The Value of Health and Longevity - Kevin M. Murphy and Robert H. Topel

Kevin M. Murphy and Robert H. Topel

This commentary discusses why the value of increased life expectancy, and health improvements more generally, has been rising over time. This trend has important policy implications, such as the amount we should be investing in medical research.

During the 20th century, life expectancy at birth for an average American increased by roughly 30 years, a remarkable increase that reflects advances against a variety of afflictions and diseases. Progress during the first half of the century was rapid and concentrated at younger ages because of reductions in infant and child mortality. Progress then shifted toward older individuals, with better prevention and treatment for heart disease, strokes, and other older-age ailments. The largest single contributor since 1950 has been reduced mortality from heart disease, which has added more than 3.5 years to the expected lifetimes of both men and women.

Rising life expectancy, and health improvements more generally, represent an important form of economic progress, and their valuation is critical for two reasons. First, traditional measures of economic growth and economic welfare, based on national income accounts, do not take into account this source of rising living standards and may therefore seriously understate improvements in well-being. Second, large portions of both medical research and medical care are publicly funded and efficient decisions concerning the allocation of these resources require a framework for measuring the benefit of treatment and research-based medical progress.

Why Do the Value of Health Improvements Rise Over Time?

In a recent study, we developed an economic framework for understanding what factors determine how much people are willing to pay for health improvements that increase both longevity (which increases consumption of goods and leisure time over the lifecycle) and quality of life (which raises the utility individuals obtain from given amounts of goods and leisure time). Some health advances (such as better surgical techniques) primarily increase longevity, others (like reduced pain from arthritis) primarily improve the quality of life, and many others (like medications that reduce blood pressure or retard the advance of cancer) improve both aspects of health.

The social value of health improvements has been increasing over the past several decades, and will increase into the future, for a number of reasons, including some simple math. The U.S. population is growing, so proportionately more people benefit from a given advance. As income grows over time, and living standards rise, people gain more enjoyment out of an additional (healthy) year of life. Furthermore, people’s willingness to pay for health improvements peaks as they approach the age when they are most vulnerable to the risks of heart disease, cancer, and so on—so the aging of the baby-boom generation has raised the social value of medical advances against age-related ailments.

But most importantly, there is an increasing return inherent to medical progress: past success raises the value of new health improvements. Increases in life expectancy (from any source) raise people’s willingness to pay for further health improvements. That is, people are willing to pay more for good health as the likelihood that they will be around to enjoy that health increases. This means that advances against say heart disease, raise the value of progress against other age-related ailments, such as cancer and Alzheimer’s.

Economic Benefits from Improved Health

In fact, the economic gains from declining mortality in the United States have been enormous. Cumulative gains in life expectancy during the 20th century were worth nearly $2 million for a newborn in 2000, or more than $1.2 million to the average-age American alive in that year. Increased life expectancy between 1970 and 2000 alone added about $3.2 trillion per year to national wealth—an uncounted value equal to about 50 percent of average annual GDP over the period. About half of this gain since 1970 was from reduced prevalence of heart disease.

Moreover, reductions in mortality since 1970 have raised the value of future health advances by almost 20 percent. Prospective gains from a 10 percent reduction in all causes of mortality in the future would have an enormous social value of almost 20 trillion dollars in present value to current and future Americans. About 30 percent of this is due to potential progress against cardiovascular diseases, and 25 percent from progress against cancer. A 10 percent reduction in mortality from infectious diseases (of which mortality from AIDS accounts for about a third) has a far lower value (about $500 billion) because of the much lower incidence of this type of disease. For women, mortality-reducing progress against heart disease would be four times more valuable than equivalent progress against breast cancer.

These estimates are conservative in the sense that they focus only on the United States and do not include the value of these same health innovations to the rest of the world. They also ignore corresponding improvements in the quality of life, which, evidence suggests, may be even more valuable than gains in longevity.

Weighing Costs and Benefits

Health improvements are worthwhile if their economic value offsets their additional economic costs. Some of these costs take the form of changes in consumption or behavior, such as reductions in smoking, increased exercise, healthier eating habits, and moderate alcohol consumption. Other costs are those associated with implementing new procedures and treatments, or extended provision of existing medical service.

Kevin M. Murphy is the George J. Stigler Distinguished Service Professor of Economics at the University of Chicago's Booth School of Business. He primarily studies the empirical analysis of inequality, unemployment, and relative wages as well as the economics of growth and development and the economic value of improvements in health and longevity.

Robert H. Topel is the Isidore Brown and Gladys J. Brown Professor in Urban and Labor Economics at the University of Chicago's Booth School of Business. He focuses his research on labor economics, industrial organization and antitrust, business strategy, health economics, national security economics, economic growth, and public policy.

Nonetheless, we estimated that additional medical expenditures offset only 36 percent of the value of increased longevity after 1970. Even though the United States now spends more than $50 billion a year in medical research, about 40 percent of which is federally funded, substantially greater expenditures might be worthwhile given that the returns to basic medical research may be quite large. For example, using our estimate that a 1 percent reduction in cancer mortality would be worth about $500 billion, spending an additional $100 billion on cancer research and treatment would be worthwhile if it has a one-in-five chance of reducing mortality by 1 percent.

One significant caveat is that the presence of third-party payers (insurance companies and the government) increases incentives to spend on medical care because at the margin the individual receiving treatment bears only a small fraction of the treatment costs. In fact, over 25 percent of all Medicare expenditures are incurred in the last year of individuals’ lives, with allegedly little benefit. These pricing distortions may also skew investment in research away from cost-saving improvements in medical technologies. As a result, not all health improvements may be socially efficient.