An interesting report was issued yesterday with loads of fanfare by The Value Group. The actual study was done by Medtap, a technology assessment shop for the pharma industry, which was spun out of the Battelle Institute (a kind of mini-SRI or RAND) a few years back. The report says that increases in health care spending are a good thing. And as Mandy Rice-Davies said, "they would say that wouldn’t they!" The consortium that paid for the report is made up of the usual suspects, including PhRMA, the AHA and their for-profit friends at the FAH,, the Advanced Medical Technology Association (AdvaMed), the ACC, and the Healthcare Leadership Council (HLC). I assume HIMA and BIO were too cheap to chuck into the pot for this one.

You can amuse yourself by going to look at this news brief, the exec summary charts or the full report. Essentially it says that although we’ve doubled real per capita health care spending in the US in the last 20 years, we’ve had so many health gains from it that we have made out like bandits from all that extra spending. To wit:

o Annual death rates declined 16%
o Life expectancy from birth increased by more than three years
o Disability rates for seniors fell 25%
o Number of days Americans spent in the hospital fell 56%

Naturally enough there’s even a ready made video that you can run straight onto your cable news show without the bother of having to do any of that journalism stuff. I particularly love the "news-type" voice-over ending "in Washington, I’m Karen Ryan reporting" Reporting for whom? I didn’t realize PR was now called reporting! (Medtap is too embarrassed to put the video on its web site but its clients aren’t!) The video uses the example of a young guy who had a heart attack and got a stent implanted in his heart.  Unfortunately a rather detailed analysis from a Stanford team published last year pointed out that stents actually are a worse deal for the patient over time than having a by-pass. So by that logic we’ve wasted all the money we spent developing stents; but what kind of sour-puss worries about a little thing like that?

And in individual disease states, even more good news. Death rates per 100,00 have dropped for heart attacks from 345 to 186, for strokes from 96 to 60, for breast cancer from 32 to 25 (although for diabetes they’ve gone UP from 18 to 25).  And the best news of all is that when you work out the cost benefit of all this good medical care, we get back $2.40 to $3.00 for every $1 spent!

And funnily enough that’s why the report was created. While I was there a report was done at IFTF (not by me I hasten to add) showing how wonderful the contribution of research-based industries was to the US economy. Although the premise was probably true, the fact that it was paid for only by drug companies made me feel more than a little uncomfortable, and no one from the health team would work on it! In fact by the time it was released the event it was designed to protect against (price controls for drugs in the Clinton health plan) was history anyway. But that’s the reason these reports are commissioned, and consequently it’s worth looking at how they came up with that statement about getting $3 back for every dollar spent.  Here’s the logic–it’s a little dry but bear with me:

To compute the value of investment in health care, we converted the mortality or life expectancy gains into dollars.  Published estimates of the value of a statistical life (VSL) method of calculating the value of small reductions in mortality risks derived using data on risk-compensating wage differences, consumption activity which affects risk, or hypothetical markets yield values of life that range from $1 million to $9 million (Blomquist 2001). The VOI analysis in this study uses $4 million for VSL, an estimate towards the mid-point of this range. Based on this VSL, a value of $100,000 was used as the net present value of an undiscounted life-year gained and $2,455 as the annual consumption value of an increase of 1 year in life expectancy (Mauskopf et al. 1991, Nordhaus 2002). Using these standard economic values for avoided deaths or increased life expectancy, the value of investment for every $1 spent on health care ranged between $2.40 and $3.00, depending on the outcome chosen (Table 3). The value of investment in health care is positive under a wide range of alternative assumptions. As an example, for every additional dollar spent on health care, the value of the investment remains greater than $1 for all scenarios where one life is valued at >$1.4 million and for all scenarios here a life-year is valued at >$40,000. Alternatively, assuming our base case values of $4 million for the value of one life and $100,000 for the value of a life-year, for every additional dollar spent on health care, the value of the investment remains greater than $1 for all scenarios where at least 40% of the life expectancy gains are directly attributable to the additional health care expenditures. Using a similar methodology, several researchers have computed a value of investment in overall health care expenditures for the U.S. for different time periods:


Nordhaus (2002) between $1.90 and $2.60 for every additional $1 invested between 1980 and 1990

Murphy and Topel (2003)
$1.60 for every additional $1 invested since 1970

Cutler and McClellan (2001)
$3.71 for every additional $1 invested between 1950 and 1990

These figures are likely to underestimate the value of investment in health since they do not include the value of the morbidity gains from the reduction in disability over age 65 and gains in worker productivity and quality of life attributable to new treatments for specific health conditions. Over the past 20 years, significant gains in productivity and quality of life associated with health care interventions in those under 65 years have been shown for several diseases including influenza, migraine, diabetes, and depression but comprehensive national estimates of changes in U.S. productivity or quality of life attributable to health conditions are not available.

So basically by teasing out the impact of better medical care on life expectancy, then attributing an value to an extra life-year, they claim that every dollar spent returns around $3.  The problem is that this is entirely dependent on what a life is worth, and those calculations are entirely arbitrary, and are pulled from all kinds of sources.  The sum of $4m a life or $100,000 a year they use is more or less meaningless. Let me take a different crack at it.

According to the Federal government, GDP per head in the US is about $35,000 a year. Median income per household is around $45,000 meaning way less per individual than $35,000, but that’s because not all GDP is income. But let’s assume that average person lives 75 years and is worth $35,000 per year, then their life is worth only $2.3 million rather than $4m.  So immediately almost all the gains that the report finds in terms of improved life expectancy have been wiped out.  But wait, it gets worse if you consider that the expectancy gains have been added to the end of people’s lives rather than the middle–and at the end of your life you tend to be retired and earning a considerable amount less each year. Median household income for those over-65 is only $23,000, so you could argue that, instead of being worth $100,000 a year, that year of life saved is worth less than $20,000. Therefore instead of returning a positive ratio of $3 saved for every $1 spent, we are in fact getting only 70 cents for each $1 spent–a record even worse than my stock trading!

OK, my numbers are abritrary and capricious (as are those in the report) because mine are based only on what people earn instead of what a life is "worth" but how about thinking of it in another way.  All that extra spending on medical care has shown improvements in results from as high as a 100% improvement in survival after heart attacks to little more than zero (or less) in the case of diabetes.  Comparatively the computer you could buy in 1980 cost 10 times what the computer you can buy today does and the new one is probably 2000% better.  Why hasn’t all this medical technology shown that level of improvement or that reduction in price? 

Or how about it another way, we’ve spent all that more money on health care, but couldn’t we have got a better return from educating young children?  The answer, by the way is, "yes" both for the societal benefits of early childhood education and for its future population health benefits, as better educated people are substantially healthier than the less well educated.

The overall answer is that this type of analysis is more or less junk analysis and necessarily cannot get at the underlying value of what we are doing in health care.  What we spend on health care is a societal choice (of sorts) and the folks behind this report have a large say in that "choice".  The only real contribution that can be made from this type of analysis is to consider how we should best spend the dollars within the health care system to improve outcomes. In many cases this ends up being bad news for the folks represented by The Value Group consortium, as using older and often cheaper technology often has more beneficial results (as with the stent vs bypass example but also in this aspirin vs statin case). The good news for the industry consortium is that technology and services often do have a beneficial effect and their role should be figuring out which technologies have the most beneficial effects and then to produce more of them.  And to be fair that’s what most of the medical technology industry on the R&D side is trying to do–the marketing folks of course have a different agenda.

The better news for the health care industry is that increasingly people view that these improvements are necessary luxury goods and are happy to help push society’s health paymasters in the direction of paying for them. Understanding the use of health care as a luxury good/service that we "have to have" and trying to steer it in the most beneficial direction is where the real analysis in American health economics needs to be done. The junk economics in this report doesn’t get us anywhere. It might help the industry deflect a question or two about what we’re getting for all the money, but on the other hand it just might provoke a sour-puss or two to cry "bullshit".