Yves here. This article will no doubt come off as unduly clinical, in the bad sense of the word, to many readers, but I hope you’ll bear with it. This piece contains useful information about how economic assumptions about the value of lives plays into health care policy. Better to be informed.
By Daniel Bauer, Hickman-Larson Chair in Actuarial Science and Associate Professor of Risk and Insurance, Wisconsin School of Business; Darius Lakdawalla; Director of Research at the Leonard Schaeffer Center for Health Policy and Economics at the University of Southern California; and Julian Reif, Assistant Professor of Finance and Economics, University of Illinois. Originally published at VoxEu
People with shorter life expectancies place more value on increases in survival than people who anticipate longer life spans. That may seem obvious, but economists have been making the opposite prediction for decades. This column demonstrates the mistake in the earlier theory and points out important policy implications, including that payers and governments are undervaluing investments in treating highly severe illnesses.
For over 40 years, policymakers and analysts have relied on an established framework for making implicit or explicit trade-offs between money and lives (Schelling 1968). While philosophical objections sometimes arise to a theory that equates life with money, this covenant is unavoidable in the real world, where policymakers and business leaders use it to guide vital decisions.
For example, increasing the safety of roads, nuclear power plants, and aircraft all costs money, but these investments reduce mortality. Health care is another salient illustration. Even though opportunities exist to reduce spending without harming human health, investing more in healthcare saves lives (Card et al.2009).
Generations of economists have contributed to this analytical framework, routinely assigning monetary values to extensions in human life (Arthur 1981, Rosen 1988, Murphy and Topel 2006).
While this economic structure has been enormously influential, it has also produced a few curious and unrealistic implications. For example, it implies that society is just as happy providing one month of life to 120 individuals in good health as it would be in providing ten extra years of life to one 50-year-old with a terminal and inoperable brain tumour. This prediction is at odds with evidence on how consumers report their own preferences over lives and money (Nord et al.1995), with the fact that societies invest significantly more resources in therapies than in prevention (Pryor and Volpp 2018), and perhaps also with common sense. Some economists have argued that this amounts to a flaw that is so fatal as to consign the entire economic theory of life-extension to the scrap heap.
Our research in Bauer et al. (2018) saves the life of this venerable framework. We show that the theory is sound and fits the facts well, provided we abandon a patently unrealistic assumption that was inserted at its birth. For simplicity, the early theorists assumed that consumers hold their wealth in a complete portfolio of annuities. Thus, instead of cash or investments in bank or brokerage accounts, each consumer possesses only a set of annuities that pay them a constant stream of income. This assumption is false and produces perverse implications for the value of life.
A very simple example illustrates the point. Imagine a 60-year-old retiree. If she owns nothing but annuities, her annual spending remains flat at, say, $30,000 annually. If she is unfortunately afflicted with a brain tumour, she has no ability to change her annual expenditures, because the annuities force her hand. However, suppose instead that she holds all her wealth in the bank. Before the brain tumour, maybe she expected to live to 85. After it, she expects to die 20 years earlier, or more. The brain tumour will cause her to spend more of her money each year, because she has fewer years to use up her wealth. This effect is slightly mitigated if she wants to leave behind some money for her heirs, but the basic pattern remains – if she is no longer planning to live into her 80s, she will see less need to save and skimp in her 60s.
This result has an important practical implication. In the wake of a severe health event – like our example of a brain tumour – each year of life becomes more precious, because it involves a higher level of consumption and wellbeing. Conversely, when people are in healthier states, life-extension becomes less valuable.
Several policy-relevant implications follow. First, in contrast to the old adage, cures may be more valuable than prevention. That is, adding an extra year of life through preventive healthcare, like vaccines or regular exercise, may be worth less to consumers than adding that same year of life when in a severely ill state. This helps explain why it seems so difficult to use policy levers to increase preventive health investments. In effect, policymakers are ‘pushing on a string’ when trying to get consumers to participate in prevention programmes.
Second, our findings matter for the evaluation of new healthcare technologies. A number of countries, including the UK, Canada, and Australia, explicitly use the economic framework for the value of life to decide how to allocate money to new medical treatments. Our analysis suggests this is causing them to undervalue the treatment of highly severe illnesses – like cancer – and overvalue mild ones – like hay fever.
The UK provides an instructive example, particularly because UK health authorities hew closely to the use of economic criteria for deciding when and how to reimburse new medical technologies. Perhaps as a result, the UK has ranked down the list of developed countries in the reimbursement of drugs to treat cancer, which has motivated legislators there to provide exceptional reimbursement for such products, above and beyond what the UK health authorities dictate (Lancet 2010). Controversy has erupted within the medical, scientific, and policy community over the appropriateness of this approach, and the legislation has drawn a great deal of criticism (Lancet 2010). Yet, our analysis illuminates how the severe nature of cancer might misalign the standard economic approach with the preferences of legislators and voters. Economists’ criticism of the UK’s cancer exception might be misplaced – indeed, it may be the legislators who have a better idea about the fundamentals of economic theory.
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This looks pretty much like another example of please take away the economists from my yard. It also reminds me of economical criteria for energy saving investments. You can, if you wish, maximize the economical benefits of energy saving investments using metrics like ROI. You migth also decide to maximize energy savings to the point of reducing economical benefits to zero using the same metrics. Up to this point, calculations are easy. Since economists are completely unable –they may try but will fail miserably– to count costs of future “externalities” like climate change, not to mention the “value” of lives saved by preventing climate change, they cannot quantify the macroeconomical effects of those investments in monetary terms or will have values that are not comparable with easy ROI calculations with enormous error margins, and with completely useless “mean values” obtained by inventing possible future scenarios.
Politics cannot be left to the mercy of economists. I migth be taking the logic of the article too far but following the example of UK and Cancer treatment, it seems clear that in cases of cancer in which the subject lacks significant savings –lacks “value”– drug reinbursement should be zero following these new economical metrics. No treatment should be granted.
^^^”…please take away the economists from my yard. “^^^
The mind reels, the gut roils.
The whole idea of monetizing human “value” is inhuman.
The people I have known in my life who smugly value themselves due to their “success”…meaning, generally, the size of their bank account…have been, without exception, people I wouldn’t pee on if they were on fire.
This is anecdote, of course…weighted by where I have lived for most of my life.*
How have we allowed this set of criteria for evaluating a Human Being’s worth to become such a reflexive norm?
Of course, I have perhaps a less than high minded interest in this…since under that rubric, I am essentially worthless…as are the vast majority of folks whom I consider exemplary Humans.
The mind recoils at the thought of evaluating human life in terms of money or for that matter in terms of economic value. In this regard, I am beginning to really detest the words economic and economy. Healthcare should be about the care of human beings so that they can live a fulfilling and healthy life without worrying about money. In Canada, the system has to choose what illnesses will be covered by our medicare system because we cannot afford, for example, a very expensive cancer drug that would be used for a small number of people. However, some extreme community measures can be used to obtain the money for expensive prescriptions, for example. The preventative part of healthcare comes from the relationship between the person and his family physician. The family doctor would promote those activities that would make his patients the healthiest. It is the family doctor that gives access to specialists whose work requires more experience and expertise than the family doctor. Because money is not central to this relationship, then prevention becomes important to make the patient’s life more comfortable.
Money should not be the central reason for deciding on treatment although there has to be some decision made for treatments that are very expensive and very unusual.
Part of this prevention should be attacking air, water and other pollution that can lead to unhealthy outcomes in human beings. Keeping government regulations regarding pollution is an important part of healthy living. The money saved in preventing pollution could be used for healthcare.
Yes, choices do have to be made about matters that affect health, and monetary impacts need to be taken into consideration. There is no sensible formula for such tradeoffs, however, since the values we place on life and health are multidimensional and often non-quantitative. The framework these authors defend should be an embarrassment to them, but they long ago drank the welfare economics kool-aid (that invests monetary flows with corresponding normative value) and can’t see its absurdity.
I wrote a book two decades ago on this very topic, Markets and Mortality, and the only qualification I’d give to it today is that it didn’t go far enough. It’s not just the consumer theory of the value of health that’s crazy, it’s the consumer theory of the value of everything.
What I find most disturbing with this article is the assumption that the preferences of “consumers”, about their own future life extension, should be the basis of public policy. So for example an industry that pollutes and will cause a slightly shorter life for many people is OK?
I would say that pollution is different.
Polluting industries typically have wildly unbalanced cost/benefit ratios as well as big external cost issues.
Actual example: Let’s say that a refinery in an urban area decides to turn off the pollution control devices so as to save $300,000 per year in chemicals. This causes something like $100,000,000 dollars in additional health care costs in the community. As long as they don’t get caught, the corporation is ahead. (This happened in Richmond, California, a few years ago.)
This clearly does not involve the “preference of ‘consumers'”. Nobody asked them what they want. There was not even an implied preference, since the law clearly required the company to operate their pollution controls.