Cost-effective Medical Treatment: Putting an Updated Dollar Value on Human Life

A thorny question lies at the heart of meaningful health care reform. How much is human life worth?

New research from Wharton and Stanford based on Medicare kidney dialysis data shows that the average figure — $129,090 per additional year of quality life — is higher than prior studies have shown. Perhaps more important, the study also puts a value on the cost-effectiveness of treatment across percentiles of the entire dialysis population in an attempt to develop a benchmark for health care coverage decisions.

As presidential candidates again debate universal coverage, the research could provide guidance to policy makers attempting to allocate scarce health care resources in the most effective way possible, according to Chris P. Lee, a Wharton professor of operations and information management, who co-authored the paper titled, “An Empiric Estimate of the Value of Life: Updating the Renal Dialysis Cost-Effectiveness Standard.” The paper is to appear in an upcoming issue of the journal Value in Health.

“Health care costs are rising rapidly and it’s believed that much of the rise in medical expenditures is attributed to the use of medical technologies that are too expensive to be justified,” says Lee. “What we’re asking is: ‘Does the medical benefit support the kind of costs we’re talking about?'”

Dialysis for patients suffering chronic renal failure is the one service that Medicare, the national health plan for the elderly, provides for anyone, regardless of age. The program has been in effect since the 1970s and health care economists have long considered it to be a fair proxy for universal health care coverage and the value that society places on a year of life.

Lee and his co-authors, Glenn M. Chertow, of the division of nephrology at Stanford University’s department of medicine, and Stefanos A. Zenios, of Stanford’s Graduate School of Business, examined records from more than a million patients. The study results show that the incremental cost effectiveness ratio of dialysis in current practice relative to the next least costly alternative is on average $61,294 per year, or $129,090 for a quality-adjusted year of life (QALY) — a measure that combines the length of time that life is extended and the quality of that life.

However, the distribution of cost effectiveness across the entire population is wide. For the lowest percentile, it costs only $65,496 to provide an additional quality-adjusted life year. For the top percentile, the figure is $488,360. The higher costs per quality adjusted life year were strongly associated with old age and additional chronic illnesses in addition to end-stage renal disease, the researchers found.

“I don’t believe that any health economist or the strongest advocate for providing coverage will argue that half a million dollars for one year of life is reasonable,” says Lee. “This would inflate health care spending by a large amount — 10 to 15 times what we currently spend. Obviously that’s not feasible.”

Lee points out that the cost to preserve one year of quality-adjusted life drops to $240,000 in the 90th percentile of expenditures. In effect, if that were to become the threshold, 90% of patients could be treated for half what it would cost to treat the sickest for whom heavy expenditures do not improve the quality or length of life very much. Coverage decisions are shaped largely by the medical community, Lee says, adding that while this community includes caring and informed professionals, they are not often focused on quantitative analysis and miss some of the subtleties that emerge in the data.

Up until now, according to the paper, the most commonly used number to place a value on a year of quality life has been $50,000. It, too, is based on a study of dialysis patients. The 1984 Canadian study used an accounting ledger for 44 patients at one center during a time span of one year. A more recent study adjusted that number to $93,500 per year, inflating the earlier number to 2002 U.S. dollars.

The new Wharton/Stanford research brings older renal care studies up to date with costs and modern practices, says Lee. “The gold standard has been $50,000, but that figure does not reflect the way dialysis is practiced and the technology we have today.”

Lee and his researchers used data from The United States Renal Data System (USRDS) for information on outcomes and costs from more than 500,000 patients initiating dialysis between 1996 and 2003, as well as from 159,616 patientswho received a transplant during the same period. 

The paper also puts the value of extended life implied by medical spending on dialysis in the context of other ways in which the value of life is calculated, outside the medical field.

For example, the paper points out that the decision to work as a contractor in Iraq involved placing a monetary value on years of extended life. Assuming an annual risk of death of 0.004 and a salary premium of $30,000 per year over comparable jobs in the United States, contractors in Iraq are essentially compensated at a rate of $250,000 per statistical year of life. The study also points to a recent survey of estimates based on occupational risk that found a range from $500,000 to $21 million per statistical life year depending on how dangerous the work is.

Another approach is based on the cost effectiveness of life saving interventions in non-medical fields such as occupational health, transportation safety or environmental hazard control, the paper states. Estimates using these methods ranged from a cost-effective $56,000 per life year saved for transportation programs to a more extravagant $4.2 million per life year saved for environmental programs.

As the paper states: “While no method can definitively determine the actual value an individual places on his or her lifetime, these estimates are less prone to some of the problems faced by estimates using labor market data or personal choices involving small but finite risks, which … people tend to overestimate.”

Implicit and Explicit Rationing

When it comes to medical care, placing a value on life leads to ethical concerns, the paper acknowledges. Lee notes that when officials in Oregon attempted to introduce cost-effectiveness to state Medicaid programs, the proposal was shot down in an angry public outcry.

“In this country we’re really uncomfortable with the notion of health care rationing,” says Lee. “On the other hand, the fact of the matter is when you have finite resources — and that is the case here — you are always rationing, whether explicitly or implicitly. Using rankings of the cost-effectiveness of medical interventions to make coverage decisions is explicit. Without that, we are rationing implicitly because Medicare has a finite budget. It can’t provide coverage for everything. In the end, people will not get everything they want. It’s just that the mechanism for the rationing is a lot fuzzier.” Medicare coverage, he says, is based on a clause that states patients must receive treatments that are “necessary and reasonable.”

“This magical phrase has been the benchmark by which coverage decisions are made in this country,” says Lee, adding that without incorporating the benefit derived from the procedure, it is impossible to know what is medically necessary or reasonable. “This whole phrase is really subject to interpretation and, because of the subjectivity, we don’t even know if our decisions are based on objective notions of medical benefit.”

Lee notes that the $129,090 figure his research came up with compares to a range of $50,000 to $100,000 used in other countries, such as Australia and the UK, which run national health care systems in guiding their coverage decisions. The World Health Organization has proposed $108,609 as the value of a disability-adjusted life year, Lee says, adding that even though other countries have adopted the use of “pseudo-official” spending thresholds in coverage decisions, they do not apply them rigidly and without exceptions. And while other nations are more oriented toward universal health care, the United States has favored a market-based system. “But it has not been as successful as we might have liked. Perhaps it is time to revisit the pros and cons of this approach,” says Lee.

Indeed, debate on the cost of the new Medicare prescription drug benefit program (part D) suggests that continuing on the path where coverage decisions are based on clinical evidence alone, without consideration of costs, may not be feasible in the long run, according to the paper. The drug benefit has led several researchers to argue that coverage decisions should be based on cost and effectiveness criteria. New technologies with cost effectiveness ratios below $50,000 to $100,000 per incremental quality-adjusted life year are deemed suitable for coverage, while others with higher ratios are too expensive, the study states.

Too Little Benefit for the Cost

The paper argues that creating thresholds for treatment needs to keep with principles of social justice established by the American political philosopher John Rawls. Rawls argued that there are many different ways to define justice, including protection of the most vulnerable in society, according to Lee, who adds that because medical cost-effectiveness varies so widely, the system is never going to be able to afford to treat everyone at the most expensive level. Attempting to provide the maximum amount of medical care in a system that cannot finance that spending will inevitably leave people out.

“The Rawlsian notion of justice is noble in its attempt to protect society’s most vulnerable, but implementing it in practice is difficult,” says Lee. “If we’re to set coverage at the sickest and most cost-ineffective patient there is, it means we will be expending a lot of resources for what may be a barely detectable increase in life expectancy — an amount that is sometimes measured in hours if not minutes, especially in end-of-life situations. When resources are scarce and costs are rising fast, this would not be sustainable and it means that somewhere someone else who can benefit more from the same resources will get excluded from coverage because we have exceeded our ability to pay.

“What we realized in the course of this study is that a more pragmatic and modern interpretation of Rawls’ argument is to think about coverage in terms of the percentile of patients up to whom we will cover rather than focusing on the coverage of the last and most expensive (cost-ineffective) patient whom we can’t afford to cover,” says Lee.

The research concerns the business community in several ways, including employer and employee health benefit payments, insurance coverage and malpractice cases, according to Lee. “Health care costs are rising for employees, but employers are also paying more,” he says. “Health insurance is expensive partly because of the degree of coverage. The fact of the matter is that there are a lot of medical procedures with high prices and minimal medical benefit.” When is it justified for one person to subsidize the demands and wishes of someone else? asks Lee. “So the question is, ‘How does a health plan or employer determine what is the right degree of coverage to provide, and at what point do we say this coverage produces far too little benefit for the costs demanded?”

For that, the paper “provides a practical benchmark based on renal dialysis,” Lee says. “To the extent that we, as a society, believe that renal dialysis — given its unique historical status — offers a reasonable point of reference for making coverage decisions, the findings in this paper can be used to guide those decisions. And despite the fact that the $129,090 figure is substantially higher than the often-quoted, but now outdated, figure of $50,000, using the former as the benchmark doesn’t necessarily mean we will be spending more money than we already are. What it means is we will allocate resources using renal dialysis as the reference point that defines what is cost-effective and what isn’t. It provides a more rational approach to allocating scarce resources.”

Lee suggests new quantitative research on cost-effectiveness could also be used in malpractice litigation which, he says, also has an impact on the health care costs. For example, in a case where negligence cost a patient 10 years of quality-adjusted life years, lawyers could at least use a figure of $1.29 million as a rough start for settlement negotiations. Lee was recently contacted by an attorney for a doctor who was being sued by a patient seeking more than $20 million in damages.

“The importance of providing a benchmark is that it establishes a precedent for how this compensation should be set,” says Lee. “Malpractice lawsuits in this country are rampant, and a lot of times there is no consistency in how a court awards the plaintiff.”

He argues that increasing numbers of suits have ended in higher payouts that have set new precedents. “The costs of malpractice lawsuits, which are going up and up, have hurt the health care system in the sense that physicians and hospitals pay those fees and, ultimately, the people foot the bill.” He also points out that in order to avoid being slapped with a malpractice suit, doctors and hospitals now practice defensive medicine, ordering excessive tests and treatments which, in turn, are driving up the overall cost of health care.

“As the spending on health care continues to rise unabated — right now it is growing at twice the rate of inflation and accounting for one out of every six dollars we earn — we as a society will soon come to a point where compromises are inevitable: Either we cut back other forms of spending to make room, or we spend our health care dollars more wisely. There is just no other way,” says Lee. “This paper provides guidance and the tools for making those decisions. These decisions are hard because they involve ethics and social values where there is no right or wrong. But if we can just get people to think a little more about medical value and the difficulties involved, we think we have done a good job.”

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