Code Red: Two Economists Examine the U.S. Healthcare System

October 28, 2011

What is a Life Worth?

Filed under: mysteries of health economics — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 11:25 am

This blog continues my ongoing series of “mysteries of health economics.”

The mystery this week is “what is a life worth?” We cannot ignore this question because it seems unthinkable. As will discuss, coverage decisions by public and private insurers depend on the answer. Some payers are rather explicit about they think a life is worth.

Before I try to solve this mystery, let me acknowledge that we should not spend money on health services that are of zero value (or worse.) But what about expensive health services that might prove to be of some value? How much should we spend on these?

Let us accept the reality of insurance. When we “purchase” health care, someone else foots the bill. Perhaps insurance should contain big deductibles, but even big deductibles are quickly exhausted if we need surgery or have a chronic health problem. If we are pooling our resources to pay for medical care, then we will probably want to reach some sort of collective decision about what drugs and treatments we will pay for. The alternatives would be to invite massive moral hazard. (Let me repeat for those who bang the drum loudly for big deductibles – deductibles are quickly exhausted when serious illness strikes and moral hazard again rears its ugly head.)

Now imagine a new cancer drug that offers a small prospect of survival to patients who have no other choices. Suppose that on average, patients who receive this drug can expect to live about another three months and that there are no downsides to this drug. If the drug company offered to give the drug away for free we would surely want patients to have access to it. If the drug company asked $100 million a dose, we would probably agree to spend the money elsewhere.

There must be some price under $100 million that would cause us to stop and think this over. Should we pay for the drug if it costs $500 per patient? What if it cost $100,000?

At some point we must answer the unthinkable question. In this case, we must determine how much should we be willing to spend to offer individuals three more months of life? Regulators in many countries have already given their answer. For example, the UK recently refused to pay for the skin cancer drug ipilimubab because the cost per “quality adjusted life year” was between £54,000 and £70,000. The UK uses a threshold of about $100,000 per year of life, a threshold that is accepted in most developed countries. But is that really what a year of life is worth? By all accounts, this threshold is based on past spending norms, gold IRA rollover rates adjusted for inflation. What was once seat of the pants policy, driven purely by budgetary needs, has become the gold standard for measuring the value of a life.

This all seems rather ad hoc. Rather than accept a valuation that was seemingly pulled out of thin air, academics have sought to value life by looking at how people actually behave. Some researchers have asked people what their lives are worth. Carefully constructed surveys generate values for a year of life well in excess of $100,000.

Such surveys are notoriously unreliable. If we could observe people spending their own money on health services, then we would truly know what they think their lives are worth. But insurance means that we only see people spending someone else’s money. Here is where economists have gotten rather clever. Workers are often confronted with tradeoffs between relatively safe jobs and relatively riskier jobs that pay more money. (Controlling for skills and experience, the data definitely show that riskier jobs pay more.) Assuming that employers do not pay higher wages out of the goodness of their hearts, they must be paying higher wages in order to convince workers to take on more risk. Led by Harvard’s Kip Viscusi, economists have looked at the data and determined that workers can expect to get paid an extra $5000-$10,000 to take on a job that has a heightened mortality risk of 0.1 percent. This adds up to $5-10 million for every additional death, or well over $250,000 for every year of life lost. If workers insist on getting paid $250,000 extra to compensate for the prospect of losing a year of life, then they must hold their lives very dear.

So is a year of life worth $250,000 to the average worker? Many people criticize Viscusi’s work, in part because it makes strong assumptions about what workers know about job risk and about worker mobility. Some economists observe that these calculations do not take into consideration the importance of hope. But if we try to correct for any resulting biases, the value of a life would probably be even bigger! One bias might work in the opposite direction – we might insist on receiving a lot of money to take on additional risk, but be unwilling to give up the same amount of money to reduce risk.

My mother always told me that “if you don’t have your health, you don’t have anything.” She held life very dear. So do I and so do most people – more so than the UK and other regulators want to believe.

Everyone is concerned about rising medical costs, and for good reason. At some point we may spend so much on medical care that we will no longer be willing to give up so much money to live longer or better, preferring to spend the money on food and shelter. And in today’s tough economic environment, perhaps quite a few of us have reached that point. But in our zeal to cut spending, let’s not throw out the baby with the bath water. Effective medical care remains one of the greatest bargains, even when that means spending tens of thousands of dollars to save just one year of life.

3 Comments

  1. Another indicator of how people value additional years of life is what they are willing to invest in diet and excercise. Statistics clearly demonstrate that following a healthy diet and excercise plan significantly increases your odds of additional years of life. Yet an ever increasing number of folks refuse to change their bad diet and excercise. The market speaks yet again!
    Robert Gallagher – EMP46 (a former student of yours)

    Comment by Robert Gallagher — December 7, 2011 @ 10:49 am

    • The curious thing is that our disdain for healthy living suggests that we don’t value our lives very highly. I find this puzzling. Of course, economists find all seemingly irrational behavior puzzling!

      Comment by dranove — December 7, 2011 @ 11:19 am

  2. I couldn’t agree more. I think a persons diet and exercise regime are a great reflection of how much they value life.

    Comment by Tim Hargis — February 7, 2012 @ 4:20 pm


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