Arnold Kling  

Health Care and Cost-Effectiveness

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When Hell Froze Over... Lifespan and Heritability...

The New York Times reports on a recent paper by Harvard's David Cutler and two co-authors.


The study calculated, however, that Americans of all ages spent an average of $19,900 on medical care for each extra year of life expectancy gained over the last four decades of the 20th century. And that cost is worth it, the study authors say.

I was emailed a copy of the paper, but I do not see it on line anywhere.

The methodology is rather crude. They add up the increases in longevity over the past 40 years and they add up the health care spending over the past 40 years, and they compare the two. They do lots of disaggregation by age group and time period--I'm not saying it didn't take a lot of work. But it's crude. There are no direct estimates of costs and benefits.

The authors assume that 50 percent of the gains in life expectancy over the past 40 years are due to health care. At my talk the other day, I said that my rule of thumb would be to attribute only 25 percent of the gains to health care. The authors justify the 50 percent number, but if I were right then they are too optimistic about the benefits of health care.

On the other hand, most health care is what is called palliative care, designed to relieve pain rather than extend life. So they are probably, if anything, too pessimistic about the benefits of health care.

I actually believe two seemingly contradictory things. One is that, on average, health care spending is cost effective. The other is that, at the margin, a significant amount of spending is on medical procedures that are not cost-effective. In the health economics literature, my view is known as the "flat of the curve" hypothesis--obviously, I am not alone in believing it.

The flat-of-the-curve hypothesis is that if you were to rank-order treatments by cost-effectiveness, with the highest benefit/cost ratios first, then the first-ranked treatments basically carry the whole health care system. That is, they are so beneficial that in the average of the whole system the good treatments are not canceled out by the bad treatments.

Think of a treatment that costs $25,000 but saves an infant's life and generates 75 years of life-expectancy. At $100,000 a life-year, that treatment is worth $7.5 million, which means that you can waste over $7 million somewhere else and still say that in the aggregate medical care is cost-effective.

David Cutler's methodology does exactly that sort of aggregation. If there are policy implications that follow from this type of study, they elude me.


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COMMENTS (5 to date)
knzn writes:

I think the policy implication is that we had better be careful about health care reform because we have a lot to lose if we screw it up. If they had found that advances in health care weren’t worth the cost, then you could say, “Let’s just try anything that will reduce the cost. At worst it brings progress to a screeching halt, and we’re no worse off than we likely would have been.” As it is, we have to be careful that reducing the cost doesn’t also reduce the quality.

For example, do we want to make drugs cheaper (by any number of possible means: reducing the patent protection, increasing the monopsony power of buyers, reducing insurance coverage to make buyers more price-sensitive, etc.)? If Cutler et. al. had found that we are no better off than we were 45 years ago, there would be a strong case to say, definitely yes. There would be a clear benefit to cheaper drugs and no obvious harm. As it is, it appears that the incentives that high drug prices provide for producers may have motivated a lot of worthwhile research. So the answer is unequivocally maybe.

Dr. T writes:

The paper is from today's New England Journal of Medicine. As you indicated, the methodology is crude. I strongly disagree with the valuations of each extra year of life (between $100,000 and $200,000 in the U. S.). These valuations are too high in general and do not consider differences across the spectrum of ages. Is it worth $200,000 to keep a critically ill 3-year-old alive for one more year? Or how about a critically ill 83-year-old?

The paper did note that in the past 20+ years, a disproportionate amount of money has been spent on extending the lives of sick elderly patients. This is no surprise to any hospital-based physician. I work at a VA medical center and often see extensive and expensive efforts made to "save" an extremely ill elderly patient who had a rather low quality of life before his acute hospitalization. Tens of thousands will be spent to buy another few months of life (mostly in the hospital or in a nursing home).

Until that type of spending is reined in, medical costs will continue to far outpace inflation.

Mark Horn writes:
I strongly disagree with the valuations of each extra year of life (between $100,000 and $200,000 in the U. S.)... Is it worth $200,000 to keep a critically ill 3-year-old alive for one more year? Or how about a critically ill 83-year-old?
I find the idea of asigning a monetary value to someone else's life to be pointless. There is no way that anyone is going to agree on any value. The reason is, of course, that the answer depends on who's paying. If I'm paying for a stranger's life, then the cost of a substitute stranger is almost zero. There roughly 6 billion people I don't know. Losing one of them isn't much of a loss. It probably offends our sense of "the respect for human life", but based on my casual observations of how much the average person is willing to pay for some stranger's life, it would appear that "the respect for human life" offense is a pretty low cost.

If it's a friend, that's a bigger loss. Through some twisted assessment, I could probably come up with a cost of making a friend, and hence compare the loss of that friend with the cost of the substitute. If it's a family member, or very close friend, the cost is probably quite a bit higher.

But if it's my own life, there is no substitute. Which makes the cost of the substitute infinite. So $200k seems like a reasonable price. $1B seems reasonable in comparison to infinite $.

I think that the only reasonable answer is for individuals to figure out how much they can afford to pay for themselves. This might also include the voluntary assistance of family members and friends. Perhaps this can be done through insurance (real insurance - like car insurance, NOT like health insurance). Each person decides on a policy maximum and pays the premium for it. When that policy is spent, that's that. No one else is assessing the value of your life. You're assessing it by how much you're willing to pay.

The primary effect of this will be to reign in costs. The problem with the costs comes when someone else makes non-voluntary payments to support some stranger's lifespan. The stranger is able to spend without limit. But if we each have our own limit, then who cares, we paid for it. Additionally, the limit will impose a ceiling on how much will be spent. And the size of the limit will be controlled through premium prices.

As a side benefit, we also get a meaningful number. By assessing the average policy maximum, we can assess how much the average person values their own life.

Mark Horn writes:

Apologies if this is a repeat post. First post didn't appear to make it.

I strongly disagree with the valuations of each extra year of life (between $100,000 and $200,000 in the U. S.)... Is it worth $200,000 to keep a critically ill 3-year-old alive for one more year? Or how about a critically ill 83-year-old?
I find the idea of asigning a monetary value to someone else's life to be pointless. There is no way that anyone is going to agree on any value. The reason is, of course, that the answer depends on who's paying. If I'm paying for a stranger's life, then the cost of a substitute stranger is almost zero. There roughly 6 billion people I don't know. Losing one of them isn't much of a loss. It probably offends our sense of "the respect for human life", but based on my casual observations of how much the average person is willing to pay for some stranger's life, it would appear that "the respect for human life" offense is a pretty low cost.

If it's a friend, that's a bigger loss. Through some twisted assessment, I could probably come up with a cost of making a friend, and hence compare the loss of that friend with the cost of the substitute. If it's a family member, or very close friend, the cost is probably quite a bit higher.

But if it's my own life, there is no substitute. Which makes the cost of the substitute infinite. So $200k seems like a reasonable price. $1B seems reasonable in comparison to infinite $.

I think that the only reasonable answer is for individuals to figure out how much they can afford to pay for themselves. This might also include the voluntary assistance of family members and friends. Perhaps this can be done through insurance (real insurance - like car insurance, NOT like health insurance). Each person decides on a policy maximum and pays the premium for it. When that policy is spent, that's that. No one else is assessing the value of your life. You're assessing it by how much you're willing to pay.

The primary effect of this will be to reign in costs. The problem with the costs comes when someone else makes non-voluntary payments to support some stranger's lifespan. The stranger is able to spend without limit. But if we each have our own limit, then who cares, we paid for it. Additionally, the limit will impose a ceiling on how much will be spent. And the size of the limit will be controlled through premium prices.

As a side benefit, we also get a meaningful number. By assessing the average policy maximum, we can assess how much the average person values their own life.

Dr. T writes:

Mark Horn says: "But if it's my own life, there is no substitute. Which makes the cost of the substitute infinite. So $200k seems like a reasonable price."

$200,000 for another year of life seems reasonable... but what if 3 months of that year is spent in the hospital, another 3 months in a skilled nursing facility, and the entire year consists of pain, chemotherapy, nausea and vomiting, lethargy and confusion (from the disease, opiates, and other drugs). Would you want your estate depleted by $200,000 for a year of that kind of life?

My mother has advanced Alzheimer's disease. She has the mental abilities of a 2-year-old. She does not remember any of her children or grandchildren. She cannot remember what happened to her yesterday. She cannot read, watch TV shows, or do anything enjoyable. She is zombie-like due to the brain damage and the drugs used to manage her anger, irrational behavior, paranoia, etc. Would you put a $100,000+ value on extra year of this type of life?

Spending $200,000 to add another year of healthy, productive, enjoyable life to a 45-year-old family man is probably money well-spent. However, that is not the typical scenario.

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