Harvard economist David Cutler calculates the ROI on U.S. health care spending and debunks the idea that it's out of control.
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| David Ollier Weber |
Editor's note: This article is the first of a two-part series on David Cutler, an economist at Harvard who has a different take on rising U.S. health care costs. This week David Weber explains why Cutler believes the health care industry is benefiting the national economy. Next week he'll look at Cutler's proposals for outcomes-based incentives and universal health coverage.
Choose one:
A) The United States is spending far too much of its earned treasure--almost $16 of every $100 of the gross domestic product--to support the health of its citizens. In 1950 we devoted $4. National health expenditures are nearing the limit of sustainability.
B) The system of health care delivery in the United States is riddled with waste and inefficiency. The key to controlling the nation's soaring medical bill--expected to rise by another 13 percent in 2005--is to wring out overuse, underuse and misuse of limited resources. (Tort reform wouldn't hurt, either.)
C) Universal health insurance coverage is a worthy goal, but politically, structurally and economically, it's unfeasible.
D) All of the above.
If your answer is D (or for that matter A, B or C), you are voicing what Internet bloggers abbreviate as CW: conventional wisdom. In the book Your Money or Your Life: Strong Medicine for America's Health Care System (Oxford University Press, 2003), Harvard economist David Cutler explains where CW is conceptually weak.
In 1992, Cutler was one of the cabal of policy wonks assembled behind closed doors by then-First Lady Hillary Clinton, at the outset of her husband's first administration, to conjure wholesale reform of the nation's health care system. When their efforts foundered spectacularly, Cutler returned to his native academia to ponder the crackup.
"One thing about health care stuff is that it has an enormously bigger economic component than most people think," he says. So he started by examining the most basic questions: Is the nation's medical spending, as CW would have it, excessive? What is the value received? How would one go about measuring those terms?
Start with the concept of health. One of the most obvious markers is length of life, which on average has increased in tandem with a steady decline in mortality since the beginning of the 20th century. But there is also a matter of vigor--and here too the trend is positive. As recently as 1980, Cutler points out, one in four elderly Americans "had difficulty living independently." Today that is true of fewer than one in five--despite the fact that more people are now living to older ages.
Can we attach an economic value to those gains? Cutler notes the development of the concept of "quality adjusted life years," or QALYs. What is it worth to a person to live five years in good health versus 10 years with severe limitations? Depending on the degree of limitation and personal proclivities, answers will vary. Citing a variety of studies and methodologies, however, Cutler notes that most people put a price tag of $75,000 to $150,000 on each additional year of healthy life. (For those who want to examine his premises in detail, Cutler has posted a technical appendix on the Web at http://post.economics.harvard.edu/faculty/dcutler/book/technical_appendix.pdf.)
That, of course, is more than most people will earn in any of those years. But the annual average--$100,000--is a fraction of the amount they can expect to earn in a lifetime. And those healthy added years are being bought in advance, Cutler points out, in affordable annual installments, just as the nation's health care budget is a kind of annual insurance premium. There are also what economists term externalities: the costs to society when a person is too ill to work, contributes no taxes, collects disability payments and so on.
So now we have a baseline against which to measure the cost effectiveness of medical interventions.
"I decided to focus on one particular condition so that I could really learn what medical spending was buying," Cutler recalls. He chose heart attacks.
From the mid-1980s to the late 1990s, Cutler calculated, the average cost of treatment for a heart attack rose by $10,000. Meanwhile, life expectancy after an attack increased by about a full year. Therefore, increased spending on medical advances yielded, at least in this case, a huge (up to $90,000) benefit.
"Startled by the starkness of these conclusions," Cutler says, he looked at other major medical contributions to longer life and greater vitality:
1. For every low-birth-weight baby, for example, he found that medical expenses are about $70,000 higher over a lifetime now than in 1950--when most simply died in their incubators. Today these tiny infants live some 13 years longer (when mortality rates are averaged among birth-weight categories). Even after deducting other associated expenses such as special education and disability for the most impaired, each $1 spent on technology that enables premature infants to survive has paid back at least $5 in healthy life for which they and their parents are deeply grateful.
2. Diagnosing and treating severe depression with selective serotonin reuptake inhibitors (SSRI) drugs like Prozac costs about $600 net. But it yields a prorated economic benefit of at least $7 for every dollar spent. (At the same time, Cutler observes, recent studies suggest that fewer than one in four people with depression receive recommended levels of care.)
3. Dramatically reduced mortality from cardiovascular disease has added four years to the life expectancy of the average 45-year-old American, and three of those years, Cutler figures, result from advances in medical treatment. He pegs the payoff at $4 for every $1 invested. But the bottom line for heart-healthy behavioral change spurred by medical research and counseling--smoking cessation, better diet and exercise to lower cholesterol--is even more impressive. It has produced an astronomical ROI, as much as 30-to-1, he reports.
So, yes, 16 percent of GDP is a lot of money to pump into health care, Cutler acknowledges. But by his reckoning, the economic harvest we've reaped from increased spending to reduce heart disease and save newborn babies weighing less than 2,500 grams in and of themselves have recompensed the nation for every penny of medical outlay.
"If anything else has benefits," Cutler says--cancer treatment, trauma care, AIDS prevention, vaccination, what have you--then expenditure is "clearly worth it."
Maybe so, argue some critics, but the United States can't sustain a ravenous health care inflation rate that threatens to eat up a quarter of every family's income by midcentury.
IMHO ("in my humble opinion" in blog jargon), there is no need to worry, responds Cutler.
"People in the future will earn more than people do today, and that will make their spending burden smaller," he counters. "Even if medical care took one-quarter of [the $75,000 a year the average family is projected to earn in 2050], nonmedical consumption would still be large. In fact, it would be significantly greater than today.
"Fundamentally," he concludes, "the problem of medical costs is not one of affordability. We can afford to spend more on medical care if we want to. The real problem is value."
Next week: David Cutler explains why he's convinced answers B and C also fail to hold up to scrutiny.
David Ollier Weber is a freelance writer and principal of the Kila Springs Group in Mendocino, Calif. He is also a regular contributor to H&HN OnLine.
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This article 1st appeared on November 2, 2004 in HHN Magazine online site.
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