eco question

Health Economics ECON 5860 PROF. KURT LAVETTI

Reinhardt et al (2004): Why is US spending so high, and can we afford it?

 Ability and willingness to pay  High GDP per capita in US

 Distribution of market power and prices  Salaries of healthcare professional  Fragmentation of purchasers

 Capacity of healthcare system  Supply side: “If you build it they will come”

 Administrative costs  Extremely complex and fragmented system

 Unwillingness to ration care  QALY concept and unwillingness to use it in US

Can We Afford It?

Depressing Wage Growth?

Depressing Wage Growth?

Source: Bosworth and Perry (1994)

What Factors Drive US Healthcare Spending  Ability and willingness to pay

 High GDP per capita in US  Distribution of market power and prices

 Salaries of healthcare professional  Fragmentation of purchasers

 Capacity of healthcare system  Supply side: “If you build it they will come”

 Administrative costs  Extremely complex and fragmented system

 Unwillingness to ration care  QALY concept and unwillingness in US to base

medical decisions on it (eg Medicare)

What is a QALY?

 Quality Adjusted Life-Year  Suppose you are diagnosed with an illness like heart

disease  Conditional on diagnosis you expect to live 10 years,

but will have limitations  What number of years without any limitations would

make you indifferent between the illness and the alternative?  Eg. Would you prefer 8 healthy years without any limitations or 10

years with limitations?

 If 8 is your indifference point then the QALY weight for this particular illness is 0.8

 Typically estimated by combination of medical theory and contingent valuation analysis

Estimated QALYs

Estimated Relationship between Age and QALY Weight

 Empirical estimates from the US suggest that 1 year of life at age 65 is worth roughly ½ a year of life at age 20-40

Source: Murphy and Topel JPE 2006

Valuing Human Life

 Example: What if we have the choice to impose a regulation on coal power plants that will reduce asthma and is expected to save 50 lives a year on average, but will cost $50 million per year. Should we impose the regulation?  What if the cost is $50 thousand, $50 billion, or $50 trillion?

 Designing efficient policies:  First, figure out the optimal spending cutoff per statistical life or

life-year

 Second, invest in things with the lowest marginal cost until the marginal cost equals the marginal benefit

Marginal Costs per Life-Year Saved

• Is this efficient?

Marginal Costs per Life-Year Saved

• Is this efficient? • Probably not:

can save more lives by moving resources from high cost interventions to low cost ones (eg move money from intensive care to immunizations, prenatal care, influenza vaccines)

Valuing Human Life

 In order to design public policies that maximize welfare, need to know how the public values its own safety  How much are people willing to spend on airbags?  How much higher are market wages for risky jobs?

 Observe how people make tradeoffs between money and safety in their own lives and use that as a value (term: Value of Statistical Life)

 Eg. If you are indifferent between a job that pays $75,000 per year with a 1% chance of occupational fatality, or a job that pays $50,000 per year with a 0% chance of fatality, then:

𝑉𝑉𝑉𝑉𝑉𝑉 = ($75,000 − $50,000)

1% − 0% = $2,500,000

 Can think about a similar calculation based on years of remaining life  This approach is used to estimate the value of one year of life

Reinhardt et al: US spends more per QALY than other countries

• Also argue that in the US we don’t ration care by equating marginal costs per QALY across different interventions

Is This Good or Bad?

 This is an empirical question: are we overspending on medical interventions?

 Another way of asking question: If rise in medical spending is due to improved technology that costs more, is technological change in medicine worth it?

 Cutler and McClellan (2001) study this question

Cutler and McClellan (2001)

 Compare costs and benefits of technological progress for 5 types of illnesses

 Angioplasty (stents) to treat heart attacks (1980s-90s)  Neonatal care for low-birthweight infants (1950s-90s)  SSRI-based antidepressants (1990s)  Improved surgical procedures for removing cataracts

(1970s-90s)  New chemotherapy and supportive drugs for breast

cancer (1980s-90s)  Gains greatly exceed costs for 4 of 5, gains equal

costs for breast cancer

Cutler and McClellan (2001)

 Example: Angioplasty for heart attacks  1960s treatment for heart attacks:

 Drugs (thrombolytics) to break up blockages of artery

 For extreme cases (<10%) coronary bypass surgery (graft new artery around the coronary artery), very intensive open-heart surgery

 ~1980 angioplasty invented  Insert metal stent into a vein, push it up to the

blockage area, then inflate small balloon inside stent to open up area

 Minimal surgery, only small incision in upper leg, fast recover time

Changes in Heart Attack Treatment Technology

Cutler and McClellan (2001)  Measuring costs and benefits of new technology  Use claims data from every Medicare enrollee

who had a heart attack between 1984 and 1998  Conditional on having a heart attack, average

cost was $12,083 in 1984 and $21,714 in 1998  New technology is increased costs by 4.2% per year

(after adjusting for inflation)  About 45% of the cost increase was due to patients

getting new technology, while only 33% of cost increase was due to rising prices for the same treatment

 On average, stents increase remaining life from 5 to 6 years (1 year gain)

 Net benefit is $100,000 - $25,000 (consumption costs) – $5000 (discounting) – (21,714-12,083) = $60,369

Practice Question

 Old Technology:  Costs $10,000  50% chance you will live 3 years, 50% chance you will

live 7 years  QALY weight: 0.6

 New Technology:  Costs $350,000  25% chance you will live 4 years, 75% chance you will live 12 years  QALY weight: 0.8

 Assume value of a healthy life-year is $100,000  Consumption costs $25,000 per year  Ignore discounting  Is the new technology worth it?

Cutler and McClellan (2001): Summary of Findings

Cutler and McClellan (2001)

 These are just examples, what about overall?  Difficult to do this for every illness

 Look at aggregate gains instead

 In 1990 life expectancy was 7 years higher than is was in 1950  Present value of medical expenditures per person was $35,000 higher in 1990  At $100,000 per life year, after discounting, the present value of the gains in life

years is $130,000  35/130=27%, so if more than 27% of the gain in life expectancy was due to

higher medical spending then technological change as a whole was worth it  Data suggest that medical spending accounts for more than 27%, but difficult

to calculate an exact rate  The gains in life expectancy from improvements for low-birthweight infants plus

from heart disease explain at least 25% of the total gains alone

 Even if all medical technology improvements had zero benefits except for those related to low-birthweight infants and heart disease, on average technological change was still approximately worth the cost!