Value_Spending_09

# Value_Spending_09 - The Value of Medical Spending PAM 4350...

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Click to edit Master subtitle style The Value of Medical Spending PAM 4350 February 3, 2009

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Finishing the 1/29 Lecture § Some of the improvement in health (e.g., life expectancy, quality of life) is due to increased medical spending. § In order to understand whether the increased medical spending is worth it (i.e., benefits > costs), we need to determine the dollar value of a single year of life, as well as the dollar value of improvements in the quality of life.
Method 2: Occupational Choices Ø Some people choose to work in an industry or an occupation that has a relatively high probability of dying on the job. Ø These people should be paid extra money to compensate them for the additional risk they incur. Ø By comparing the extra compensation to the extra risk of dying, one can estimate the value people implicitly place on their own lives. Ø Extrapolating this value of a small risk to a certain loss of life yields an estimate for the value of a “statistical” life. Ø Dividing by a person’s life expectancy yields the value per year of life.

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Calculating the Value of a Life 1) Regress a worker’s wage on his/her experience, gender, education, whether he/she has a blue or white collar job, whether he/she is a union member, and the on-the-job fatality rate for the person’s industry. 2) Workers receive an average of 2.1 extra cents per hour for every increase of 1/100,000 in the on-the-job fatality rate, or \$43.30 per year. 3) Extrapolating, this implies a \$4.3 million value per “statistical” life. Source: Moore and Viscusi, 1988.
Method 3 -- Value of Time Versus Risk of Dying Example: Speed Limits Source: Ashenfelter and Greenstone, 2004. § States were given the choice in 1987 to raise the speed limit on rural interstate highways to 65 miles per hour. § Tradeoff: faster speeds save people time (and time is \$); but driving faster increases the risk of crashing/dying. § Results: a 10% increase in fatalities due to changes in a state’s speed limit are associated with a 1% reduction in travel times (due to an increase in driving speed). § Results are consistent with a \$1.5 million value of life.

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Summary of a Large Number of Studies on the Value of a Statistical Life § Most studies estimate the value of life to be between \$3 million and \$7 million. § If people expect to live an additional 40 years, this implies an approximate \$75,000 - \$150,000 value per year of life. § David Cutler (and many others) use \$100,000 as an estimated value per year of life. Source: Cutler and Richardson, 1998; Cutler, 2004.
Some medical care improves the quality of life rather than extending life expectancy How can we value improvements in the quality of life in financial terms?

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§ A year of perfect health is considered to have a QALY of 1.0 § A health condition can reduce a person’s health to a value below 1.0 § Methods of determining condition-specific QALYs: § Time-tradeoff : “rather than living for 10 years with your
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Value_Spending_09 - The Value of Medical Spending PAM 4350...

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