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.


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