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Live Long and Prosper

Examining the Economic Value of Medical Research

Research by Kevin Murphy and Robert Topel

What value do Americans place on living longer and healthier lives? Improvements in health and medical knowledge can greatly affect the quality of life and the risks of mortality at various stages of life. How much are people willing to pay for these improvements?

In a recent working paper entitled "The Economic Value of Medical Research," economists Kevin Murphy and Robert Topel of the University of Chicago Graduate School of Business conduct an extensive study of the social, political, and economic issues surrounding medical research in the United States. They find evidence that Americans would enjoy enormous benefits from even modest progress in fighting the major diseases, and their results make a strong case for increased government funding for basic medical research.

A Measurable Difference

The authors begin by asking the 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 several decades. (Together with other factors, the authors calculate "economic value" of medical research by measuring how much a person would pay for an additional year of disease-free life). Their analysis suggests 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 periodbenefits many times larger than total spending on 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, they say. The authors 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 improvement 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 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. Figure 1 estimates that for a man in his 50s, the economic value of reduction in heart disease is worth about $270,000. In other words, he would pay that amount at that time in his life for an additional year of disease-free life. The price is less for a younger man since the fear of 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 pay the highest price for an extra year of life because AIDS most often affects younger men. For women, a high value is placed on the reduction of death from breast cancer.

Figure 1 illustrates the different values that men place on an additional year of life without various diseases including everything from heart attacks to cancer to AIDS to the flu. At younger ages, people are less threatened by the thought of disease and so they would pay lower amounts. In older age, there is a realization that additional years are unlikely and their values decrease. In this example, it is men in their mid-50s who would pay big money -- in the $250,000 range -- for reduced death rates from heart attacks and 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 U.S. 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 depends 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 would be justified even if they only yield small declines in death rates.

Until the Topel/Murphy 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 impact all segments of society and are complementary with all other forms of consumption. For a rich country like the U.S., 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 ages 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 incomes 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.

Kevin M. Murphy is the George Pratt Shultz Professor of Economics and Industrial Relations at the University of Chicago Graduate School of Business. Robert H. Topel is the Isidore Brown and Gladys J. Brown Professor in Urban and Labor Economics at the school.

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