Subjecting technical efficiency to cost-benefit analysis

While I was at the Wall Street Journal:

In a small, damp factory here, blood-smeared men wring pulp from pig intestines, then heat it in concrete vats.

The activity at Yuan Intestine & Casing Factory is the first step in the poorly regulated process of making raw heparin, the main ingredient in a type of blood-thinning medicine that in recent days has come under suspicion in the deaths of four Americans.

More than half the world’s heparin comes from China. The chemical is often extracted from pig entrails in small factories — many as rudimentary as this one, which also manufactures sausage casings from intestines. The heparin eventually ends up in drugs used world-wide by patients having surgery or who need dialysis.

The growing concern over heparin’s safety brings to the forefront the question of whether the raw materials from which it is made — for that matter, the raw materials for any drug derived from animals — should be more tightly controlled. The FDA’s position is that the purification steps in the drug-making process are sufficient to produce a pure product from pig tissue, and that “companies are responsible for sourcing the materials” and “appropriately processing the material.”

The health of the animals from which heparin is extracted can be important to the safety of the drug. Drug makers in the U.S. and Europe stopped using cows — a once-common heparin source — after the discovery of bovine spongiform encephalopathy, or “mad cow” disease, amid concerns that the illness could be passed on.

In China, not all heparin makers answer to drug regulators. That’s partly because some are registered as chemical makers, not drug producers. It’s a legacy of a regulatory system that focuses on finished drugs, not their ingredients, says Shen Chen, a spokesman for the State Food and Drug Administration in Beijing.

This part was interesting:

Mr. Yuan, the owner of the heparin and sausage-casing factory in the village of Yuanlou, is a gregarious man who takes pride in the business he has built. Now 57 years old, he has earned enough money from heparin to send his two sons to university. Mr. Yuan himself never graduated from high school because his family was too poor to pay for school.

He launched the original business in the mid-1980s making sausage casings from intestines. Later he added heparin production.

Funnily enough (sort of), I was being asked, by colleagues, about a related matter just the other day. As a vegan, how do I respond to prescribed pharmaceutical treatments when those drugs may come from animals (the intestines of about 3,000 pigs are required to produce a kilogram of heparin)?

Honestly, I just didn’t know. I don’t know whether drugs are vegan. My guess is that I would ask, and try to find vegan, yet effective, alternatives. At the end of the day if I needed that antibiotic, I’d take it. I’m vegan – but I’m not an idiot. For now, I think I’ll just keep hoping I stay healthy as a (healthy) horse.

More generally, this is our issue: how do we weight technical/productive efficiency (producing things for the lowest possible cost/price/resource use) with, say the risk of harm being caused by the corners cut? For me, this is an issue relating to the value of information.

The known risk of negative side-effects (say, Adrenal, Ovarian or Retroperitoneal hemorrhage, if you’re taking heparin) can be, and are, built into the model for cost-effectiveness employed by health-care systems the world over (risk-adjusted adverse events are negative benefits).

However, there’s this issue: if we agree that a drug is cost-effective, then go and manufacture it (efficiently, productively) in a weird farmhouse in China (for example) and, as a result, suffer four deaths and around 350 allergic reactions among heparin consumers in the US, that is something not a part of the original information set or decision-making.

How, then, do we proceed? It would seem that complexity needs to be considered more fully. When we say “the cost-effectiveness of this compound is this much”, we should be adding “…if it is made for this much in facilities of this quality in these countries.” Pursuing the lowest costs of production overseas has the potential to devalue the information we already had gathered on the benefits vs. the risks of any given pharmaceutical intervention.

Outsourcing clinical trials

If Union Carbide taught us anything, it’s that we don’t, truly, care so much about catastrophic outcomes when they’re in other countries.

During the 20th century, clinical trials – for many years a legal necessity to demonstrate that experimental medicines are safe and effective before their approval – were predominantly conducted on patients in North America and western Europe, close to companies’ scientists, regulators and principal markets. Since 2000, however, the expansion of western pharmaceutical companies around the world and the emergence of local rivals in developing countries have meant that the number of trials taking place in the emerging economies of China, India, eastern Europe and Latin America is catching up.

…

recruitment in western markets is increasingly difficult and costly. Patients are generally willing to participate in Phase 2 and Phase 3 trials, designed to measure efficacy, assess the appropriate dose and identify any side effects. But for rarer diseases, including for many cancers, the number of patients who are not already enrolled in trials for rival new drugs is limited – and the cost of finding them high.

By contrast, a number of the emerging markets offer good and improving medical infrastructure, at least for a significant proportion of their population, supported by well-trained doctors and assistants available at a fraction of western salaries – including many who speak English and were partly educated in the west. That can reduce the direct costs of trials by half or more.

Just as important, such countries offer large pools of patients willing to be tested, including many who are “treatment naive”, because the relatively low standard of healthcare compared with western countries means they have not had access to the latest and most expensive medicines.

Trouble is – and anyone who read or saw the Constant Gardener will, with all their cynicism intact, not be surprised, just because a cost can be saved, doesn’t mean that it should. Just as it was in Bhopal. The Financial Times provides this handy diagramme:

Transferability and generalisability are also serious issues. There are two key questions to be applied to clinical trial results: 1) Was the trial representative of the population to which the treatment will be offered? Will the effects measured be generalisable in the population? 2) Was the trial structure representative of the treatment delivery structure in the population? Will the effects measured be transferable to patients in the real world?

Odds are that, if the trial for a US-bound pharma product for a rich-man’s-burden kind of disease took place in Bihar, the answers to those questions will be no – in which case the uncertainty surrounded the results, ex poste, are probably unacceptably high for FDA, PBAC, NICE, etc.-level approval.

The FT also offers an impressive ethical dilemma:

Another is that patients may be unduly coerced to take part because a trial offers access to medical care they could not otherwise afford; and because they may lack adequate “informed consent” to understand they are taking risks by using an experimental medicine – or from receiving a placebo rather than the new drug.

A third concern is the lack of post-trial access to medicines. The country where a trial is conducted may not gain access until long after the drug is approved in the west. Often even the patients on whom a medicine is successfully tested are not guaranteed that they will continue to receive it once a trial comes to an end.

Pretty interesting debate, well-handled by the FT.

Who pays for tomorrow’s drugs?

The Problem

From the Telegraph (originally spotted at Environmental Health News):

Millions of lives could be at risk because the plants which provide the basis of more than half of all prescription drugs face extinction, a new report warns.

The loss of plants and trees which provide natural medicines could provoke a global healthcare crisis, says Botanic Gardens Conservation International (BGCI).

…

Scientists had predicted that biochemistry would allow most drugs to be produced synthetically in the laboratory but in many cases it has proved impossible to reproduce the beneficial compounds found in plants.

The report cites as an example the world’s most widely-used cancer drug, Paclitaxel, which is derived from the bark of several species of yew tree. Its complex chemical structure and biological function has so far made it impossible to produce artificially.

Until recently it took an average of 6 trees to produce a single dose resulting in the decimation of wild yew populations across the world. In China’s Yunnan Province, once famous for its yew forests, 80 per cent were destroyed within a three year period.

“The dramatic decline in a range of yew species, highlights the global extinction crisis that is facing medicinal plant species.” said Sara Oldfield.

Poorer countries will be particularly hard-hit if trees and plants continue to be destroyed at the current rate. The World Health Organisation estimates that 5.3 billion people – 80 per cent of the global population – rely on traditional plant-based medicine as their primary form of healthcare, and in many cases collection and sales of these plants provide their only form of livelihood.

Leaving aside the poor country aspect of the problem, for a moment, as well as the agency problem. Can Economics fix this? Of course – Economics can fix anything!

The Solutions

What would Economics do? The same thing it does with every negative externality: tax the participants of the market causing the harm.

We can take the Pigovian method: tax the drugs that deplete the resource necessary for the drugs, thereby (a) lowering their use (potentially their overuse) and (b) forcing more efficient/sustainable extraction or (c) forcing faster research into synthesised chemical compounds.

We can also take the Coasean approach, which is to tax the use of these drugs for the specific purpose of funding research into solutions to the problem – slightly different to the Pigovian method (for which the motive only has to be lowering consumption).

Alternatively, we can (and should) examine the cross-subsidisation. Given that the depletion of natural resources is a holistic one, much of what we do contributes to the problem. There is a strong case to be made for international regulation of some kind – since the countries where these plants are to be found have little in the way of oversight of their own. Our own governments could add pharmaceuticals to the idea of ‘food security’, and start domestic growth of these plants, so that any given country with the initiative and subsidies (using those taxes, for example) could secure its own supply of the same (or other potential) treatments for future generations.

The difference is as the title of the post suggest: who pays for tomorrow’s drugs? Today’s drug-users, or Today’s everybody (the idea being that (a) we all contribute to the problem, and/or (b) we, or our children, are all potentially Tomorrow’s drug-needers: we all have an investment in insuring ourselves against the catastrophe of no drugs).

Here’s another idea: we’re familiar enough, by now, with the idea of carbon-offsets. We (households or firms) purchase, say, land, somewhere – and that land has trees that off-set our carbon emissions. The Economics behind this (and the surety that the plan will work) is still yet to proved conclusively, as has the science that suggests any such behaviour will save us.

So: why not a market for Pharmaceutical-Resource-Depletion off-sets? Your firm pays some money, and X amount of acres of Hou Po are preserved in China – or planted in South Dakota.

It’s an idea.

The Caveats

Now, to the other issues: that poorer countries are affected first. This is always a problem. We are under no obligation to care, until the extent of the depletion affects us directly (or sufficiently, indirectly). This means it is very hard to affect change. We can be taxed into acting as though we care (when really we are just responding, tropishly, to a price signal) but we will not appreciate that tax at all – and likely punish the poor bastard who tries it. So how to find the incentives that enduce Pharma-plant Conservatism in people/firms is one of, if not the, Economic Problem. It’s the sort of thing with which the Environmental Defense Fund (for example) deals.

Second problem: agency bias. Who are Botanic Gardens Conservation International? According to the Telegraph:

The BGCI has drawn on the work of some of the world’s leading botanists, conservationists, healthcare professionals and traditional healers to identify which medicinal plant species are most at risk and what steps are needed to save them.

Plant conservation is their bag. Meaning that they have a vested interest in us believing, also, in plant conservation. Whether they intend to or not, (and whether they have or not) their bias existed before they ever began researching or writing the report. I’m not suggesting that the report is a lie; I’m not suggesting that we believe nothing until Merck or Pfizer themselves confess to the problem. I’m just saying that we need to attach that piece of information to the information BGCI is giving us – more information equals more and more rational decision-making, after all.

The war on terror, technological change and all-new Heroin products coming soon

The story that kicked this off was this one, in today’s Guardian:

A teenage student has become the latest victim in Dallas to die from a powerful and highly addictive new street drug known as ‘cheese’. The rise of the drug, a mixture of black tar heroin and powdered headache tablets, has been described as an epidemic. Dealers often sell it at $2 a time to get youngsters hooked. Because it is snorted, teenagers do not realise they are taking such a lethal heroin-based drug.

The economics of drug-use are very, very interesting. In terms of market demand, drugs can – historically – be separated into sustainable markets (sustainable by casual use) and not. So: Alcohol, Methampetamines, THC and Cocaine, etc. People can use them without disappearing into the bottom of society. Meth/Speed/etc. and Cocaine belong, for me, in the same line of thinking (in that Cocaine really isn’t worth the money: it costs too much and does too little. For people who can’t snort hundred-dollar bills up their noses, there are the more accessible substitutes). I guess I just lump stimulants together, with the dis-aggregated markets separated by income (and being a wanker). I shouldn’t, but it is okay for this purpose, at least, to do so.

Heroin, crack cocaine, free-basing, etc. belong in a different market, one that is not really sustainable unless there is plenty of turnover of consumers. With the same stock of consumers, you do not have casual/social use: you have junkies. Hence the mention in this story of the USD2 hits being sold, to get those new consumers and breathe new life into the market.

That’s the market. For individuals, demand can be considered differently. For things like Marijuana, Alcohol, Meth, Ecstacy, LSD, etc. (they’re called recreational for a reason, after all), we probably face a demand curve familiar to the Neo-Classical market. Decreasing Marginal Benefit from consumption (addiction notwithstanding, and allowing for the fact that these impair cognition, so we aren’t talking about the usual chocolate bar examples), and some responsiveness to risk, cost, leisure/work trade-offs, etc.

Harder drugs: heroin, which is delivered mostly intravenously; crack Cocaine which is phenomenally addictive; and freebasing, either Cocaine or mixtures (speedballs, for example: mixtures of Cocaine and Heroin). These are much more likely to have threshholds, meaning two stages in the demand function. The first stage is some decision to participate at all (I’ll return to it in a minute, but the needles are a big barrier for Heroin. The risk is big for rational recreational drug users for all of these, given how addictive they are). Once that is cleared, then there is kind of a demand, but we’re talking proper addicts: the idea of marginal benefit declining with use won’t really hold (amongst other things, the assumption of rational agents goes right out the window). Freebasing and smoking crack, for example, deliver by ‘slamming’ the Cocaine (hydrochloride) into the system. It’s big, but it’s very fast – meaning users tend to re-dose much too quickly, wasting themselves completely.

So, to return to the story. Needle-less Heroin! “Cheese”: this mix of black-tar Heroin and “headache tablets” (anything up to codeine? I don’t know), which apparently resembles Parmesan (meaning so granular you’d have to be a tit to imagine snorting it would be pleasant, but that’s just me). The first hurdle for heroin: needles, risk (of disease or prosecution) have been removed. Since needles are attached to the ‘bad’ of Heroin, it also looks like the fear of addiction is ameliorated by making it look as benign (speaking in relative terms) as Cocaine or Speed, i.e. recreational Heroin – if you can imagine such a thing.

It is, of course, not. I don’t know Heroin, personally, but I understand it to be a drug to which any drug user, however much some over-dosed Warren Ellis caricature, can still fall victim. One can blow their way through all the stimulants invented, but the opioid will win its fight.

So to war and technological change. Wars bring technological change by rapidly increasing production (new guns, jets, space travel, all come from war funding, war planning and war innovation), lowering marginal costs, increasing the user-base (increasing innovation at the point of use, as well as production). Now consider the war in Afghanistan:

Britain is stoned at home and sold out in Helmand

The vast increase in opium poppy farming in Afghanistan is indicative of an inability to grasp a basic law of economics

The British government for sure knows how to do one thing. It knows how to help farmers in need. Since it arrived in Afghanistan in 2001 and was put in charge of the staple poppy crop, ministers have spent hundreds of millions of pounds on promoting it. On Monday the United Nations announced the result. Poppy production in Afghanistan has soared since the invasion, this year alone by 34%. The harvest in the British-occupied protectorate of Helmand rose by 50% in 12 months. This is a dazzling triumph for agricultural intervention.

The Guardian also ran a good follow-up story to this one, if you’re interested.

Add to this infrastructural investments that will, as surely as if by design, stabilise and massively increase exports of opium. From the perspective of the Heroin market, we have the elements that we need. Just like crack and freebase cocaine grew out of participation in the market, new supply, even cultural awareness we can expect similar from Heroin.

This new product is an example of a market adapting its product to new consumers, getting them over that threshold. Producers, suppliers, dealers, etc. have every incentive to do so: it insures against a glut by diversifying the product itself, keeps the market thick and prices/profits up. I’m sure “Cheese” won’t be the first: not with this much supply coming on-line.

Like I said. Drugs make for very interesting commodities. Their markets are naturally very interesting, but I think they’re made more so by military policing – as identified in the Guardian article, military minds tend to move directly to the idea of policing, as though that alone is the incentive required. What they in fact do is cock up a market that economists could more easily regulate otherwise (i.e. the Senlis Council’s proposal).

Slight caveat: I’ve treated stimulants as recreational drugs, here, and I accept that they are not necessarily so. However, as an economist, I am assuming a rational recreational drug user (no, seriously) can understand these drugs and use them rationally. We make, for example, the same assumptions about Alcohol and Cannabis. It’s an important distinction for the use of a two-stage demand function for harder drugs.