• The value of health care

    This is a TIE-U post associated with Jonathan Kolstad’s The Economics of Health Care and Policy (Penn’s HCMG 903-001, Spring 2012). For other posts in this series, see the course intro.

    In their first paragraph, Murphy and Topel [1] (ungated PDF) hit readers with a stunning fact: “In 1900, nearly 18 percent of males born in the United States died before their first birthday; today, cumulative mortality does not reach 18 percent until age 62.” That’s just one of many ways to illustrate the impressive gains in longevity achieved in the 20th century, due to improvements in public health and medical care.

    Even though medical care can only claim credit for a fraction of the gains in longevity, it’s a substantial fraction, if you believe David Cutler and colleagues. Even at the high prices we in the US pay for care, Cutler et al. argue that the benefits have been worth it. This is the principal message of Cutler’s book Your Money or Your Life [2]. Hall and Jones [3] (ungated PDF here) argue that health care is so valuable, we should expend a greater portion of our wealth on it as our wealth increases. Allocating 30% in 2050 of our GDP to health care would not be unreasonable, according to their estimates.

    This sets up a key question, just how much should we be willing to pay for the longevity gains provided by health care? According to Murphy and Topel, a lot.

    Reductions in mortality from 1970 to 2000 had an (uncounted) economic value to the 2000 U.S. population of about $3.2 trillion per year. Cumulative longevity gains during the twentieth century were worth about $1.3 million per person to the representative member of the 2000 U.S. population. Valued at the date they occurred, the production of longevity-related “health capital” would raise estimates of per capita output in the United States by from 10 to 50 percent, depending on the time period in question.

    Prospectively, even modest progress against diseases such as cancer and heart disease would have enormous social values. A 1 percent reduction in mortality from cancer or heart disease would be worth nearly $500 billion to current and future Americans.

    With benefits this large, it would seem, therefore, that we should be investing a lot in health care technology. And, indeed, we are.

    But hold on. We can’t actually tell from any of this whether we’re investing too little, too much, or the right amount in the health sector. Any such claim is in the realm of allocative efficiency, about which I wrote yesterday, using a chart from Chandra and Skinner [4] (ungated PDF here). Even though health care investments have returned great value on average (even value above cost), that does not mean that investment today, at the margin, is efficient. Some investments might be, some might not. Moreover, there is tremendous inframarginal waste in health care. That’s just another way of saying that the sector is not productively efficient and, hence, we cannot assess allocative efficiency. It could be that we should spend our marginal dollar elsewhere. We don’t know.

    Look at it this way: There is no question purchase of shelter is valuable and worth the price, in general. That does not itself mean that adding another bedroom to your house is worth it. It would not be if you were simultaneously starving. It would not be if your kitchen no longer functioned. Thus, though past health spending can be credited with tremendous value that is worth what we paid, it does not follow that we should spend our next dollar on health care. Nor does it follow that we should not.


    [1] Murphy, Kevin M. and Robert H. Topel. (2006). “The Value of Health and Longevity.” Journal of Political Economy 114(5): 871-903.

    [2] Cutler, David M. Your Money or Your Life, Oxford University Press: Oxford, UK. 2004.

    [3] Hall, Robert and Chad Jones. (2005). “The Value of Life and the Rise in Health Spending.” Quarterly Journal of Economics, 122(1): 39-72.

    [4] Chandra, Amitabh and Jonathan Skinner. (2011). “Technology Growth and Expenditure Growth in Health Care.” NBER WP#16953.


    • In a “flat” world, can one locale spend twice as much on health care and compete.

    • Yes, it would be good to spend more on healthcare if it actually bought better health.
      However, in the US, our return on investment in health spending for most people has gone far beyond the point of zero returns to the point of negative returns. We spend twice what other developed countries spend and our health status is not as good as most of them.
      The medical industry charges premium prices for often ineffective and even dangerous products and services which do not buy better health. Examples of this are stents for stable angina, MRIs for simple sprains, robot surgery, proton accelerators, etc.
      Most of the improvements in health since 1900 have been due to better food, sanitation, immunization and other public health measures. I don’t think our medical care industry has contributed much.

    • “In 1900, nearly 18 percent of males born in the United States died before their first birthday; today, cumulative mortality does not reach 18 percent until age 62.”

      I bet you this is true for the UK as well, but their medical costs are about half ours.

    • I’m just doing a little back-of-the-envelope here.
      The graph is showing apprx $1,200,000 worth of life expectancy gains per capita. This seems like a lot, and certainly it is true that the gains we have made in life expectancy are impressive.
      But at our current health care speding rate of ~$7,000 per capita annually, that comes out to ~$500,000 per capita health care spending over a 75-80 year life span. So yes, based on those numbers, our “output” of $1,200,000 in morality benefit is still ahead of our $500,000 “input” in health care.

      However, I think that at this point “value” of our health care would still turn on the question of whether we can attribute all, or most of, those outputs to the same inputs – as Austin mentioned in the post. If you were to attribute even half of our gains in life expectancy (a conservative estimate, in my mind) to hygeine, vaccines, and penicillin, then the remaining $499,500 of health care that each person is receiving over his/her life starts to look a lot less cost-effective.

      (Cutler et al attribute 50% of our POST-1950 gains to health care techonology, but, as we can see from the graph, most of our 20th-century gains actually occurred before then)

      • Investment in health includes public health too. So I don’t understand why we have to credit health investment with only 50% of the gains. I probably didn’t make this so clear in the post.

    • Here’s a great presentation (as usual) from Hans Rosling on life expectancy and income over the past 200 years.

      Hans Rosling’s 200 Countries, 200 Years, 4 Minutes – The Joy of Stats – BBC Four


    • First a demographic comment:

      Most analysts agree that Medicare alone has raised the average life expectancy of older persons by about 8 years.

      That has happened just since 1965, and all the increase is due to medical care plus a decline in smoking. I cannot think of any other changes in America that would have caused this. Our air and water and sewer systems are about the same today as they were in 1965.

      Now to a sociological comment.

      There are many examples in economic history where medical improvements did not make societies richer.

      The most obvious cases are poor nations, where improved maternal health care just means an explosion of unemployed young people.

      The less obvioius example is America itself. It is not good to devise social policy based on anecdotes, but forgive me this one time.

      . I spend time helping at an Alzheimer’s caregivers support group at my church.

      If you spend just one hour in such a group, you will forever question the assumption that long life spans make us richer. My group is filled with families that are poorer in every respect because another member is living longer than ever before.

      I come away with the notion that when doctors and inventors save lives, instead of being given high salaries they should actually be taxed for what they are doing.

      Longer life spans are also destroying defined benefit pension schemes in the private sector, and may someday destroy Social Security also.

      In some ways this is a happy problem, compared to carting bodies off in World War II. But longetivity is a financial challenge for society, and medicine is making it tougher,