Your Money or Your Life

Medical spending still a good value


It is conventional wisdom that health care costs in the United States are spiraling out of control. In fact, health care as a percent of U.S. GDP has tripled from 5.2 percent in 1960 to 16 percent today. Some analyses project that health care expenditures will rise to 25 percent of America's GDP by 2030.

So is there any evidence that we're getting our money's worth from the hundreds of billions we annually shower on hospitals, physicians and drug companies? Yes, says a team of health economists in an article published in the New England Journal of Medicine (NEJM) earlier this month.

The researchers from Harvard University, the Ann Arbor Veterans Affairs Medical Center, and the University of Michigan Health System note that inflation-adjusted, annual per person medical spending has risen from $700 in 1960 to $6,000 today. The researchers used increases in life expectancy to evaluate the rising costs of health care. They looked at life expectancies for four age groups (newborns, 15-year-olds, 45-year-olds and 65-year-olds) in 1960, 1970, 1980, 1990, and 2000. For example, since 1960 the life expectancy of newborns increased from 69.9 years to 76.87 years, for a gain of nearly seven years. Meanwhile, the life expectancy of 65-year-olds rose from 14.39 years to 17.86 years, an advance of nearly three and a half years.

They researchers assume that half of the gains in life expectancy over the past four decades are the result of medical care. The bottom line of their analysis: The average cost per year of life gained between 1960 and 2000 for newborns was $19,900, for 15-year-olds $31,600. At age 45 the average cost per life year is $53,700; for 56 year-olds the average cost is $84,700 per life year. So how do we know that these are reasonable expenditures? The researchers point to one widely cited estimate of $7 million for the value of a statistical life of a working age person. Using this figure, the researchers roughly calculate a value of $200,000 per year of life for a 45-year-old who can expect to live another 30 years or so. So the $200,000 value of a life year for a working-age person clearly exceeds the average $53,700 costs of medical care consumed in saving that life.

However, the authors of the NEJM study note that in recent years the average costs for saving a life year of a person older than 65 have been increasingly dramatically. For people 65 years old, the cost for life year gained was $145,000 between 1990 and 2000. If the rate of increase continues, the costs per life year saved for Americans older than 65 will surpass the value of an extra year of life. However, the authors acknowledge that longevity is an imperfect measure of the value of medical spending. A lot of health care spending may not boost life expectancy but may improve the quality of life. In fact, the rate of disability among the elderly in the United States has been declining for the past couple of decades.

The authors observe that other developed countries spend less per person on health care yet many have higher average life expectancies. This suggests that the U.S. health care system can be made more efficient. However, the authors point out that the increase in spending over the past 40 years is not "solely attributable to an increase in inefficiency. Indeed, medical spending has increased at roughly the same rate in all countries."

But are medical costs destined always to grow faster than GDP? Perhaps not. Columbia University health economist Frank Lichtenberg looks at the benefits of new pharmaceuticals. They do cost more than older drugs (many of which are now off-patent); but Lichtenberg calculates that replacing a 15-year-old drug with a 5-year-old drug increases the cost of a prescription by $18. However using the newer drugs reduces expenditures on hospitals by $44 and reduces the cost of other non-drug medical spending by another $27, for a total of $71. This yields an overall saving of $53. Of course, many new medical technologies and treatments cost more than earlier versions, but the new ones are generally more effective. On a hopeful note, the NEJM researchers suggest, "The genetic revolution is opening new avenues for medical inquiry, and some very cost-effective treatments could emerge."

Whatever the future may hold for medical progress and costs, the bottom line of the NEJM report is that "although medical spending has increased substantially during the past 40 years, the money spent has provided good value."