« *Create Your Own Economy*, standing on one foot | Main | Assorted links, from the Appalachian Trail »
QALY and the Value of U.S. Health Care Spending
The US spends considerably more per-capita on medical care than other countries, without an obvious increase in life expectancy. Yet what we make of this depends a great deal on the value of human life.
The value of a quality adjusted life year (QALY) is often set at $50,000 although more recent research puts it at $100,000 to $300,000 or even higher. Kidney dialysis, for example, costs $70,000-$100,000 per year and the quality of a life-year on dialysis is estimated at about half the value of a fully-healthy life-year which suggests that Americans are willing to spend $140,000-$200,000 for an extra quality-adjusted life year. Let's go with $100,000, you may adjust as you see fit.
Let's imagine that all of the extra spending in the US adds one QALY to US citizens. How much is that worth? Well $100,000*300 million is $30 trillion but we don't all get the QALY at the same time. We could do some fancy discounting by age but let's instead imagine that the QALY goes annually to the people who are dying - that is, we will assume that the people who died this year lived one QALY more than they otherwise would (since everyone dies this involves no double counting). 2.5 million people die annually in the United States so the total QALY increase per year is worth $250 billion ($100,000*2.5 million).
US health care spending is around 15% while in many other advanced countries it's 10% so call the extra spending 5% of GDP or $670 billion. Thus, on this calculation we spend 2.6 times as much as is justified by a one year increase in QALY; alternatively, one QALY must be worth at least $260,000 for our spending to be justified. The latter number is high but not outside the ballpark. Of course, if medical spending results in less than one QALY to US citizens the value of QALY must be higher to justify such spending.
More generally, when people say we should cut "wasteful" health spending they should specify what they think a QALY is worth. Politicians who say that they can balance the budget by elminating "health care waste" are selling the same line as politicians who say that they can balance the budget by elminating "government waste." In particular, it's naive to think that we can save a lot of money by eliminating spending with 0 QALY. More reasonably, we can eliminate spending with high costs per QALY. For example, dialysis for the sickest patients (top 10%) costs more than $240,000 per QALY and some heart pumps costs more than $500,000 per QALY.
Cutting waste means cutting medical care which costs more per QALY than a QALY is worth. So what is the value of a QALY? And who does the cutting?
Hat tip to Robin Hanson for discussion.
Posted by Alex Tabarrok on June 23, 2009 at 07:38 AM in Economics, Medicine | Permalink
Comments
Looking at QALY is a good way to analyze the problem.
My first instinct as an economist is to agree with your claim that "it's naive to think that we can save a lot of money by eliminating spending with 0 QALY."
However, after looking at the work of David Cutler and others, I'm am increasingly convinced that our current system is extraordinarily inefficient. We have an enormous amount of x-inefficiency and allocative inefficiency compared to other advanced countries. This is reflected in far higher spending without demonstrably better results (and often worse results) on a wide variety of metrics.
Cutler, who has spent far more time carefully analyzing this question than either of us makes a convincing case that we actually can save a lot of money without reducing QALY, e.g. by spending just a little more effort propagating best practices, by realigning incentives, and by redirecting existing gov't spending and subsidies to more cost-effective areas.
The choice is NOT simply turning the dial to "more or less" while keeping everything else about our system in place.
Posted by: a student of economics at Jun 23, 2009 7:53:49 AM
why is kidney dialysis so expensive?
Posted by: babar at Jun 23, 2009 8:09:15 AM
It's expensive because it requires specialized equipment & supplies, lots of time per treatment (hours, not minutes), and many treatments per year (3+ per week), continued indefinitely.
The better alternative to cutting treatment is to drive innovation toward better, cheaper treatment. For example, as stem cell/cell culture/tissue culture technology continues to improve, it should be possible to grow or regenerate kidneys, making dialysis a bridge therapy, not a chronic one.
Cutting or rationing therapies isn't going to get us where we need to go--they move us underneath the existing production possibility frontier. What we need is to shift the frontier out on both the 'low cost' and 'outcome' measures, and that takes a big jump, not a step back.
Posted by: Scott at Jun 23, 2009 8:27:18 AM
What I've read suggests that a QALY is worth roughly twice annual income. Since US GDP per person is $40K, that's about $80K per QALY. Of course I'd let anyone personally pay what they can afford, but from government funds I'd definitely cut off treatments that cost more than twice this figure. So I'd stop us paying for those expensive heart pumps and dialysis.
Posted by: Robin Hanson at Jun 23, 2009 8:30:07 AM
It might be worth pointing out that dialysis patients' self-reported life satisfaction levels (say, 6 out of 10) are much higher than healthy people's expectation of how they would feel were they sick (say, 4 out of 10).
Thus what healthy people pay may not be a good measurement.
Posted by: Enda at Jun 23, 2009 8:42:29 AM
If the extra spending doesn't add to life expectancy, why suppose that it adds to QALY? Are you supposing that Americans live as long as the Cypriots and the Bosnians, but have more QALYs? Is there some empirical way to compare QAL years per capita across countries?
Posted by: beamish at Jun 23, 2009 8:43:36 AM
I don't understand your model here. You quibble about the value of a QALY when your first chart clearly shows that your "Let's imagine..." is a rather unlikely proposition. How does Denmark get the same life expectancy with half the spending? How does South Korea get higher le with a sixth of the spending? Even your "how much is a QALY worth" should be easy to answer for an economist - see how much it costs to get one in the fit in that first your graph.
Posted by: Thomas Themel at Jun 23, 2009 8:44:15 AM
If we believe Atul Gawande, then this discussion is incredibly misleading or at least woefully incomplete. I'm sure you've seen it, but in case, here's the link to the New Yorker article on why certain cities (within the US) spend so much more on health care with no appreciably better results. The extra expenditures on procedures aren't increasing quality or quantity of life, but rather fattening Doctor's paychecks and raising health insurance premiums. It's easy to think like an economist here and assume we are getting something for all that money we are paying for health - to do otherwise would be irrational, right? But here is a case (at least partially) of collective irrationality produced by a certain kind of individual rationality (particularly one where doctors come to see themselves as entrepreneurs and not professional health workers), *not* a case of legitimate trade-offs having to do with the value of an extra bit of life. And if Gawande is right, these differences could account for all of the discrepancy in spending between the US and elsewhere.
Posted by: Dan Hirschman at Jun 23, 2009 8:46:56 AM
I'm dumbstruck that Robin Hanson would allow thousands to die each year based on "what he's read" in the highly contested economic literature on QALY. I can hope he was kidding.
Posted by: Dan at Jun 23, 2009 8:53:35 AM
Congress will never cut dialysis, since people on dialysis vote, as do people with kidney issues who know they face a future dialysis risk.
Consider instead the mandatory minimum 48 hour hospitalization that insurers were required to pay for mothers after birth: medscape link. The resulting evidence is that the blanket policy provides little or no medical benefit, although it does signal caring and it gives patients a choice of another night's stay or going home. How much of our medical expenditures are for signaling and choice rather than for health?
Posted by: DK at Jun 23, 2009 8:57:24 AM
seems like QALY is another acroynm for CBA. the gov't has been doing this for decades (measuring the value of life vs. cost of regulation), so what's the fuss?
Posted by: dkahn at Jun 23, 2009 9:06:03 AM
It is expensive because you cannot sell your extra kidney.
Posted by: Andrew at Jun 23, 2009 9:10:57 AM
As noted in many of the comments above, it's a BIG assumption that our extra spending generates additional QALYs. I suppose this is an empirical question, but the Dartmouth data suggest the possibility that the additional spending may in fact *decrease* QALYs. The current incentives (pay for activity rather than outcomes) are quite consistent with this possibility as well.
We must shine a bright light on the implicit assumption that more is better. It might be, but by no means must it be.
Posted by: Bob Nease at Jun 23, 2009 9:15:02 AM
Isn't a perfectly legitimate alternate question, if Korea and France et. al. have such awesome healthcare systems, why don't the spend a little more to achieve more QALYs?
Posted by: Andrew at Jun 23, 2009 9:18:04 AM
So, we take a bunch of questionable assumptions, do a little math, and try to figure out who might take action on the results?
Posted by: Zbicyclist at Jun 23, 2009 9:27:36 AM
Come check out Immigration Hour with Margaret Wong at chataboutit.com which is an interactive live talk radio show. The show is designed in a question/answer format, so please feel free to call in with any immigration-related questions.
Margaret Wong, who was named one of the "Best lawyers in America", will discuss the immigration process, case procedure, and entertain a wide range of immigration questions and concerns.
Thursday's 9-10 PM EST!
Call in at 877-CHAT-212
Posted by: Chat About It CBS at Jun 23, 2009 9:28:01 AM
Come check out Immigration Hour with Margaret Wong at chataboutit.com which is an interactive live talk radio show. The show is designed in a question/answer format, so please feel free to call in with any immigration-related questions.
Margaret Wong, who was named one of the "Best lawyers in America", will discuss the immigration process, case procedure, and entertain a wide range of immigration questions and concerns.
Thursday's 9-10 PM EST!
Call in at 877-CHAT-212
Posted by: Chat About It CBS at Jun 23, 2009 9:28:31 AM
You write:
US health care spending is around 15% while in many other advanced countries it's 10% so call the extra spending 5% of GDP or $670 billion.
I don't think you can reasonably switch between percentage of GDP and absolute dollars here. The U.S. GDP per capita is greater than the average GDP per capita of those many other advanced countries. In spending 10% of GDP the U.S. would already be spending more in absolute dollars per capita than the average spending per capita in those many other advanced countries.
Posted by: Brent Buckner at Jun 23, 2009 9:28:48 AM
excuse me, but something is broken with my model. i truly think that the possibility of living longer makes me poorer. how can an option have negative value?
Posted by: babar at Jun 23, 2009 9:34:52 AM
Another thing. Things cost more in the US. Now, we can happily make the leap that "well, sure, but they should cost the same as a percentage of GDP." But, how is that leap made? Medical and education (hush hush) are labor intensive requiring highly skilled labor, a dear resource in the US because there are so many productive sectors that highly skilled people can be productive in, like finance...oops!
Posted by: Andrew at Jun 23, 2009 9:56:21 AM
No less than the dot-com bubble and the housing bubble, there is a QALY bubble.
It will blow up bigger than any of the previous ones, because "we can't afford this" will always be met with "we can't afford not to". Too big to fail, until it fails in a spectactularly disastrous way.
Posted by: anonymous at Jun 23, 2009 10:02:15 AM
dialysis [...] costs $70,000-$100,000 per year and the quality of a life-year on dialysis is estimated at about half the value of a fully-healthy life-year which suggests that Americans are willing to spend $140,000-$200,000 for an extra quality-adjusted life year. Let's go with $100,000, you may adjust as you see fit.
Your statement is bizarre in that it assumes that the operation of the current system reflects the aggregate will of Americans and not simply capture of the system by the people getting paid. Next I suppose you'll tell us that military procurement prices are a good representation of how much Americans are willing to pay for hardware.
Posted by: bbartlog at Jun 23, 2009 10:10:55 AM
Who gets to decide what a QALY is?
The strength of your method is that it provides a clear-cut answer. But what is the value of a clear answer, if the assumptions behind it are too arbitrary and simplistic?
You've given no justification for your approach over another (e.g. democratic discussion and many votes and debates in Congress), other than that it is appropriate given the model you have specified.
Posted by: paul at Jun 23, 2009 10:47:05 AM
I still argue that when broken down by ethnic group, we do get a longer life for our dollars. Somebody in Minnesota lives just as long as his cousin in Sweden. And a resident of Detroit will live much longer than a resident of Cape Town.
Also, what brings down our life expectancy? One factor is measurement of deaths at birth. The other is our murder rate and auto accident death rate. It would be nice to see some numbers that measure apples-to-apples.
Posted by: Ted Craig at Jun 23, 2009 11:08:20 AM
People are skirting around the key question: Even if we can show that the "right" cuts will lower costs at no loss in QALY, are we sure a) We know what the right cuts are? and b) Are we confident that the state will make those cuts?
What if making the right cuts requires targetting various medical or nursing groups who will fight hard to resist? What if a mistaken cut lowers costs but at the expense of a politically weak interest group with a big loss of QALY than is not trumpeted by the press? What if strong interest groups are good at masking their inefficiencies? What if the losses are on unobservable comfort or innovation dimensions that are hard to measure? Who will flip the reforms back if these issues are done wrong? Will a bad set of reforms be followed up by even more bad reforms?
I already see this pattern with the stimulus package. Bush's errors are being used to justify Obama's even larger expenditures.
And in the environment, bad regulation (CAFE) is not cancelling out carbon taxes, but the two are being treated additively (instead of substitutes).
Why won't healthcare follow this logic?
The constant mantra: BUT Canada (or France or Sweden...) does it better (maybe) is no help in showing how the US moves to a "better??" system.
Posted by: jn at Jun 23, 2009 11:11:27 AM
