# QALY and the Value of U.S. Health Care Spending

on June 23, 2009 at 7:38 am

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.

1 a student of economics June 23, 2009 at 7:53 am

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.

2 Scott June 23, 2009 at 8:27 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.

3 Enda June 23, 2009 at 8:42 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.

4 Thomas Themel June 23, 2009 at 8:44 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.

5 Dan June 23, 2009 at 8:53 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.

6 dkahn June 23, 2009 at 9:06 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?

7 Bob Nease June 23, 2009 at 9:15 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.

8 Zbicyclist June 23, 2009 at 9:27 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?

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10 babar June 23, 2009 at 9:34 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?

11 anonymous June 23, 2009 at 10:02 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.

12 paul June 23, 2009 at 10:47 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.

13 jn June 23, 2009 at 11:11 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.

14 Gabe Harris June 23, 2009 at 11:46 am

Let me get this straight. Since we don’t have data on how many extra QALY’s we have, lets make up a number to justify increased federal control of the health care industry?

ok I’ll make up a number: 12….wow! we ARE getting a great deal, your right, we need to spend more on health care and we should use the governemnt to force us to do it. Economics is amazing.

15 Floccina June 23, 2009 at 12:21 pm

Some treatment e.g. back surgery show no net benefit over the population that receive it. It would make sense to at least warn people of this.

16 Joe June 23, 2009 at 12:56 pm

The quickest way to improving the efficiency of medicine is not to decide who to cut off dialysis but to reduce the rate of errors/or mistakes/or defects in the regular practice of medicine. Anyone ever study Demming?

So, doctors at Johns Hopkins found you can reduce the rate of intravenous line infection down to near zero if you just require everyone to follow a 5 point checklist every time they do that procedure. fewer infections, reduces costs and gives better outcomes.

InterMountain Health will not do an elective cesarean section for first births earlier than 39 weeks because the rate of complications is dramatically higher. So fewer complications gives better outcomes, vaginal deliveries are significantly less expensive (and the probability of needed another expensive c-section in the future is also reduced.

This could go one and on. There is a tremendous lack of measurement of error rates and very little attention to the continuous improvement process to eliminate them. Higher quality results in better care, and lower costs. Some experts estimate there is 30 to as much as 50% to be saved rigorously applying a continuous improvement process to the actual delivery of care.

17 Sam June 23, 2009 at 1:34 pm

I suspect that a QALY is not of constant value, and that it is not desirable for it to be of constant value. In particular, I think people are more willing to believe that, say, sick kids have had a tough break, and it’s OK to spend large sums of money on a small number of really sick kids than they are to believe that it’s OK to spend the same amount of money per capita on prolonging the lives of a large number of old people.

This is understandable. Government welfare (and heath insurance in the US has so much government meddling that it’s not really all that different) looks like insurance against life dealing you a sucky hand. Kids with cancer have clearly been dealt a bad hand, whereas old people with cancer are mostly just old.

18 dsundahl June 23, 2009 at 3:04 pm

I think the post misses the point of people’s claim that we need to cut the “waste” in health care spending. Politicians, clinicians, etc. are not thinking so much about overpaying for something or other–in this case a QALY. Rather, they’re thinking about the costs that are incurred for unnecessary tests and treatments, as well as things like conflicting or missing information, redundant information gathering, &c.

I don’t mean that there’s no appetite for finding lower prices–for, say, pharmaceuticals–but eliminating interventions that benefit patients, simply because they are too costly–is NOT what people intend when talking about reducing costs in health care.

On the other hand, getting the right price per QALY is a sensible way to look at reducing health care expenditures. Unfortunately, it’s a non-starter for politicians AND clinicians. I suspect, furthermore, this will only get worse. (cf. Robin’s paper on evolutionary explanations for demand for health care).

19 Dennis June 23, 2009 at 3:20 pm

We all tend to omit the basic economic principles in the present discussing about Health Care reform. We ignore the eternal problem of physicians driving demand, even though the physicians would like us to think that they are not rational business oriented people. Secondly, the problem is not providing health care to healthy young people; the problem is that we paid too much money taking care of young healthy folks. (Need for price discrimination?). Finally we have the patients, the consumers, sited between the “Divine Trinity† of Physicians, Pharmaceuticals, and Insurance Companies; all wanting to make money by manipulating the medically uneducated consumer.

20 DS June 23, 2009 at 3:23 pm

We all tend to omit the basic economic principles in the present discussing about Health Care reform. We ignore the eternal problem of physicians driving demand, even though the physicians would like us to think that they are not rational business oriented people. Secondly, the problem is not providing health care to healthy young people; the problem is that we paid too much money taking care of young healthy folks. (Need for price discrimination?). Finally we have the patients, the consumers, sited between the “Divine Trinity† of Physicians, Pharmaceuticals, and Insurance Companies; all wanting to make money by manipulating the medically uneducated consumer.

21 Andy June 23, 2009 at 3:38 pm

Ted, I agree. Looking just at life expectancy (or infant mortality) and then arguing that health care in the US sucks doesn’t make any sense, for the reasons you note.

Life expectancy for whites in the US is 76 for males, 81 for females. In Sweden it’s a little bit higher.

22 Lord June 23, 2009 at 4:35 pm

All indications are QALYs have a negative value in the US, so if we wanted to make them positive we would have to cut spending to improve care.

23 Joe June 23, 2009 at 5:28 pm

Buzzcut, you are a coward. I said so.

1.Ted’s and Adny’s implication is that life expectancy in the US is lower than other country’s because African American’s are bringing down the average. That’s a curious definition of America, but one that apparently is a very comfortable for today’s Republican party. (You are both Republican’s right?) By the way cowards are afraid to say what they mean. If you mean African American’s, in general, then say so. Comparing today’s residents of Detroit to today’s resident of South Africa is about as ignorant as one can get.

2. I suppose it never occurred to you that racial disparities are endogenous to our country’s production of health. Never mind the selection effects.

3. Black women have higher life expectancy than white men, presumably even Swedish white men. (I haven’t disaggregated the African American population by ethnicity comparable to picking Swedes among all European descendents). So clearly race –that’s what you are talking about not ethnicity– is less important than gender.

4. The differential in life expectancy between white women and black women in 1930 was 14.3 years. In 2000 it was 4.9 years. For men, it has fallen from 12.4 to 5.8 years. Wonder how and why that happened? Oh the differential of life expectancy at age 60 is only half that.

5. The life expectancy of Swedish Americans may be “slightly” less than Swedes in Sweden but we pay more than twice as much per head as they do to get there. That’s the whole point. By the way, Life expectancy of women in Sweden is 83 years, and for white women in the US 81. (it’s 84 in France, 85 in japan, 84 in Canada, 82.7 in Puerto Rico and 81 in Jordan). HOw are we gonna decode all those “ethnic” differences?

24 Gary Leff June 23, 2009 at 8:10 pm

It’s been a long time since I’ve read my Veblen, but I’ve always assumed that the ‘waste’ that was to be eliminated referred to the fetish nature of profits.

25 Steve June 23, 2009 at 11:01 pm

The who does the cutting is a great question. The market doesn’t seem to work and no one likes the government. Probably there are no good answers because people have no idea what a QALY is worth.

But if we want to talk about increasing life spans we’d get more bang for our buck doing social engineering in schools or using tax incentives. Or better yet we can fund infrastructure in developing countries!

The real question for the U.S. right now is “are we going to subsidize (and mandate) medical coverage for lower-middle class people?” not this spending stuff.

26 Ricardo June 24, 2009 at 1:39 am

If you take non-disease deaths out of the life expectancy statistics, Americans are essentially the longest lived people in the industrialized world, offset by a very high risk of dying prematurely due to other causes.

This misses the point. The analysis done by Ohsfeldt and Schneider says that average life expectancy in the U.S., when excluding the effects of accidents and homicide, is 76.9 years. Next in line are Switzerland (76.6 years) and Norway (76.3). The point is that the U.S. spends far more than these countries and whether we gain or lose four months in life expectancy, we have little to show for the extra money spent.

27 Payday June 24, 2009 at 7:03 am

The ultimate aim of this high spending on health is ‘ensuring’ better health care system in place for citizens. Hence there will not be any questions on over expenditures unless it is really ‘avoidable’.

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29 David Young June 25, 2009 at 1:30 am

Perhaps this is a stupid question but when it is said that the US spends X dollars a year on health care are they including all the elective quality of life type spending like various plastic surgeries, sex changes etc.?

30 David Young June 25, 2009 at 1:31 am

Perhaps this is a stupid question but when it is said that the US spends X dollars a year on health care are they including all the elective quality of life type spending like various plastic surgeries, sex changes etc.?

31 Charlie August 15, 2009 at 4:57 pm

I believe the U.S. includes deaths to car accidents, etc.
in their Life Expectancy calculations while other nations
don’t. This gives a false reading to U.S. Life Expectancy.
The UN enjoys seeing the U.S. rate low on their charts.

Those who agree to ‘rationing’ won’t want it if it includes
their parents, grand-parents, etc. We believe in allowing
Americans the freedom to make choices. Who wants Govt.
employees making health care decisions for us ? No way.

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