During the twentieth century, life expectancy for Americans increased by approximately thirty years. A recent study develops a framework for evaluating the gains from improved health and longevity.
In the study “The Value of Health and Longevity,” University of Chicago Graduate School of Business professors Kevin M. Murphy and Robert H. Topel assess the “social value” of improved health and longevity. Social value refers to the estimated amount that additional life years, or other health improvements, are worth to individuals.
For economists, the classic way to measure the value of any good is calculating “willingness to pay” for a given product, in this case health and longevity. While there are no direct measures of what people are willing to pay for another year of life, there are many indirect measures based on actual behavior and life choices, such as risk factors on the job, where people live, or whether they smoke. From these life choices, it is possible to infer people’s willingness to pay for improvements in health.
The value of improved longevity is based on what individuals gain from the enjoyment of consumption and time during an additional year of life, rather than how much they earn. Murphy and Topel’s economic framework for valuing improvements to health and life expectancy is based on data about individuals’ willingness to pay.
“It is an error to value improvements in health based simply on measures of productivity or earnings,” says Topel. “This is especially true today, since most health improvements apply to older individuals who may have retired.”
Traditional measures of economic growth and welfare do not account for this source of rising living standards, and therefore underestimate improvements in well being. In addition, public expenditure accounts for a large portion of both medical research and the provision of medical care. Efficient decisions for health spending require a way to measure the value of treatment and research-based medical progress.
Murphy and Topel find that over the twentieth century, cumulative gains in life expectancy were worth over $1.2 million per person to members of the current population. To put this figure into perspective, Topel offers the following example: “Suppose you were offered $1.2 million to trade your health for that of an average American in 1900, when life expectancy was 30 years shorter. If you would refuse that offer and demand more in order to sacrifice that much life expectancy, then you may think our estimate is actually conservative.”
From 1970 to 2000, increased longevity added approximately $3.2 trillion per year to national wealth, the equivalent of half of the average annual GDP over the period. Half of these gains were due to progress against heart disease alone. Reduced mortality from heart disease has increased the value of life by about $1.5 trillion per year since 1970.
“The value of improvements in health care over the twentieth century are equal to or possible greater than gains in material well-being,” says Murphy.
Long-Term Evidence of Improvements in Health
From 1900 to 1950, improvements in longevity came at birth and young ages, due to large declines in infant mortality and deaths from childhood diseases. After 1970, improvements in health shifted toward older individuals, reflecting progress against heart disease, stroke, and other older-age ailments. From 1970 to 2000, gains in longevity were greatest for people between the ages of 40 and 60, and greater for men than for women, mostly because of advances in the treatment of heart disease.
Advances in health-related knowledge and its application can take many forms, ranging from the development of new medicines and techniques for treating disease to improvements in public health infrastructure. These advances affect the quality of life and the risks of mortality at various stages of the life cycle. The authors find that the value of remaining life is age dependent—first rising and then falling—as a person ages.
“The more life you have left, the greater the value of improvements in health,” says Murphy.
The cumulative post-1970 gains for men total $61 trillion, and $34 trillion for women. Combining gains for both genders, reductions in mortality between 1970 and 2000 yielded additional life-years with an end of century value of $95 trillion, or about $3.2 trillion per year. Of this amount, separate calculations show that two-thirds ($64 trillion) accrued to people alive in 2000, and one-third will be enjoyed by future generations.
The authors find that the current social value of a medical advance is proportional to the size of the current and future population to which it applies, and rises with wealth. Thus, economic growth is a boon to health related investments. Richer societies invest proportionately more in health because life itself is more valuable economically.
The value of progress against a particular disease is greatest when the current age is close to, but before, the typical age of onset of the disease. For example, progress against heart disease is concentrated at ages 50 and above. Therefore, the expected present value of such progress will be greater at age 45 than at ages 25 or 90.
Improvements in health and longevity are partially determined by society’s stock of medical knowledge. The United States invests over $50 billion annually in medical research, 40 percent of which is federally funded.
It is necessary to weigh the costs of implementing new medical technologies against the potential benefits of improving health. Overall, the authors find that the value of increased longevity has greatly exceeded the rising costs of health care.
Furthermore, mortality-reducing improvements in health are complementary. Progress against one disease raises the value of progress against other life-threatening ailments and diseases, because individuals are more likely to be alive to enjoy the benefits. For example, progress against heart disease raises the value of progress against cancer. Improvements in the types of health problems that increase with age also are complementary; progress against Alzheimer’s raises the value of progress against arthritis.
Rising Costs of Medical Care
The improvements in health and longevity from 1970 to 2000 came at a much higher cost than the gains from the early part of the century.
To be economically worthwhile, the benefits of health improvements must offset the costs of achieving them. These costs have two components: 1) the up-front cost of developing new health-improving technologies or infrastructure; and 2)the cost of actually implementing new procedures and treatments. Cost-benefit analyses of improving health care must take into account the change in medical expenditures that accompany life-extending medical progress. The authors point out that the key question is not what the research costs, but the cost of implementing the treatment.
Using data on individuals’ expenditures from the Medical Expenditure Surveys, Murphy and Topel estimated aggregate health care expenditure by age and gender from 1970 to 2000.
Medical expenditures grew from 11.3 percent of total consumption in 1970 to 19.6 percent in 2000. The per-person expenditure on medical services grew from $2,172 in 1970 to $4,855 in 2000, representing an increase of 124 percent. To calculate the net social value of health care advances, Murphy and Topel measured the value of increased longevity and changes in medical expenditures from all sources.
Between 1970 and 2000, increased longevity yielded a “gross” social value of $95 trillion, while the capitalized value of medical expenditures grew by $34 trillion, leaving a “net” gain of $61 trillion. Almost two-thirds ($39 trillion) of this gain occurs in the 1970s, where both gross benefits are highest and additional costs are the lowest. Overall, rising medical expenditures absorb only 36 percent of the value of increased longevity.
The authors suggest that increased research spending and cost containment are complementary goals. If there is effective cost-containment via cost-effective research spending, the value of research rises dramatically. Ideally, enhanced research funding would be combined with a delivery system that keeps an eye on cost effectiveness.
Prospective Gains from Medical Progress
There are substantial potential gains from future innovations in health care. For example, even a modest 1 percent reduction in mortality from cancer or heart disease would be worth nearly $500 billion to current and future Americans, and a potential cure would be worth $50 trillion. Estimates suggest that improvements in the quality of life may be the more valuable dimension of recent health advances.
To illustrate the “complementarity” of health advances mentioned above, the authors estimate that declining mortality between 1970 and 2000 raised the social value of future health progress by 18 percent. Two-thirds of this effect is due to increased willingness to pay for progress against heart disease and cancer.
The authors find that a 10 percent reduction in all causes of mortality would have a social value of $18.5 trillion. About 30 percent of this total ($5.7 trillion) is due to potential progress against cardiovascular diseases.
Similar progress against cancer would be worth $4.7 trillion, with roughly equal benefits for men and women. A 10 percent reduction in mortality from infectious diseases, including AIDS, is roughly the same value to men ($500 billion) as progress against breast cancer would be for women ($444 billion). To put these values in perspective, total federal health related research in the United States for 2005 is approximately $28 billion.
“The lesson of the last fifty years is the need to address the issue of research that will continue to extend longevity without breaking the bank,” says Murphy. “A system that better prices medical care may involve people paying a larger percentage of the cost of their own treatment, or enhanced insurance arrangements that allow us to have more effective cost containment.”
Kevin M. Murphy is George J. Stigler Distinguished Service Professor of Economics at the University of Chicago Graduate School of Business and the University of Chicago. Robert H. Topel is Isidore Brown and Gladys J. Brown Professor in Urban and Labor Economics at the University of Chicago Graduate School of Business.