Two Goals of Today’s Talk 1.Review some research on the value of increased longevity 2.Link the results of that research to important policy questions

Review: Measuring the Value of Medical Research Q. How do we measure the economic value of improvements in health and longevity? A.We measure the value by what people are willing to pay. Q. How do we measure what people are willing to pay? A. By looking at the choices that they make.

Sources of Evidence on the Value of Health and Longevity Responses to health information (e.g. cigarettes) Choices of safety equipment (cars etc.) Occupational choices (what we use) What we order for lunch

Measuring the Value of Health and Longevity Casual and empirical evidence suggests that health and longevity are important to people Evidence from occupational choices suggests that people are willing to pay roughly $500 to reduce their annual probability of death by about 1/10,000 This translates into a value of about $166,000 per additional year of life

What we do not do We do not measure the contribution of medical research to GDP – jobs etc. – these are costs not benefits We do not measure the contribution of the increase in productivity from longer lives – people care about much more than productivity We try to measure what health and longevity contribute to individual well being – this is what matters

Basic Results Historical improvements in life expectancy have been very significant – improvements in longevity from 1970 to 1998 were worth roughly $73 trillion (or about $2.6 trillion per year) Improvements in life expectancy have contributed about as much to overall welfare as have improvements in material wealth

Gains at The Individual Level

Aggregate Gains from Increased Longevity Males$21,215$12,139$13,223$46,577 Females$15,863$6,979$3,461$26,303 Total$37,078$19,117$16,685$72,880 Aggregate Gains ( Billions of $1996)

Basic Results (cont.) Potential future gains are also very large: Eliminating cancer is worth roughly $44 trillion Eliminating cardiovascular disease is worth roughly $51 trillion Even modest progress has great value: 10% reduction in cancer deaths worth over $4 trillion Historical reduction in heart disease from 1970 to 1998 was worth about $32 trillion

Males Females Total $10,016$7,147$17,163 $2,994$2,149$5,142 $2,471$1,614$4,085 $356$399$755 $2,258$2,101$4,359 $793$516$1,309 $3$421$424 $271$282$553 $538$393$931 $498$146$644 ALL CAUSES MAJOR CARDIOVASCULAR DISEASES DISEASES OF HEART CEREBROVASCULAR DISEASES MALIGNANT NEOPLASMS RESPIRATORY AND RELATED ORGANS BREAST GENITAL ORGANS AND URINARY ORGANS DIGESTIVE ORGANS INFECTIOUS DISEASES (Including AIDS) Gain from a Permanent 10% Reduction in Death Rates by Category of Disease (Billions of $1996)

Gain from a Permanent 10% Reduction in Death Rates by Category of Disease (Billions of $1996) (Continued) Males Females Total

Longer Term Changes Recent improvements are reflective of longer term gains in longevity Gains were actually somewhat greater in earlier decades using a fixed valuation profile (like fixed basis GNP accounting) Gains have become increasingly concentrated at older ages in recent decades

What About Health Expenditures?

Caveats to the Net Gains Analysis Gains include improvements from many margins not just health care Health care costs include many expenditures other than those directed at longevity However, the comparison allows us to compare the size of two important trends

Implications of the Analysis The economic value of disease reduction is increasing over time The value of disease reduction is rising along with the level of overall wealth The value of progress against any one disease rises as we make progress against other diseases The value of disease reduction is increasing as the U.S. population ages Appropriate efforts to control health care costs will increase the value of research

Medical Research and Costs of Medical Care Investments in medical research are small by comparison: About $35 billion in 1995 About 3.5% of direct health expenditures Potential gains from medical research are large, but could be offset by increased cost of care Key issue is the potential costs of care more so than direct expenditures on research – need to focus more on the outputs of research rather than inputs

Thinking More About Medical Research Due to distortions in the market for medical care (third party payers etc.) increases in costs may exceed the benefits for some advances These same distortions affect the composition of research and medical advances Favors output enhancing over cost reducing innovations Favors advances that can be patented over those that cannot Funding for medical research and appropriate cost containment are complementary

Thinking About Investments in Medical Technology Growth in the market for health care Market growth favors fixed cost technologies – drugs/ medical advances Growth in the demand for health care is seen as a curse by most – but may be a relative gain to fixed cost technologies Such technologies may be a key way to control the long-term growth in costs

The Bottom Line Past improvements in health and longevity have had enormous economic value Potential gains from future reductions in mortality are also extremely large The results presented today should lead us to revise our estimates of the value of research upward Absent costs of treatment, very modest potential reductions in disease would justify significant expenditures on research. This leaves the cost of treatment as the open issue.

THE END

Our Approach Provides a simple but flexible formulation for measuring what people are willing to pay for life extending innovations or improvements in health Draws on existing evidence on the value of life Can be extended to allow for improvements in health in addition to gains in longevity

Goals of our Research Measure the gains to improvements in health and longevity Expand our measures of economic well being to include medical advances Provide some perspective on the cost/benefits of medical research and medical care more generally Measure the potential gains from future medical progress

Empirical Results

Additional Results The economic value of disease reduction is increasing significantly over time The value of disease reduction is rising along with the level of overall wealth The value of progress against any one disease rises as we make progress against other diseases The value of disease reduction is increasing as the U.S. population ages Appropriate efforts to control health care costs will increase the value of research

The Bottom Line Past improvements in health and longevity have had enormous economic value Potential gains from future reductions in mortality are also extremely large The results presented today should lead us to revise our estimates of the value of research upward Very modest potential reductions in disease would justify significant expenditures on research (the cost of treatment is the more significant question)