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Your Money and Your Life: The Value of Health and What Affects It

In: Frontiers in Health Policy Research, volume 2

Author

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  • David M. Cutler
  • Elizabeth Richardson

Abstract

This paper examines the role of medical care in improving health and compares that value of better health produced by medical care with the costs of that care. Valuing medical care requires measuring the health of the population. We start by developing a measure of the nation's health capital -- the dollar value of health a person will have over the course of their remaining life. We estimate health capital empirically using data on the length of life, the prevalence of adverse conditions for those alive, and the quality of life conditional on having an adverse condition. For a newborn in 1990, we estimate health capital at about $3 million, while for the elderly, health capital is nearly $1 million. Health capital has increased greatly over time -- by roughly $40,000 to $50,000 per decade. Comparing the change in health capital with the increase in medical spending, we estimate that, for most plausible assumptions, increased medical technology has been worth its cost. In our preferred specification, only about 30 percent of the improvement in health capital in the past 40 years would need to result from medical care advances for the improvement of medical technology to justify its cost. While we find that on average value of medical technology is high, we discuss other evidence that substantial amounts of medical care is provided in situations where its value is low. We thus suggest a fundamental repositioning of the public debate about medical spending. Traditionally, the question that has been posed in the public sector is: how can society (or the government) limit medical costs so that we can afford medical care in the future on our budget today? Our results suggest that a more appropriate question is: how can we get more of the spending that is valuable but avoid the spending that is not valuable?
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Suggested Citation

  • David M. Cutler & Elizabeth Richardson, 1999. "Your Money and Your Life: The Value of Health and What Affects It," NBER Chapters,in: Frontiers in Health Policy Research, volume 2, pages 99-132 National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberch:9848
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    References listed on IDEAS

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    1. Moore, Michael J & Viscusi, W Kip, 1988. "The Quantity-Adjusted Value of Life," Economic Inquiry, Western Economic Association International, vol. 26(3), pages 369-388, July.
    2. Cutler, David M & Richardson, Elizabeth, 1998. "The Value of Health: 1970-1990," American Economic Review, American Economic Association, pages 97-100.
    3. David M. Cutler & Mark McClellan, 1996. "The Determinants of Technological Change in Heart Attack Treatment," NBER Working Papers 5751, National Bureau of Economic Research, Inc.
    4. Richard B. Freeman & David A. Wise, 1982. "The Youth Labor Market Problem: Its Nature Causes and Consequences," NBER Chapters,in: The Youth Labor Market Problem: Its Nature, Causes, and Consequences, pages 1-16 National Bureau of Economic Research, Inc.
    5. Viscusi, W Kip, 1993. "The Value of Risks to Life and Health," Journal of Economic Literature, American Economic Association, pages 1912-1946.
    6. repec:mes:challe:v:33:y:1990:i:3:p:56-58 is not listed on IDEAS
    7. Dardis, Rachel, 1980. "The Value of a Life: New Evidence from the Marketplace," American Economic Review, American Economic Association, pages 1077-1082.
    8. Victor R. Fuchs, 1982. "Time Preference and Health: An Exploratory Study," NBER Chapters,in: Economic Aspects of Health, pages 93-120 National Bureau of Economic Research, Inc.
    9. Cutler, David M, 1995. "The Incidence of Adverse Medical Outcomes under Prospective Payment," Econometrica, Econometric Society, vol. 63(1), pages 29-50, January.
    10. Fuchs, Victor R, 1996. "Economics, Values, and Health Care Reform," American Economic Review, American Economic Association, pages 1-24.
    11. Michael Grossman, 1972. "The Demand for Health: A Theoretical and Empirical Investigation," NBER Books, National Bureau of Economic Research, Inc, number gros72-1.
    12. Victor R. Fuchs, 1982. "Introduction to "Economic Aspects of Health"," NBER Chapters,in: Economic Aspects of Health, pages 1-12 National Bureau of Economic Research, Inc.
    13. Johannesson, Magnus, 1996. "A note on the relationship between ex ante and expected willingness to pay for health care," Social Science & Medicine, Elsevier, pages 305-311.
    14. Joseph P. Newhouse, 1992. "Medical Care Costs: How Much Welfare Loss?," Journal of Economic Perspectives, American Economic Association, pages 3-21.
    15. Cutler, David M & Richardson, Elizabeth, 1998. "The Value of Health: 1970-1990," American Economic Review, American Economic Association, pages 97-100.
    16. Fuchs, Victor R. (ed.), 1982. "Economic Aspects of Health," National Bureau of Economic Research Books, University of Chicago Press, edition 0, number 9780226267852.
    17. Torrance, George W., 1986. "Measurement of health state utilities for economic appraisal : A review," Journal of Health Economics, Elsevier, vol. 5(1), pages 1-30, March.
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    Citations

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    Cited by:

    1. David M. Cutler & Ellen Meara, 2000. "The Technology of Birth: Is It Worth It?," NBER Chapters,in: Frontiers in Health Policy Research, Volume 3, pages 33-68 National Bureau of Economic Research, Inc.
    2. Chernew, Michael E. & Encinosa, William E. & Hirth, Richard A., 2000. "Optimal health insurance: the case of observable, severe illness," Journal of Health Economics, Elsevier, vol. 19(5), pages 585-609, September.
    3. The Untold Standards of Living Story: The GDP value of Twentieth Century Health Improvements in Developed Economies, 2012. "Hickson, Kerry," CAGE Online Working Paper Series 105, Competitive Advantage in the Global Economy (CAGE).
    4. Huckman, Robert S., 2006. "Hospital integration and vertical consolidation: An analysis of acquisitions in New York State," Journal of Health Economics, Elsevier, vol. 25(1), pages 58-80, January.
    5. Yoon Lee & Cynthia Jasper & Margaret Fitzgerald, 2010. "Gender Differences in Perceived Business Success and Profit Growth Among Family Business Managers," Journal of Family and Economic Issues, Springer, vol. 31(4), pages 458-474, December.
    6. David M. Cutler & Mark McClellan, 2001. "Productivity Change in Health Care," American Economic Review, American Economic Association, pages 281-286.
    7. Cutler, David & McClellan, Mark, 2001. "Productivity Change in Health Care," Scholarly Articles 2640585, Harvard University Department of Economics.
    8. José M. Labeaga & Xisco Oliver & Amedeo Spadaro, "undated". "Measuring Changes in Health Capital," Working Papers 2005-15, FEDEA.
    9. Alvin Headen & Kenneth Manton & Max Woodbury, 2004. "Co-morbidity and black and white disparities in health and functional status," The Review of Black Political Economy, Springer;National Economic Association, pages 9-33.
    10. Cutler, David M. & Mas, Nuria, 2003. "Comparing non-fatal health across countries: Is the US medical system better?," IESE Research Papers D/525, IESE Business School.
    11. David M. Cutler, 2000. "Walking the Tightrope on Medicare Reform," Journal of Economic Perspectives, American Economic Association, pages 45-56.

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