To ensure a year free of cancer? of strokes?
    of AIDS?

    Professors Kevin M. Murphy and Robert

    H. Topel examined the economic returns of

    medical research and found that Americans

    would pay a substantial amount for even small

    reductions in disease.
Research by Kevin Murphy, George Pratt Shultz Professor of Economics and Industrial Relations (above left) and Robert Topel, Isidore Brown and Gladys J. Brown Professor in Urban and Labor Economics (above right). A version of this article previously appeared in Capital Ideas, a quarterly research publication produced by the GSB Communications Office.
What’s more, Murphy and Topel concluded that Americans would enjoy enormous benefits from even modest progress in fighting major diseases and made a case for increased government funding for basic medical research.

A Measurable Difference
The authors begin by asking a broad question: How can we value improvements in health and life expectancy? Armed with an economic framework for addressing such issues, they estimate the economic value of the changes in life expectancy observed over the past few decades.

The analysis has three main ingredients. The first is an estimate of what a typical American would agree to pay for a reduction in mortality risk that would add a year to people’s lives. Based on economists’ calculations of what workers must be paid to work in occupations with greater risks of job-related death, Murphy and Topel put the value of an additional life year—spent consuming and interacting with family and friends—at about $150,000. This means, for example, that a 30-year-old would be willing to sacrifice $3,000 in annual income in exchange for a reduction in risk of death that adds one year, on average, to his or her life.

The second ingredient is a recognition that research produces new knowledge and ideas that benefit us all. A medical breakthrough that reduces the likelihood of dying from cancer can be enjoyed by everyone. In the jargon of economists, basic research is a public good. In the United States, these benefits are spread over the current population of roughly 273 million people. And future generations benefit as well.

The third ingredient is the increase in life span that Americans have actually experienced. Between 1970 and 1990, the expected remaining life of a typical 40-year-old increased by more than three years, mainly as a result of sharply lower death rates from heart disease.

Putting these pieces together, Murphy and Topel find that the historical gains from increased life expectancy have been enormous, approximately $2.8 trillion annually from 1970 to 1990. The reduction in death rates from heart disease alone has increased the value of life by about $1.5 trillion per year
over the 1970 to 1990 period—roughly 50 times the nation’s total investment in medical research over that period.

A further decline in death and illness from heart attacks, cancer, and other diseases would produce additional benefits in the future, the authors say. They estimate that eliminating deaths from heart disease would generate about $48 trillion in economic value, and eliminating deaths from cancer would be worth $47 trillion to Americans. In other words, Americans would be willing to pay this amount to achieve such an increase in the length and quality of their lives.

While such dramatic improvements in health are not on the immediate horizon, the authors’ calculations suggest that reducing the death rate from either heart disease or cancer by even 20 percent would generate approximately $10 trillion in economic value to Americans, or more than one year’s worth of the gross domestic product.

Buying Time
The authors’ estimates of the gains are so large in part because most young men and women would be willing to pay a substantial amount even for small reductions in their chances of dying from diseases such as cancer, heart disease, or stroke during middle or old age. The chart above shows that for a man in his 50s, the economic value of a cure for heart disease is more than $250,000. In other words, he would gain additional years of life worth that amount if the threat of dying from heart disease were eliminated. The present value is less for a younger man because the threat of heart disease is less immediate.

In the case of AIDS-related diseases—as opposed to heart disease—it is younger men (between ages 25 and 30) who would gain the most from a cure because AIDS most often affects younger men. For women, a high value is placed on the reduction of death from breast cancer.

Room for Improvement
These results raise the question, Are we spending enough on medical research? Of the $35.8 billion spent on medical research in 1995, $13.4 billion was funded by the federal government, more than $18 billion came from private industry, and about $4 billion was funded by other private and public sources. Although the United States clearly invests in the health of its population, other federal programs—such as farm and urban subsidies—receive more sizeable attention. Government funding for medical research accounted for about 21 percent of the overall federal budget for research and development in 1995. The government allocates only about $50 a person for medical research, compared with about $5,000 a person for all other federal programs. In the future, the amount of additional spending on medical research by the government will depend on the difficulty of producing advances in medical knowledge. But the authors’ results suggest that the potential benefits of increased medical research are so enormous, especially compared with the costs, that much higher expenditures on research might be justified—even if they only yield small declines in death rates.

Until the Murphy/Topel study, little empirical evidence has existed to prove the value of such basic medical research. The authors gathered compelling evidence that economic gains from increasing life expectancy were not only a past phenomenon but will continue to increase over time. The extremely large value of improvements in health care for the country as a whole follows directly from the fact that improvements in health affect all segments of society and are complementary with all other forms of consumption. For a rich country like the United States, the value of improving the health of its population is bound to be very large; as the U.S. population grows, as lifetime income grows, as health levels improve, and as the baby-boom generation ages toward the primary decades of disease-related death, the economic reward to improvements in health will continue to increase. The authors estimate that the growth and aging of the population alone will raise the economic return to improvements in the treatments of many diseases by almost 50 percent between 1990 and 2030. In addition, projected increases in income and life expectancy will add at least that much.

Policy Implications
Private companies have partly taken up the slack left by limited government funding of medical research. However, these private companies naturally pursue applied research—vaccines, drugs, and other products that can be patented—to earn a profit, rather than basic research such as understanding the causes of cancer, which becomes free and common knowledge once discovered.

Higher federal funding of basic research on a particular disease usually increases rather than decreases spending by private companies because a private company can capitalize on advances in knowledge created by basic research of the disease. For this reason, the authors agree that the government’s main role in this area should be in supporting basic research. They conclude that a doubling of annual government funding would have only a small effect on the overall federal budget. Yet greatly expanded basic research may have an enormous payoff by reducing deaths from major diseases and by increasing the value, length, and quality of life for Americans.
The Economic Value of Disease
Reduction by Age for Men
The above chart illustrates the different values that men place on an additional year of life without various diseases. At younger ages,people are less threatened by the thought of disease, so they would pay lower amounts. In older age, there is a realization that additional years are unlikely and values decrease. In this example, it is men in their mid-50s who would pay big money—more than $250,000—for reduced death rates from heart attacks and cancer.
E-mail Chicago GSB - Chicago GSB Front Page - GSB Home