Tayfun Sonmez was at Northwestern recently to give a mini-course on market design. Naturally he discussed Kidneys. Tayfun pointed out that the use of money to procure organs was illegal in the US. What is more, physicians would show you the door should you mention its use. I think Tayfun used the stronger `throw you out.’
The opposition of (many?) physicians to the use of money to procure organs attracted my curiosity. Yes, they object (as do others) on ethical grounds. Should one accept that at face value? Could they object because it is in their incentive to do so? A transplant requires both a kidney and a team of physicians. Trade in kidneys is outlawed so depressing the supply of kidneys. This makes transplant opportunities scarce so allowing physicians to raise the price of a transplant. In other words physicians get to capture the rents from scarcity. Not just from transplants but from dialysis (a substitute for kidneys) as well.
So much for the theory. What about the evidence? I suppose one would look at the profitability of dialysis and transplant centers as well as the rate of entry. I would guess there have been large increases in dialysis centers. The Economist magazine in August 2010 describes the US dialysis market as
…….. the world’s most lucrative dialysis market, with the government spending $24 billion a year, or $71,000 a year per patient, on dialysis, and private insurers paying yet more.
As an aside, a recent paper claims that patients at for-profit dialysis centers are 20% less likely to be informed about transplant options and referred for operations than those at nonprofit centers.
The average hospital admission fee for a kidney transplant in the US is $91,200. However, the profitability of transplant centers is more difficult to determine because of how a hospital can choose to allocate its costs among its different divisions. I suspect that they must be profitable for the incumbents because of the 2002 fight between transplant centers over the geographical distribution of organs.
The Leisure of the Theory Class 
2 comments
June 13, 2012 at 10:33 pm
Steven
You need to be more careful with your theory. Physicians capture the scarcity rent of kidneys only if they can both prevent new entrants from accessing the fixed pool of kidneys and prevent expansion of output by existing surgeons. E.g., if new entrants have equal access to the pool of kidneys, then the rents will be dissipated by competition. Of course, if they can restrict output in this way, there’s little need to reduce the supply of kidneys. In fact, a perfect cartel generally loses by creating scarcity of a complementary input.
I’m not saying that you can’t tweak your model to fit your intuition. I’m just saying that you have some work to do to get there.
June 14, 2012 at 6:43 am
rvohra
Dear Steven
Absolutely right. Rap on the knuckles for me. I should have argued that regulatory approval and experience are barriers to entry. The following from Joshua Nemzoff, a Philadelphia hospital consultant. “Transplants are a highly specialized service that requires a significant level of skill and a very large population base,”
This is from the Miami Herald 5-14-12. Note this does not prevent existing operations from setting up franchises!