Calculating zero inflation when drug costs rose from $100 to $36,000

A paper by  Claudio Lucarelli and Sean Nicholson  (2009) examines the skyrocketing cost of colorectal cancer treatment.  In 1993, the price of treating these patients with chemotherapy was only $100.  By 2005, this price had skyrocketed to $36,000.  Is this what is wrong with our health care system?

The authors claim that the answer is no.  Although prices increased, so did quality.  Thus, the price per unit of quality has stayed fairly constant over time.  In the author’s words:

Using discrete choice methods to estimate demand, we construct a price index for colorectal cancer drugs for each quarter between 1993 and 2005 that takes into consideration the quality (i.e., the efficacy and side effects in randomized clinical trials) of each drug on the market and the value that oncologists place on drug quality.  A naive price index, which makes no adjustments for the changing attributes of drugs on the market, greatly overstates the true price increase.  By contrast, a hedonic price index and two quality-adjusted price indices show that prices have actually remained fairly constant over this 13-year period, with slight increases or decreases depending on a model’s assumptions.

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