The return on investment to health care: sky-high

I recently read Your Money or Your Life: Strong Medicine for America’s Health Care System, by David Cutler. He’s a health care economist from Harvard.

There’s a lot of things in the book that are interesting, but one stood out to me, and that’s something that’s rarely discussed, or actively denied. What is it? That the money spent on health care is effective and has absolutely unbelievable rates of return. Even with all the money the US system wastes. Even with all those horror stories of people hanging on at the very end for lots of money in a coma. Yes, really.

What’s your life worth?
Quality-adjusted life years gives an answer. Basically, with some statistical tricks on imputed life values (what people are willing to pay for certain kinds of safety features, insurance program willingness to pay), polling, and what not, you end up with a number that’s an estimate of what people are willing to pay for an additional year of a fully healthy life. Apparently 8 years of good health is worth 10 years of poor health.

Depending on how you do it, you get a range of numbers. Cutler has $25,000 a year at the low-end and $100,000 at the high-end. These sound high at first glance, as median income is only something like $40,000, but remember that it only applies for the (small) percentage of life towards the end, and also includes stuff like “how much would your friends and family pay to keep you alive and health?”

The big picture
The 1800-1940 changes in life expectancy were amazing, but they were mostly in the first few years of life. This isn’t nothing - it increased from 38 to 63 at age 0 - but at age 50 or so there was far, far less change. Basically you still got old and dropped dead of a heart attack, or cancer, or pneumonia, or any of the other sets of things that have offed people since the dawn of humanity.

Then, somewhere between 1940 and 1960, things changed. Life expectancy for white males at age 50 shot up from 22 years to 29 years over the 1940-2004 period; other demographics got better results, as they had lower starting points. It wasn’t just in the first few years due to antibiotics, or the decline in smoking, either - it went up 0.9 in just the 4 years from 2000 to 2004.

In addition to the raw lifespan numbers, the quality of life for the elderly in that period has gotten way better; it’s not the elderly hanging on super sick for more years. Respiratory disease declined by 66%. Nursing home numbers have stayed flat over the last twenty years even with a big increase in the elderly population, because the elderly population has gotten healthier.

So what’s the payoff?
Heart attack treatment costs increased from about $12,000 to $22,000 from the 1980s to 1990s. Life expectancy for heart attack victims increased over that period by about a year. That implies a return on investment in the range of 250% to 1,000%.

Something to note is that baseline for the calculation - the alternative scenario - is important. Often it’s not a clean death, it’s years and years of disability (for the elderly), or living but having brain damage (for premature births), or being unable to work and earn anything (for the working age). An example he gives along these lines is premature births; best-quality treatment costs around $70,000, but provides $350,000 in lifetime benefits.

So, in short, modern health care is worth far more than you probably think. Those rates of returns are amazing.