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Friday, August 31, 2007

Valuing old age

Health insurance is a very interesting area of study, throwing up multiple challenges. Insurance companies are forever trying to reduce their costs, by screening out people with higher potential health costs. But they face a fait accompli in higher medical costs, with their aging clients. There is an excellent article in the NBER on this debate "The Value of Life Near its End and Terminal Care", by Gary Becker, Kevin Murphy, and Tomas Philipson.

The authors claim, "Medical care at the end of life, which is often estimated to contribute up to a quarter of US health care spending, often encounters skepticism from payers and policy makers who question its high cost and often minimal health benefits. It seems generally agreed upon that medical resources are being wasted on excessive care for end-of-life treatments that often only prolong minimally an already frail life. However, though many observers have claimed that such spending is often irrational and wasteful, little explicit and systematic analysis exists on the incentives that determine end of life health care spending. There exists no positive theory that attempts to explain the high degree of end-of life spending and why differences across individuals, populations, or time occur in such spending. This paper attempts to provide the first rational and systematic analysis of the incentives behind end of life care. The main argument we make is that existing estimates of the value of a life year do not apply to the valuation of life at the end of life. We stress the low opportunity cost of medical spending near ones death, the importance of keeping hope alive in a terminal care setting, the larger social value of a life than estimated in private demand settings, as well as the insignificance in quality of life in lowering its value. We derive how an ex-ante perspective in terms of insurance and R&D alters some of these conclusions."

Update
Economists Charles I Jones and Rober E Hall, in The value of life and the rise in health spending, argues that as societies develop and incomes grow, the premium attached to extending our lives increase. They ask, “As we grow older and richer, which is more valuable: a third car, yet another television, more clothing — or an extra year of life?” They claim, "Standard preferences—of the kind used widely in economics to study consumption, asset pricing, and labor supply—imply that health spending is a superior good with an income elasticity well above one. As people get richer and consumption rises, the marginal utility of consumption falls rapidly. Spending on health to extend life allows individuals to purchase additional periods of utility. The marginal utility of life extension does not decline. As a result, the optimal composition of total spending shifts toward health, and the health share grows along with income. In projections based on the quantitative analysis of our model, the optimal health share of spending seems likely to exceed 30 percent by the middle of the century."

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