Putting a Price on the Hope of Immortality

05 Aug

Ok, as promised, here’s your quick introduction to the concept of cost-effectiveness in health care. There’s much more to this topic than it is possible for me to cover here, but it should catch you up to speed with the basics you need to know.

The first question is: Why cost-effectiveness?

Well, I hope that the answer to that one is intuitive, but just in case: Cost-effectiveness is essential in a world with limited resources if we are to know what we are getting when we decide to exchange one resource for another. Now, I’m no economist, but I am familiar with the law of diminishing returns, and that’s at the heart of this.

Consider the old standby production curve of “guns and butter.” The government (or any economic actor) must choose how to use their limited resources. They can make all guns, all butter, or some combination of the two. You’ll notice that the graph is not a straight line, but a curve, and this indicates that at the margins, your gun-making resources are less useful for making butter. Clearly, priorities have a part to play in where to locate on the curve, but the diminishing gains at the margin are important too. At some point, even if you want more guns, it’s just not “worth it.” But how do you define “worth it?”
Well, when it comes to installing traffic lights, it turns out that there’s a cost-benefit formula that is applied. In fact, there are eight criteria which must be met for the installation of a traffic light to be considered “worth it.” They have to do with what the signal will do to traffic volume, accidents, etc. The costs are weighed against the benefits and if the benefits outweigh the costs, the light is installed. But wait a minute, how can benefits be compared to costs? Easy. By putting a dollar figure on everything.

In health care, the same thing is often done (although not so often in the U.S.). If a new technology costs (X) dollars, and that technology is demonstrated to extend a life by one year, then we can consider the tradeoffs, provided we convert the value of a life into dollars. Well, sort of. We actually get there through the back door.

A disability-adjusted life year, or DALY, takes into account both morbidity (sickness) and mortality (death) to create a common measure that reflects the years of life lost and the years lived with a disability as the result of a health condition. It is a way to quantify disease burden.

A quality-adjusted life year, or QALY, is similar to a DALY, but is used to quantify the results of a medical intervention. Each year is given a value ranging from 0 (death) to 1 (perfect health) with a condition like blindness empirically tested at around 0.5. So, for instance, if a procedure would extend your life for 10 more perfectly healthy years, that would be a gain of 10 QALYs. If it gave you an additional 10 years, but you’d be blind, that’s a gain of 5 QALYs.

Cost per QALY is the definitive cost-utility measure in health care. It allows the costs of an intervention to be compared against the gain in QALYs it provides. We haven’t had to quantify a human life in dollar terms yet. But, we must decide at what point the cost per QALY is “worth it” and when it is not.

Fortunately, as cold of a task as that might seem to you or me, there is a large body of research that has been able to do just that — not according to experts, but by asking people just like us what they would be willing to pay for various outcomes. The answer? Well, it varies, but in the U.S. the figure is typically about $50,000 per QALY. If something costs more than that, most health economists agree that we shouldn’t be paying for it. If something costs less than that, it’s “worth it.”

Now, of course, reality often fails to induce rational behavior. When Mom is dying, you have an understably hard time putting a price tag on the hope you get from letting her doctor perform a longshot procedure. That’s an issue of subjective decision-making that, when aggregated across a country the size of ours, adds up to a lot of money spent chasing after the hope of immortality, which–in the end–can never be bought. The result is a bloated, wasteful system, which begs the question: Is what we’re getting “worth it?”

1 Comment

Posted by on August 5, 2009 in Uncategorized


One response to “Putting a Price on the Hope of Immortality

  1. alath

    August 12, 2009 at 2:18 am

    Nice post. I agree with most of what you say and strongly agree that these are the kind of issues we need to be talking about.Here's where I start to lose hope: we're not talking about these issues. Both of the major poltical parties are pretending that these tough decisions aren't necessary, and if we reform the system (Democrats) or leave it alone (Republicans) there won't be any rationing.The public is about evenly divided on which fantasy they prefer and which party they want to "Score a Big Win."I don't see much hope for the nation to have this discussion in a serious way, or even admit the need to have it.I blog here about health care (and other issues):


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