The Value of Health and Longevity
"A single percent reduction in mortality from cancer or heart disease would be worth nearly $500 billion to current and future Americans."
During the twentieth century, life expectancy at birth for a representative American increased by roughly thirty years. In 1900, nearly 18 percent of males born in the United States died before their first birthday - today, it isn't until age 62 that cumulative mortality reaches that level. This remarkable increase in longevity reflects progress against a variety of afflictions and diseases, driving reductions in mortality at all ages. It illustrates a substantial, but unmeasured, increase in social welfare attributable to improvements in health.
Rising longevity, and health improvements more generally, are aspects of economic progress. Valuation of these gains is important for two reasons. First, traditional measures of economic growth and welfare, based on national income accounts, make no attempt to account for this source of rising living standards. Therefore, they underestimate improvements in well- being. Second, public expenditures account for a large portion of both medical research and the provision of medical care. Efficient decisions require a framework for measuring the value of treatment and of research-based medical progress.
In The Value of Health and Longevity (NBER Working Paper No. 11405), authors Kevin Murphy and Robert Topel develop and apply an economic framework for valuing improvements in health and longevity, based on individuals' willingness to pay. They then use that framework to estimate the economic gains from declining mortality in the United States over the twentieth century, and to value the prospective gains that could be obtained from further progress against major diseases.
Murphy and Topel find that reductions in mortality from 1970 to 2000 had an economic value to the 2000 U.S. population of about $3.2 trillion per year. Over the longer term, the cumulative longevity gains during the twentieth century were worth about $1.3 million per person. Valued at the date they occurred, the production of longevity-related "health capital" would raise estimates of per capita output in the United States from 10 to 50 percent, depending on the time period in question.
The authors distinguish between two types of health improvements - those that extend life by reducing mortality and those that raise the quality of life. Life extension is valued because the utility from goods and leisure accrues over a longer period, and improvements in the quality of life raise the utility from given amounts of goods and leisure. This study provides a framework for calculating the economic value of a life-year, the value of remaining life, and changes in these values when health improves.
Based on a lifecycle model of consumption and survival, the authors show that the social value of improvements in health is greater: 1) the larger is the population; 2) the higher are average lifetime incomes; 3) the greater is the existing level of health; and 4) the closer are the ages of the population to the age of onset of disease. These factors point to an increasing valuation of health improvements over the past several decades and into the future. As the U.S. population grows, as lifetime incomes grow, as health levels improve, and as the baby boom generation approaches the primary ages of disease-related death, the social value of improvements in health will continue to rise.
The authors also find that improvements in health tend to be complementary. For example, improvements in life expectancy (from any source) raise willingness to pay for further health improvements by increasing the value of remaining life. This means that advances against one disease, say heart disease, raise the value of progress against other age-related ailments, such as cancer, or Alzheimer's. This is of significant empirical relevance, as it implies that the well-documented historical progress against heart disease, for which mortality has fallen by roughly 30 percent since 1970, has increased the value of further progress against other afflictions. The authors find that reductions in mortality since 1970 have raised the value of further health progress by about 18 percent.
Prospectively, even modest progress against mortality-causing diseases, such as cancer and heart disease, would have enormous social value. A single percent reduction in mortality from cancer or heart disease would be worth nearly $500 billion to current and future Americans. These estimates ignore the value of health advances to individuals in other countries, so they likely understate the aggregate social value of possible innovations. They also ignore corresponding improvements in the quality of life -- which evidence suggests may be even more valuable than gains in longevity -- and for these reasons as well they are likely to be conservative. The authors show that these values will increase in the future because of economic growth and, more interestingly, because health itself continues to improve.
Large as they are, these values may be offset by the costs of developing and implementing improvements in health. Current public and private spending on health-related research is a tiny fraction of what is available, but such investments may not be worthwhile if the costs of implementing new technologies are large.
An analysis of the social value of improvements in health is a first step toward evaluating the social returns to medical research and health-augmenting innovations. Improvements in health and longevity are partially determined by society's stock of medical knowledge, for which basic medical research is a key input. The United States invests over $50 billion annually in medical research, about 40 percent of which is federally funded, accounting for 25 percent of government research and development outlays. The $27 billion federal expenditure for health-related research in FY 2003 represented a real-dollar doubling over 1993 outlays. The authors suggest that the returns to basic research may be quite large, so that substantially greater expenditures may be worthwhile. Using the authors' estimate that a single percent reduction in cancer mortality would be worth about $500 billion, then a "war on cancer" that would spend an additional $100 billion on cancer research and treatment would be worthwhile if it h as a 1-in-5 chance of reducing mortality by one percent.
The authors caution that social transfer programs and other third-party methods of financing health care can distort both utilization decisions and research, with the result that some health improvements are socially inefficient.
--Les Picker The Digest is not copyrighted and may be reproduced freely with appropriate attribution of source.