MARCH 5, 2012
How Free-Market Kidney Sales Can Save Lives—And Lower the Total Cost of Kidney Transplants
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"Suppose that plumbers were given valuable pipes and fittings free of charge, on the condition that they could not resell what they had been given. What would we expect plumbers to do next?"
The recent conviction of a New York man for brokering the sale of black-market kidneys has economists and the general public alike rethinking the 1984 National Organ Transplant Act. This law prohibits the free trade of human organs, including, according to President Obama's Department of Justice (DOJ), bone marrow. However, a three-judge panel of the Ninth Circuit Court of Appeals ruled unanimously in Doreen Flynn at al. v. Holder that bone marrow donors could be compensated. Part of their reasoning involved the idea that if the government's argument (against compensation) were upheld, then the 1984 law "would prohibit compensating blood donors." The Obama Justice Department is now seeking a hearing by the full Ninth Circuit. What is the DOJ's argument? That bone marrow should not be subject to "market forces" because the resulting price of bone marrow would undermine voluntary donations and price many prospective recipients in need of transplants out of life-saving operations.
As is so often the case with government intrusions in markets, the 1984 law has had the opposite effect of the one intended. Instead of protecting people (especially low-income individuals) by ensuring that the kidneys they receive or donate are done so "morally," the law has effectively increased the death rate from organ failure and made it illegal for the poor to improve their lives through the sale of a kidney. Moreover, contrary to widely accepted conventional arguments on the subject, free-market sales of bodily organs can actually lower their effective prices. In this article, we focus on the market for transplantable kidneys, but only for purposes of illustration. The points we make here apply more broadly.
The Arguments, Pro and Con
One reason that free-market sales of transplantable kidneys (or other organs) from live donors are illegal is that many policy makers view them as repugnant. According to the World Medical Association and the World Health Association, such sales, especially by live donors, should be "condemned." Opponents of legalizing kidney sales claim that legalization would drive up the price of kidneys, reduce the number of kidneys demanded, and price low-income people with kidney disease out of the transplant market.
Proponents of legalized kidney sales stress the fact that people are blessed with excess kidney capacity and can, with attention to diet and drink, do just fine with one kidney. They also note that there are 90,885 American kidney-disease patients now lingering on waiting lists for donated kidneys. Kidney sales at elevated market prices will mean an increase in the supply of kidneys and a reduction of as many as 4,573 annual deaths from kidney disease. The poor can benefit in two ways: First, they can sell their kidneys at a price that will enable them to enrich their lives. Second, they can actually pay less for the transplanted kidneys than they would have to pay over time for weekly, if not daily, kidney dialysis.
Opponents and proponents have locked political horns. Interestingly, though, both sides presume that free-market kidney sales will actually lead to higher kidney prices and, therefore, higher total costs of kidney transplants. Their presumption is, in all likelihood, wrong. Legalizing kidney sales would reduce the total cost of the transplants, a point that, unfortunately, even many proponents of a free-market for transplantable organs have missed.
The Economic Ways of Plumbers, Doctors, and Hospitals
To see why legalizing kidney sales would reduce the total cost of a kidney transplant, consider a thought experiment: Suppose that plumbers were given valuable pipes and fittings free of charge, on the condition that they could not resell what they had been given. What would we expect plumbers to do next? They could obviously provide their customers with "free" pipes and fittings. But plumbers should have no problem figuring out what else to do in face of a resale prohibition: They could simply give away the pipes and fittings and then increase the price they charge for their labor. After all, customers value the pipes, fittings, and plumbers' services as a package, and the fact that the pipes and services are provided free doesn't reduce the value of the package. So, plumbers would charge a high price for the package. The pipes and fittings would be "sold" at their free-market price, but the price of the pipes and fittings would be hidden—and everything would be legal.
Now consider transplantable kidneys. With the current laws prohibiting the sale of organs, kidney donors are essentially giving "free" kidneys to doctors and hospitals under the same condition imposed on plumbers in the previous example—the doctors and hospitals cannot resell the kidneys. As with the plumbers, the doctors and hospitals know that the "free" kidneys have added to the overall value of the transplant package. (Indeed, the transplant package would have no value at all without the donated kidneys.) What would we expect the doctors and hospitals to do? Unless they are, compared to plumbers, less wise in the ways of markets or less inclined to exploit their market positions, we should expect the total price of the transplanted kidney operations to reflect, more or less, the market value of the surgery (and related) services. This includes the market value of the kidneys that they have received free of charge. Moreover, because of the law against donors selling their kidneys, we should expect the number of kidneys supplied to be lower than if kidney sales were legal. This last fact has an important implication. With fewer kidneys supplied, the marginal value of a kidney is higher. This means that the implicit price that doctors and hospitals can charge for the "free" kidneys and the transplant operations is higher. The result is that the overall price of a kidney transplant is higher than if kidney sales were legal.
A simple supply-and-demand graph, illustrated in Figure 1, can clarify our central points.
Figure 1. The Supply and Demand for Transplantable Kidneys
The demand for kidneys is a function of several factors, including the size of medical schools and their need for kidneys in research and instruction and the number of people who experience kidney disease or outright failure. Because kidney failures can be linked to a person's eating and drinking habits, such habits can also affect the demand for kidneys. Further, the demand for kidneys is related to the cost of alternative treatments (dialysis, for example) and known techniques for transplanting organs. The greater the cost of alternative treatments, the greater is the demand for transplantable kidneys. As transplantation techniques are perfected and spread throughout the medical industry, doctors' willingness to operate will rise, increasing the demand for transplantable kidneys.
In economists' jargon, the demand for transplantable kidneys, like the demand for other goods, is downward-sloping. That is, as the price of a kidney rises, more people will be willing to stay with the then-cheaper dialysis machine rather than get a kidney and others may be excluded from the market because of insufficient funds to buy at the higher prices.
The supply curve of transplantable kidneys is upward-sloping, as the figure shows. Even when someone who gives up a kidney receives a zero payment for it, as is true today, some people still choose to donate kidneys. This quantity, depicted by Q1 in the figure, reflects people's altruism and benevolence. As the price rises, more and more people will overcome their hesitancy to give up one of their kidneys, offering it for sale, with the payment compensating "donors" for any discomfort felt. From Q1 outward, the supply curve rises in a normal positive direction, illustrating that a larger quantity will be made available to buyers as the price rises.
Imagine first a world in which the quantity of kidneys demanded is very low regardless of the price. For example, consider a demand curve such as D1. D1 reflects a demand for kidneys so low that even at a price of 0, the quantity of kidneys demanded is satisfied by the quantity supplied. With a supply equal to S1, charitable donors are willing to give Q1 kidneys, and that is all that potential demanders want even when the price is zero. In that case, the equilibrium price of a kidney is zero. This completely altruistic system works to give a kidney to everyone who wants one.
But that is not the world we live in. If it were, there would be no shortage of kidneys. In fact, there is an ongoing and substantial shortage of transplantable kidneys. This means, in terms of our graph, that the demand for kidneys is greater than D1. Assume that the demand is D2. Then, the number of kidneys demanded at a zero price is Q3, which is greater than the quantity being offered out of altruism, Q1. The resulting shortage is Q3 minus Q1. That shortage means that many people will go without kidneys and that some will die. That is the world we live in.
If a free market in kidneys were allowed to function, the explicit price of kidneys would rise toward the intersection of supply and demand, or P1. How high is P1? Many people argue that it can be several thousand dollars or even tens of thousands of dollars, mainly because black-market kidney prices have ranged from a low of $2,000 to a high of $300,000.
Perhaps nothing can be said to change the minds of many people who oppose the sale of kidneys, but another important point evident in the graph should not be overlooked. At a price of P1, the number of transplantable kidneys, Q2, is greater than Q1, the number provided when the price is zero. Allowing kidney sales, therefore, means that fewer people will be strapped to a dialysis machines for the rest of their lives.
Furthermore, with sales being legal, doctors will have a greater variety of kidneys to choose from, and the greater variety can mean that doctors can more closely match the kidney to the recipient, reducing the possibility of rejection. Doctors will tend to receive a larger number of kidneys from live donors. Since experience indicates that the rejection rate is lower with kidneys from live donors than from cadavers (the "donors" and recipients can, at times, be brought together at times in the same hospitals), further reductions in the "spoilage" and rejection rates can be achieved. That means fewer deaths, and it also means that many others will live more-normal lives.
In addition, as emphasized above, the market value of the kidney is included in the prices that doctors and hospitals charge. Having recognized the prospects of the donated kidneys' being sold for implicit prices, we might ask: "What would the implicit price be?"
In the figure, the restricted donated quantity of kidneys, Q1, could be sold for P2 (assuming that the demand is D2), which is what would be charged if the doctors and hospitals involved were to maximize their take from the operations. This means that if the donated kidneys are actually sold to the patients (via increases in other doctors' and hospitals' bills) at P2 (or at any price above P1) before the advent of a free market in kidney sales, then the advent of a free market in bodily organs would cause a drop in the price of the kidneys from an implicit price of P2 to an explicit price of Pl.
Indeed, seeing the legalization of kidney sales through our economic prism offers an added explanation for the hostility of many doctors and hospitals to allow free-market sales of transplantable organs. Free-market sales of kidneys would reduce their ability to charge for "free" kidneys.
Proponents are right that free-market kidney sales will increase the available quantity of transplantable kidneys. This would give people with kidney disease a new option and would save lives. We simply add an unheralded market outcome—that free-market kidney sales would also lower the total costs of kidney transplant operations. What's not to like about those outcomes?
More specifically, the 1984 law makes it a federal crime to "knowingly acquire, receive, or otherwise transfer any human organ for valuable consideration for use in human transplantation if the transfer affects interstate commerce" (National Organ Transplant Act. Pub. L. 98-507, Oct. 19, 1984). Retrieved on February 16, 2012 from http://history.nih.gov/research/downloads/PL98-507.pdf.
From a resolution adopted by the World Medical Association, October 1987, Madrid, Spain. See also World Health Association. Legislative Responses to Organ Transplantation. Dordrecht: Martinus-Nijhoff and Kluwer Academic, 1994: 467.
As reported by "Data." OPTN: Organ Procurement and Transplantation Network. U.S. Department of Health and Human Services. Web. Retrieved February 16, 2012 from http://optn.transplant.hrsa.gov/data/.
As reported by Havscope Black Markets, Kidney and Organ Prices (with dates for the various prices from the linked sources provided). Retrieved February 16, 2012 from http://www.havocscope.com/black-market-prices/organs-kidneys/ (with links to sources of various prices). However, economists have estimated that with an expected dramatic increase in the supply of transplantable kidneys, the price of kidneys might go no higher than $1,000 (Adams, A. F., A. H. Barnett, and D. L. Kaserman. 1999. "Market for Organs: The Question of Supply." Contemporary Economic Policy17 (April): 147-155.)
The market system is not without its difficulties in this area. As noted, some people in need of a kidney will be unable to buy one because of their limited financial resources. But although the introduction of a market for kidneys may reduce altruistic donations of kidneys, it would not preclude such donations. Kidney donors can choose to donate them to poor people. In addition, such persons' financial problems can be solved in the same way that we now solve many other health-related problems of the poor, through charity and governmental aid. One important strength of the free market is that it would make more kidneys available to the government and charitable groups to provide to the poor.
Kathryn Shelton is a research assistant in the O'Neil Center for Global Markets and Freedom at Southern Methodist University.
Richard B. McKenzie is professor emeritus in the Merage Business School at the University of California, Irvine and co-author with Gordon Tullock of The New World of Economics
(forthcoming in a 6th edition in March 2012), from which the graphical analysis in this commentary has been extracted, with adaptations.
For more articles by Richard B. McKenzie, see the Archive.