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Monday, June 11, 2007

What's Life Worth?

What is the economic value of life and health?

Pinning Down the Money Value of a Person’s Life, by Alex Berenson, NY Times: How much is your life worth? How about a year of life? How much is your vision worth? What about being pain-free? Able to walk unassisted? ... Unanswerable questions all. Or maybe not.

Economists ... are trying to answer ...[a] difficult question... — the price of health. The exercise has enormous real-world implications ... as health care technology becomes more expensive and health care spending becomes a bigger burden on companies, taxpayers and patients. The price of health is part of the calculus in determining whether a new medicine or treatment is worth the cost.

While making such determinations may seem unsavory, ... “The reality is we have to make these comparisons, and we either do them implicitly or explicitly,” said Dana Goldman, director of health economics at the RAND Corporation...

To make the process more explicit, economists want to compare the cost-effectiveness of different treatments in a single measurement, one that doctors and policy makers will trust enough to use.

So, how much is your life worth? You may think the answer is infinity, that no amount of money could compensate you for the loss of your life.

But people do put a price tag on their existence. Workers accept riskier jobs for higher pay, for example. And the rich tend to think their lives are worth more than poor people’s.

Studies of real-world situations produce relatively consistent results, suggesting that average Americans value a year of life at $100,000 to $300,000, said Peter J. Neumann ... at Tufts...

So a year of life is worth at least $100,000. But that figure only begins to answer the question of what health is worth. ... [M]ost medical care has a ... modest goal: back surgery is performed to relieve the pain..., and drugs are given to lift depression or end an asthma attack more quickly. Those treatments are meant to improve — not necessarily to save — lives. Can their value actually be compared?

Yes, say health care economists, who have created the “quality-adjusted life year.” The idea is that a year in perfect health is worth more — both to the patient and to society — than a year spent in pain, depression or a wheelchair. ...

Once they know how to rank the “costs” of various diseases, economists can determine the worthiness of a particular treatment. To do so, they use the “quality-adjusted life-year,” or QALY.

The idea of QALY is to put a value on treatments that may not save lives but improve them. For example, if a blind person’s quality of life is “worth” 0.75 points per year, a treatment that would restore him to perfect vision — and raise his quality of life to 1 per year — is worth 0.25 per year of life. If the person lived another 30 years, the treatment would be worth 7.5 QALYs, or 30 times 0.25. ...

In theory, QALYs offer a single figure that can measure value of every treatment, from drugs to surgeries to preventive care, like vaccines and cancer screenings.

Once they know how many QALYs a treatment is worth, economists can figure out its cost per QALY — the broadest measure of the cost-effectiveness of health care. ...

“When we go and buy health care, we have no idea how much health we’re going to get for a dollar,” said Dr. Goldman of RAND. “And if we had this just right, we’d know how much health we’re going to get. You’re not really interested in buying health care — you’re interested in buying health. That’s what this is trying to do.”

Still, Dr. Goldman said that using QALYs would work only if policy makers use them as guides and do not make decisions on the basis of efficiency. In some cases, like new cancer treatments, Americans simply do not want to consider cost, he said.

“They’re incredibly expensive and don’t work so well,” Dr. Goldman said of the cancer drugs. “But Americans have said they want these things. We like to do things for patients that are very vulnerable.”

[Update: I just remembered that I had a related post ready a few days ago, but never actually posted it - here's the original: Putting a Price Tag on Death, Scientific American - and a shortened version is in the post is below.]

The best general study I know of these issues is a a meta-analysis by Kip Viscusi and Joseph Aldy from The Journal of Risk and Uncertainty. Here are a few selections from the paper (which seems to steer away from the "single-measure" approach discussed in the NY Times article):

The Value of a Statistical Life: A Critical Review of Market Estimates Throughout the World, by W. Kip Viscusi and Joseph E. Aldy, The Journal of Risk and Uncertainty, 27:1; 5–76, 2003: Abstract ...

Introduction Individuals make decisions everyday that reflect how they value health and mortality risks, such as driving an automobile, smoking a cigarette, and eating a medium-rare hamburger. Many of these choices involve market decisions, such as the purchase of a hazardous product or working on a risky job. Because increases in health risks are undesirable, there must be some other aspect of the activity that makes it attractive. Using evidence on market choices that involve implicit tradeoffs between risk and money, economists have developed estimates of the value of a statistical life (VSL). This article provides a comprehensive review and evaluation of the dozens of such studies throughout the world that have been based on market decisions.

These VSL estimates in turn provide governments with a reference point for assessing the benefits of risk reduction efforts. The long history of government risk policies ranges from the draining of swamps near ancient Rome to suppress malaria to the limits on air pollution in developed countries over the past 30 years (McNeill, 1976; OECD, 2001). All such policy choices ultimately involve a balancing of additional risk reduction and incremental costs.

The proper value of the risk reduction benefits for government policy is society’s willingness to pay for the benefits. In the case of mortality risk reduction, the benefit is the value of the reduced probability of death that is experienced by the affected population, not the value of the lives that have been saved ex post. The economic literature has focused on willingness-to-pay (willingness-to-accept) measures of mortality risk since Schelling’s (1968) discussion of the economics of life saving.

Most of this literature has concentrated on valuing mortality risk by estimating compensating differentials for on-the-job risk exposure in labor markets. ... In addition, economists have also investigated price-risk (price-safety) tradeoffs in product markets, such as for automobiles and fire alarms.

Use of the economic research on the value of mortality and injury risks in government policy evaluation has been a key benefit component of policy evaluations for a wide range of health, safety, and environmental policies. The policy use of risk valuations, however, has raised new questions about the appropriateness of these applications. How should policymakers reconcile the broad range of VSL estimates in the literature? Should the value of a statistical life vary by income? Should the VSL vary by the age distribution of the affected population? What other factors may influence the transfer of mortality risk valuation estimates from journal articles to policy evaluation in different contexts?

We begin our assessment of this literature with an overview of the hedonic wage methodology... Although there continue to be controversies regarding how best to isolate statistically the risk-money tradeoffs, the methodologies used in the various studies typically follow a common strategy of estimating the locus of market equilibria regarding money-risk tradeoffs...

Section 2 examines the extensive literature based on estimates using U.S. labor market data, which typically show a VSL in the range of $4 million to $9 million. These values are similar to those generated by U.S. product market and housing market studies... A parallel literature ... examines the implicit value of the risk of nonfatal injuries. These nonfatal risks are of interest in their own right and as a control for hazards other than mortality risks that could influence the VSL estimates.

Researchers subsequently have extended such analyses to other countries. ...[T]he general order of magnitude of these foreign VSL estimates tends to be similar to that in the United States. International estimates tend to be a bit lower than in the United States, as one would expect given the positive income elasticity with respect to the value of risks to one’s life.

A potentially fundamental concern with respect to use of VSL estimates in different contexts is how these values vary with income. ... Our meta-analyses of VSL estimates throughout the world ... imply point estimates of the income elasticity in the range of 0.5 to 0.6. ... Heterogeneity in VSL estimates based on union status ... and age ... indicate that the VSL not only varies by income but also across these important labor market dimensions. The existence of such heterogeneity provides a cautionary note for policy. While policymakers have relied on VSL estimates to an increasing degree in their benefit assessments, ... matching these values to the pertinent population at risk is often problematic, particularly for people at the extreme ends of the age distribution.

1. Estimating the value of a statistical life from labor markets ...

2. The value of a statistical life based on U.S. labor market studies ...

3. Evidence of the value of a statistical life from U.S. housing and product markets ...

4. The value of a statistical life based on non-U.S. labor market studies ...

5. The implicit value of a statistical injury: U.S. and international estimates Complementing the research on the returns to bearing fatal risks in the workplace, a significant number of studies have evaluated the risk premium associated with bearing nonfatal job risks. The hedonic labor market studies of nonfatal risk employ the same econometric approach as used for mortality risk. As discussed above, some studies that attempt to estimate jointly the effects of fatal and nonfatal risks on workers’ wages do not find significant effects of risk on wages for at least one of the risk measures. Fatal risk is highly correlated with nonfatal risk, so joint estimation may result in large standard errors due to collinearity...

31 studies from the U.S. labor market ... and 8 studies of labor markets outside of the United States ... have found statistically significant influences of nonfatal job risk on wages. ...

These value of statistical injury studies yield a wide range of estimates, reflecting both the differences in the risk measures used as well as whether mortality risk is included in the results. While several studies have very high values of injury, ... most studies have estimates in the range of $20,000–$70,000 per injury. ...

6. The effects of income on the value of a statistical life ...

7. The effects of union affiliation on the value of a statistical life ...

8. The effects of age on the value of a statistical life ...

9. The application of the value of a statistical life to public policy decisions ...

10. Conclusion For nearly thirty years, economists have attempted to infer individuals’ preferences over mortality and morbidity risk and income in labor and product markets. The substantial literature that has developed over that time has confirmed Adam Smith’s intuition about compensating differentials for occupational hazards in a significant and growing number of countries. In addition to evaluating various international labor markets, the literature has expanded to address a variety of econometric issues, morbidity risk premiums, and factors influencing mortality risk premiums such as union affiliation and age.

While the tradeoff estimates may vary significantly across studies, the value of a statistical life for prime-aged workers has a median value of about $7 million in the United States. Our meta-analysis characterizes some of the uncertainty in estimates of the value of a statistical life, and finds that the 95 percent confidence interval upper bounds can exceed the lower bounds by a factor of two or more. Other developed countries appear to have comparable VSLs, although some studies of the United Kingdom have found much larger risk premiums. Consistent with the fact that safety is a normal good, developing countries’ labor markets also have significant, but smaller, values of statistical life. Overall, our point estimates of the income elasticity of the value of a statistical life range from 0.5 to 0.6. Union members in U.S. labor markets appear to enjoy greater risk premiums than non-members, while the evidence in other developed countries is rather mixed. The theoretical and empirical literature indicates that the value of a statistical life decreases with age.

The estimates of the value of a statistical life can continue to serve as a critical input in benefit-cost analyses of proposed regulations and policies. Refining VSLs for the specific characteristics of the affected population at risk remains an important priority for the research community and the government agencies conducting these economic analyses. Improving the application of VSLs in this way can result in more informed government interventions to address market failures related to environmental, health, and safety mortality risks.

Appendix ...

[Here's the post related to the update above]:

Putting a Price on Grief

A new way to value loss of life:

Putting a Price Tag on Death, Scientific American: Economists say balancing the pain of loss with the right amount of money could lead to more rational court awards

If money could buy happiness, how much would it take to bring it back after the death of a partner, child or spouse? Most of us would be loathe to assign such a value, if not offended by the question, but two economists have attached such dollar values to deaths by comparing the way that lost loved ones lower scores on happiness surveys with the way that greater incomes boost scores. More than just a gruesome exercise, they say they hope it will provide courts with a way to more fairly award damages.

"It's a very black thing to talk about," says economist Andrew Oswald of the University of Warwick..., but courts regularly award damages to bereaved survivors after the death of a loved one. Such awards, however, are not necessarily based on well considered rules. In the U.K., the 1976 Fatal Accidents Act provides for a lump sum of $20,000 to a surviving spouse or the parents of a minor. Recent U.S. court cases have valued life at as much as $18 million or as little as $10,000, according to a 2005 study.

Looking for a more equitable way to assign damages, Oswald and Nattavudh Powdthavee of the University of London reviewed data collected from 10,000 Britons..., begun in 1991, which records major life events and includes questions designed to gauge overall mental health. They identified the amount of money, on average, that raised a person's mental health score by the same amount that a loved one's death lowered it.

They calculated that it would take $220,000 annually to raise someone's happiness to pre-death levels after a spouse dies, $118,000 for a child, $28,000 for a parent, $16,000 for a friend and only $2,000 for a sibling. Taking into account that some people might be harder hit than others could as much as double those amounts...

Eric Posner, a UC law professor..., says it is too early for courts to adopt Oswald and Powdthavee's method but notes that it may be less arbitrary than the existing way of assigning damages. "The courts ask juries to pick a number and they don't give juries a specific rule or principle for guiding their deliberations," he says. As a result, "it's either nothing or a very high number."

Social psychologist Jonathan Haidt of the University of Virginia says there is "so much more at stake when people suffer loss than simply the hit to their happiness." Actual suffering should factor into damage awards, he says, but so should other things such as feelings of outrage or injustice.

Oswald agrees that more research is needed before the findings should influence policy, but he stands by the concept. "Just because it's hard to value this subtle thing is no reason not to try to do the best in being fair to victim," he says. "We're trying to make it logical instead of random."

    Posted by on Monday, June 11, 2007 at 03:42 PM in Academic Papers, Economics, Methodology | Permalink  TrackBack (0)  Comments (26)

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