28 April 2017

David Cameron’s wasteful cancer calculation


It turns out it’s not only the Labour Party who likes to spray our money around with an enthusiasm we would find unbecoming in drunken sailors. David Cameron had his moments too, as the inquest into the Cancer Drugs Fund has found. The £1.27 billion that was showered on those pharmaceuticals was a total waste of money. Worse than that, the fund might have had a detrimental effect on patients, given the toxicity of some of the treatments paid for.

But this can’t have come as a surprise. We already have a rationing system in the NHS, called NICE. Unlike the impression its friendly acronym gives, what the body actually does is say: “Nope, sorry, you’re going to die, not worth saving you.” Every health care system have to have a way of assessing whether the cost of doing something outweighs the benefit from it being done. The usual measurement is if it costs more than £30,000 for an extra quality-adjusted year of life, then we get to die instead. Sure, there are some exceptions but that’s the general rule.

However, Cameron’s cancer fund was set up specifically to get around this cost benefit analysis. So, it’s inevitable that when we come to measure the effectiveness of his plan, we’re going to find out that it was a waste of money. As with so many political arguments there’s a certain circularity here. If we don’t do something because it’s a waste of money, and then go and find a way to do it anyway, it’s hardly a surprise to have it confirmed that, yes, money was indeed wasted.

The only way to change this is to change the way we do the calculation. Whether you or I get a specific cancer drug or not is of course a private good. But the existence of the drug to treat cancer in the first place is a public good. That it exists is “non-rivalrous” and “non-excludable” in the jargon. Sure, any specific dose of it can be denied to us and once taken cannot be used by another. But that we now know how to treat a particular cancer variant is useful to us all.

It’s also true that the major reason we have government is in order to gain access to public goods. Markets and individual action just don’t produce them efficiently – this is the very point about the government support of science. At which point we come to the vagaries of how drug development, drug existence, is paid for.

Depending on who you believe, it can cost somewhere between $800 million and $2 billion to get a new drug developed and approved. The economist will suggest it’s the upper end of that range once we take opportunity costs into account. Patents last 20 years, it usually takes the first half of that to gain approval. So, the development cost has to cover a decade of treatment for a few thousand people suffering from a virulent varient of cancer – which is why these drugs are so damned expensive.

But, then, at the end of the second decade, the patent expires and anyone can produce the drug with some mark up to manufacturing cost, but it won’t be priced so as to recoup the sunk costs of the R&D. This is why we grant the monopoly of the patent, in the first place, so that the fixed costs can be recouped.

So, we could, if we so wished, change our method here. Rather than saying that £100,000 a year (just to take it as an example) is way too much to pay for one extra year of life for one person, we could decide it’s a necessary investment so that in 10 years’ time we can save a similar life, using the same drug, for £1,000. Because this really is the way that it works. On introduction back in the 1990s Herceptin was too expensive to be used without a massive political fight. Now the patent’s expired, it’s on the WHO list of Essential Medicines. That’s just the way that it works.

So why don’t we just admit it: high prices for cancer drugs now is just what we’ve got to pay to have low prices in the future. That is, after all, why we’ve got a patent system for drugs in the first place.

However with the rationing system as it is, we have no alternative but to agree with Nice and conclude that the Prime Minister wasted money by circumventing the system meant to stop him wasting money.

Tim Worstall is senior fellow at the Adam Smith Institute