Monday, October 09, 2006


I just recently read this paper from Wesley Yin at The University of Chicago. Before I started reading Arnold Kling, my opinions on healthcare were quite stagnant. However, after many of the posts Kling makes on healthcare, I found myself interested, and my views on healthcare changing.

Yin’s paper reveals a by-product of the Orphan Drug Act (ODA); an act that was supposed to (and has) help develop drugs for rare diseases. Yin calls the unintended effect of the ODA “balkanization.” Essentially balkanization is when a drug company creates a new rare disease that is actually just a derivative of an already well-established disease.

Here’s Yin:

I find that 25-percent of all clinical trials induced by the ODA represent balkanization. While limiting off-label drug use may be impractical, reducing balkanization by imposing a fee when an orphan drug reaches a trigger level of off-label sales may be viable. Extending the moral hazard analogy, the fee or tax repayment can serve as a “co-payment” to reduce the incentives to balkanize. At the same time, co-payments also create a disincentive for firms to develop drugs for previously unconsidered alternative uses (true R&D externalities). More creative solutions may be able to limit social waste without extensive cost to innovative activity.

If you care about economics and/or healthcare, this paper might be worth your time. Or at least, just giving a couple minutes to think about “balkanization” could be worth your time.
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