted blood were administered under their auspices. • The legal system has not conferred property rights (and liability) on the blood system, so the externality persists. 03 March 2021 37
14. 9 Infusion-Induced AIDS and Hepatitis • Tighter donor screening and exclusion provide potentially powerful tools to reduce transfusion-induced disease. • Blood-banking organizations wish both to encourage donors and to provide safe blood to patients. • To satisfy the “donor encouragement” objective, blood banks are reluctant to exclude donors from donating blood. • With the current legal incentives and structures, some blood donors create serious and potentially fatal health hazards for others and do not account fully for these costs in their own actions, thus creating another externality. • In the U. S. , new donor screening protocols and more precise laboratory testing of blood have reduced the incidence of infected blood supply to about 2 percent of the background population rate of HIV infections and hepatitis C virus (HCV). 03 March 2021 38
14. 9 Infusion-Induced AIDS and Hepatitis • Blood banks state that the transfusion risk is now down to about 1 in 1. 5 million (each) for HIV and HCV. • Experts now state that (with improved laboratory tests) the rate of HCV infection is approximately one per two million units of blood. • According to a 2010 CDC report, a 2008 case of transfusion-acquired HIV was the first in the U. S. since 2002. • The externality from transfusion-transmitted infections (TTIs) persists in many nations throughout the world, even with modern laboratory tests that have nearly eradicated the problem in the U. S. • The extent of this externality problem closely tracks the overall extent of development across various countries. • WHO classifies nations on a composite scale called the Human Development Index (HDI), and groups nations into “very high, ” “medium, ” and “low” based on life expectancy, literacy rates, education, and standards of living. 03 March 2021 39
14. 9 Infusion-Induced AIDS and Hepatitis • In a report on the prevalence of infection in donated blood, found a strong link between HDI classification and the rate of blood infection. • WHO strongly recommends that nations develop an all-volunteer blood supply, noting a strong positive correlation between the extent of paid donations and the rate of blood infections. 03 March 2021 40
- Slides: 40