Cost Benefit/Effectiveness Analysis and Innovation

The Institute of Medicine produced a book entitled, Medical Innovation in the Changing Healthcare Marketplace.  The following selection shows how important cost effectiveness is. We have a limited budget and we should spend on things that get us the greatest value and that is what cost benefit analysis and cost benefit/effectiveness analysis tries to do. Even though most research is a failure that produces nothing useful, a few breakthroughs have had a tremendous impact and so research has had tremendous value.

Cost-benefit analysis translates the benefits (health and saving lives) into dollars:

p. 17: University of Chicago economists Kevin Murphy and Robert Topel sought to evaluate the social benefits of medical research by placing a value on aggregate improvements in longevity … The first task was to estimate what an average American would agree to pay for a reduction in mortality risk that would add a year to his/her life. Murphy and Topel used data on what workers are paid in occupations with differing risks of job-related death to estimate the value of an additional life-year to be about $150,000, a figure that varies with age.

Over the period 1970–1990 increases in the life span of an average American have been significant. For example, the increase in the life span of a typical 40-year-old person is more than three years. Using age-dependent values of an additional life-year and the increases in life expectancy over this period, Murphy and Topel attribute a value of roughly $57 trillion or about $2.8 trillion per year to the increased life expectancy, indicating the public values improvements in health very highly. To put these figures in perspective, improvements in life expectancy over the period 1970–1990 contributed about as much to overall welfare as did improvements in material wealth.

p. 18: Kevin Murphy pointed out that investment in medical research has brought significant returns. In 1995, according to NSF calculations there were about $35 billion in investments in medical research. The gain in health, as measured by the value of added longevity, is about 50-100 times what we spend on research, even taking into account the fact that health improvements are due to a variety of factors.

Looking forward, Murphy said that potential future gains will also be very large. For example, eliminating cancer is worth roughly $47 trillion. Further, the economic value of disease reduction is increasing significantly over time… as the wealth of the population increases. In addition, the value of progress against any one disease rises as we make progress against other diseases. For example, as we have made progress against heart disease and, hopefully, make progress against cancer, the value of curing/mitigating Alzheimer’s disease increases. The reverse is also true. Progress against Alzheimer’s disease makes further progress against cancer or heart diseases much more attractive because of a better life in those later years as well as more years to live.

MAJOR RETURNS ON INVESTMENT IN MEDICAL TECHNOLOGY FOR CARDIOVASCULAR DISEASE :  David Cutler, a Harvard University economist, explained that life expectancy has increased 9 years since 1950 with about half of this increase resulting from reduced mortality from cardiovascular disease. These successes in treating/preventing cardiovascular disease can be attributed to developments in the intensive treatment of heart attacks, new medications for chronic heart disease (hypertension, cholesterol, angina), and behavioral changes (less smoking, reduced fat intake, decline in heavy drinking). These developments, including the behavioral changes, are products of medical research.

To determine the return on medical care and basic research (Cutler, Forthcoming), Cutler attributed roughly one-third of the benefits to developments in intensive treatment, roughly one-third to new medications, and the remaining third to behavioral changes. For someone 45 years old the total increase in longevity is about 5 years since 1950, of which about 41/2 years is a result of reduced cardiovascular disease mortality, with 3 years from medical treatments and 11/2 years from behavioral changes. For someone 45 years old the average cost of medical treatment on cardiovascular disease is $30,000 in present value terms. The costs of providing behavioral advice are much less—David Cutler estimated about $1,000 to cover the costs of research and consultation with health care professionals. For the purpose of estimating benefits, Cutler assumed an extra year of life to be worth $100,000.

p. 19: For the return on medical care [for cardiovascular disease], there is a cost of $30,000 in exchange for three extra years. These three extra years are [only valued at]... $120,000 [total] because the benefits occur in the future and need to be discounted. Even so, the return for medical care is very large, on the order of 4 to 1. For the return on behavioral changes, there is a cost of $1,000 in exchange for just over an extra year. [The additional year is discounted more than for medical care because it is farther in the future on average and so the value is only] $30,000. Thus, the return on behavioral changes (30:1) is much higher than the return for medical care.

Cost-effectiveness analysis only measures the costs of treatment in dollars and sees which is cheaper for accomplishing the same goal of reducing mortality or morbidity.  This is less controversial because of the difficulties and subjectivities involved in estimating the dollar value of a life, but both methods generally lead to exactly the same policy conclusions.   

SIGNIFICANT POTENTIAL BENEFITS FROM MELANOMA PREVENTION PROGRAMS

As Cutler pointed out… life style changes have brought about significant reductions in cardiovascular deaths. Life style changes can also have an impact on the incidence of melanoma. Margaret Tucker of the National Cancer Institute said that although the incidence of melanoma is increasing, it is a disease that can be prevented by decreasing sun exposure. To achieve this, major cultural issues need to be addressed since having a tan is an important part of “looking healthy” in American culture. These cultural problems have been successfully addressed in Australia where considerable investment in a prevention program has resulted in melanoma incidence rates leveling off, possibly even decreasing. The Australian program taught the need for sunscreens and protective clothing and led governments to provide shade at nearly all outdoor pools and school playgrounds.

Tucker also said that secondary prevention/early detection is practicable. In Australia, it has been estimated that a family practitioner doing a 2-year screening for adults over 50 costs about $12,000 per male life-year saved, and $21,000 per female life year saved (Carter et al., 1999). In America, it has been estimated that a one-time screen by a dermatologist with treatment would cost $29,000 per life year saved (see below). These costs would decrease for targeted screening.

p. 20: …The issue of whether screening is cost-effective was addressed in a recent study by Freedberg et al (1999). This study examined whether no screening or a single one-time screen by a dermatologist could be cost effective for high-risk patients. The study found that it is cost-effective but highly dependent on the initial cost. If the screen costs $30 then the cost per life year saved is $29,170. However, if the screen costs $120 then the cost per life year saved is $110,000, a considerably higher figure whose acceptability is debatable.