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More on Value of Life and CBA

Cost-Effectiveness Analysis in Health Care. More on Value of Life and CBA. Use of CBA in Health Problems with Willing-to-Pay for lives VSL vs. VSLY Is Modern medicine worth its cost? Slides on Other VSL topics. Key Points.

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More on Value of Life and CBA

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  1. Cost-Effectiveness Analysis in Health Care More on Value of Life and CBA Use of CBA in Health Problems with Willing-to-Pay for lives VSL vs. VSLY Is Modern medicine worth its cost? Slides on Other VSL topics

  2. Key Points • We use WTP to get the Value of a statistical life (VSL), but there are problems in doing so. • Contingent valuation can help. • “Lives saved” and QALYs can lead to different decisions • How should VSL vary with age, wealth? • Cutler: the health gains from technical progress makes higher medical costs worthwhile.

  3. Measures of Effects Options Direct Cost, millions Indirect Cost Years of Life Exp. Restricted Satis- Activity faction Days A 4 100 B 1 50 10 200 C Summary Table of Costs and Effects 1000

  4. Cost Effectiveness and Cost Benefit • Cost-Effectiveness Analysis (CEA) • Focuses on a single effect • e.g. number of kids vaccinated • or aggregates all health effects into QALYs • gives efficient way to allocate fixed budget • Cost-Benefit Analysis (CBA) • Aggregates all effects into dollars • even living longer or better • answers “ Is a program worth it”

  5. Willingness to Pay for a statistical life (VSL) • So CBA needs a value for health or life-saving gains. • “lost wages” was the historic measure, but • WTP is now the economist’s favorite approach • comes from observed behavior, or surveys • VSL is an estimate of an individual’s willingness to pay to avoid a small risk of death, scaled up to 1 death. • VSL = WTP for risk reduction/(size of risk reduction)

  6. Example of WTP for safety • So suppose airbags reduce chances of dying in an car accident over the life of a car from 1/5,000 to 1/10,000 = .0002-.0001 = .0001 • Air bags save the life of 1 driver per 10,000 cars • 10,000 car buyers each paying $300 for an air bag is like paying $300 x 10,000 = $3 million for each life saved • if laws reflect values, • then those buyers value life >= $3 million

  7. More Sophisticated Estimates • Use change in income needed to tolerate a change in risk as a measure of WTP • Use data on job risks and wages to estimate the compensation wage necessary to induce someone to take a risky job. • Regress wages on risk, other characteristics • but personal risk tolerance is unobserved and effects job choice • search for papers, books by Kip Viscusi on this.

  8. Summary: WTP Values for a statistical life • $/life comes from scaling up $/fraction of life. • appropriate because most life-saving programs change risks only slightly. • allows us to compare values from different risks • Surveys, wage premia, prices of safer products • Range VSL = $3-15 million /life • 5-10 times larger than lost wages • EPA now uses $6 million. Reference. Hirth et al. Med Dec Making, 2000

  9. Problems with Willingness-to-Pay • People find it hard to guess • what to do with bad answers? • caused by confusion, gaming, distaste • List paradox: What are you WTP for cutting your chance of getting breast cancer in half? • of US age-specific incidence of breast cancer in half? • of all US cancers in half? • Each charity wants to be first in line.

  10. Contingent Valuation • A method to get better WTP answers • Forced choice: are you WTP $X for better school? • vary X randomly from 5-100 in large survey. • fit logistic regression line, find 50% value • Say they must pay in taxes • Mention substitutes, the full list • Use telephone or face to face to reduce bad answers by help from interviewer References: see Hammitt handout

  11. Logistic regression of NOs ---> WTP Would not pay 1.0 50% X $ for program

  12. Problems with Willingness-to-Pay -2 • Willingness-to-Pay (WTP) higher for rich • Could value outcome by % of income • Also high for old due to • “dead anyway” effect ( Pratt & Zeckhauser,1996) • Money has fewer other good uses

  13. WTP and utility: Bill Gates’ headache wtp is not aligned with utility, because MV $ lower for rich utility = f(health, w) Good health Bb ∆ U headache A paraplegia ∆ U a wtp wtp wealth

  14. Measuring the value of life year (VSLY) • To base decisions on LE gains using BCA, we need to estimate VSLY. • Harder to think of hedonic measures or realistic scenarios for VSLY than for VSL. • In practice, VSLY = VSL / E(discounted QALE) • for example, all 42 studies reviewed in Hirth et al. “Willingness to pay for a QALY” MedDecMaking 2000 had estimated a VSL from which Hirth computed a VSLY

  15. Using Lives vs QALYs in CBA • Historically EPA, NHTSA and other government agency have used CBA and “lives” valued at $6 million in fine-tuning regulations. • Compared to using QALYs gained, “lives” gives more weight to people who: • won’t live long • are already sick • So reducing air pollution, which primarily kills people with COPD, is weighted heavily using lives compared to reducing environmental lead which affects kids.

  16. Young old lifesaving tradeoffs

  17. Cutler: Is Technology Worth it? • Even if medical spending is rising, social welfare is enhanced if the benefits exceed the costs • Cutler paper estimates the RoR from 4 clinical areas that have experienced rapid technological change • Estimating medical spending is easy • See Levitt et. al. 2004 • Benefits are harder to estimate Your money or your life, Oxford UP 2004 has more

  18. Outline of Cutler’s Approach For each disease area, • Measure Years of life added in QALYs • Assume value of a current QALY = VSLY = VSL/LE = $4 million/ 40 years = $100,000* • Compute all discounted costs and benefits • 3% discount rate * How does this VSLY compare to a value of a discounted QALY in theory?

  19. Advances in Treatment of CVD • Roosevelt dies of hypertension • Largely untreatable in 1945 • Eisenhower heart attack • Bed rest recommended • No treatment except anticoagulant • Mortality from CVD has fallen by ½ since 1950

  20. Case 1: Heart Attacks • Thrombolytic drugs to dissolve clots • Coronary Artery Bypass Graph (CABG) • Angioplasty • Use of stents to open blockages • Drugs for CHD (e.g. ACE inhibitors) • Statins to lower cholesterol (e.g. Lipitor)

  21. Calculations for CVD • Average 45 year old can expect to live 4.5 years longer relative to 1950 • 2/3rds attributable to medical treatment (2.8 years) • PV of these three years is $108,000 • Cost of keeping folks alive in non-working years is $10,000 more than in 1950 • PV of costs for CVD medical care is $30,000 (zero costs in ’50) • Net return = 260% • Or $3.60 gained for every $1 invested

  22. Value of LBW Medical Care • Low birthweight • Since 1950, LBW babies live 15 more years • About .04 of all infants are LBW • So 0.6 years saved per infant (.04*15) • NICU, CVD Tx have increased lives by 3.4 years • Do the results generalize, i.e. • Is it true (generally) that the benefits of medical spending have been worth it? • Cutler et al. NEJM 2006 says yes for young people, maybe not for those over 65.

  23. Summary: Is technical progress worth its cost? • David Cutler looked at changes in life expectancy in the US since 1960. • multiplied by a value of QALY or life year • Compared them to the estimated change in medical costs. • On average, benefits are bigger than costs. • Others have done similar analyses for new drugs. • Still, US could do much better at the margin. • I.e. there is a lot of waste in the system

  24. Supplementary slides

  25. Setting Treatment cutoffs Let A(x) = E(b(c) | c > x) Let Strategy 1 be treat one more Strategy II be screen more, treat if above x Discounted Years saved by treatment b(x) Let (x) be cdf of X = P(c < x) contains (x) X contains 1- (x) of kids

  26. Nordhaus’: fun vs. health and VSLY • Suppose you’re offered a choice between • All the consumption gains since 1950 (better cars, computers, TV’s, veggies etc…) OR • All the health improvements (9 years of life and better health while alive). • Difficult choice based on informal surveys • Nordhaus estimates it’s $750,000/9 years • Just under $100,000 per year

  27. Reconciling lifetime wages with willingness to pay for safety. • Young adults will work 10-20% of their future living hours • So if they value leisure hours like work hours, • Value of life = 5-10 times future lifetime wages Keeler, The value of remaining lifetime is close to estimated values of life, J Health Econ, (20) 141-3 (2001)

  28. Discounting as decreasing returns? 0 .01 .03 .05 .07 How many years for sure are equivalent to a SG with a 50% chance of living 50 years + a 50% chance of living 1 week?

  29. WTP for a QALY studies • Researchers have patients rate their current HRQL, and give their WTP for a lifetime cure • This gives low values of WTP/QALY, e.g. • $12,500 - $32,000/QALY in VA patients facing possible neurosurgery King et al MDM 2005 • average HRQL ~ .7, WTP ~ $100,000 • use of average lifetime, income effects? • 5 other such studies gave similarly low values.

  30. Estimating waste using CBA • Waste is defined as resources spent unnecessarily in US health care system • Inefficient production of given services • In producing the wrong things • whose value < the cost of producing them. • Artificial heart • Preventable asthma hospitalizations? We just finished a paper on this.

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