Markets where the drugs don’t work

Yesterday I found a good excuse to post a quote from Frasier in discussing how high price increases the placebo effect – because people use it as a signal of high quality in choosing particular health treatments.

The problem is that price really isn’t a very good signal of quality. It’s easily manipulated by healthcare providers. Bad healthcare providers can easily masquerade as good ones, simply by charging very high prices.

This is one of the reasons why competition isn’t as effective in healthcare markets. Normally, competitive markets where there are many firms tend to be good for consumers: firms compete on price and quality to deliver the best value products to consumers. But if consumers are less likely to choose a lower priced treatment, then there is no incentive for a competing firm to try to undercut its rival: quite the opposite in fact. So consumers are left with the dubious honour of buying products that don’t really work better than a placebo, at prices that are well above the cost of actually making them. (Take for example, many homeopathic remedies where the main ingredient is that very expensive product, umm, water).

For public health policy there is another difficult issue. In many countries, such as the UK, medical care is to some extent paid for by the state. Does it make sense to spend public money on treatments that only work because of the placebo effect? There are some conditions for which there are no scientifically proven cures, but a placebo might make people feel better. So why not harness the placebo effect for good in these situations?

The difficulty is that a being prescribed a box of pills labelled “placebo, contains water and sugar only, costs almost nothing to make” doesn’t exactly inspire confidence in its efficacy. The pills need to have some sort of back story to make it plausible that they could actually cure you. Something like healing energies or magic bacteria. So that means that unless public health authorities want to make up their own fantasy back stories for placebo pills (difficult: lying to the voters is most definitely frowned upon these days), they need to purchase them from existing established placebo providers at prices well above cost: homeopaths, reflexologists, acupuncture… the list goes on.

The public health authorities might suspect these things don’t really work, but hey, at least they’re not the ones doing the misleading.  This seems to be the uncomfortable position of “alternative” medicines in the UK: despite a medical committee report suggesting homeopathy is unproven, the Department of Health said that it would continue to fund homeopathic treatments, citing its belief in allowing consumers being allowed to make their own choices.

I’m quite keen on choice – it’s what makes markets work well (usually). But I think consumers need to make informed choices, and I don’t think we’re doing a very good job of informing them at the moment. Trying to shatter the high price-high quality illusion would be a good place to start.

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One Response to Markets where the drugs don’t work

  1. Pingback: Frasier and Niles and placebos | Five Minute Economist's Blog

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