ECONOMISTS' NEW MEASURE OF HEALTH TO TRANSFORM HEALTH CARE DEBATE Commentary By David Warsh, The Boston Globe, published

in the Chicago Tribune 1 FEB 1998 It's very hard to get people to think about human capital. Afterwards, they usually conclude it was worthwhile. Economists have been forced to become very ingenious in developing strategies for investigation over the years. Some remarkably clever accounting schemes have been the result. The latest of these is the application of the measuring rod of money to the ever-changing health status of populations with surprising and quite wonderful results. Begin by considering human capital. The idea that technical skill and knowledge, received through education and on-the-job training and embodied in workers, might be reflected in a stream of higher earnings is by now a familiar one in economics. Human capital accounting is a powerful tool for understanding the policy choices we face as a nation. We are currently spending about 17 percent of gross domestic product on health care. Is that a lot? Or too little? Should we invest more in cancer research? In infant care and childhood vaccines? Has the overnight corporation of medicine improved our health? Or decreased it? How about Medicare and Social Security? For the rich? For the poor? The nation got a look at this debate in 1993 when Hillary Clinton and Ira Magaziner set about reorganizing health care on a grand scale. Every special interest in medicine converged on Washington to plead its case. One of the least known but most important men in Washington in those days was a 28-year-old newly minted Harvard economist named David Cutler. His importance stemmed from the fact that he was one of the very few professional economists in touch with the Health Care Task Force. Four years later, Cutler is now tenured at Harvard University, and with research partner Elizabeth Richardson, he has sketched the basis for an accounting scheme that represents an enormous advance over present methods. At the American Economic Association meetings in Chicago last month, the two introduced a framework that in all likelihood will blossom into a system of national health accounts to supplement the present-day system of national income accounting. The usual way of measuring population health is to rely on a number of straightforward indicators familiar to everyone: infant mortality, life expectancy, morbidity, and so on. The yardsticks are highly revealing of the overall health of the population, as far as they go. Life expectancy at birth in the U.S. has increased from 47 years in 1900 to 75 years in 1990. But such yardsticks tell little about how the transformation has been achieved, or what might be done to make the health care system still more efficient. Adding up inputs--hospital days, number of doctors, pharmaceutical sales--tells us little about RESULTS. Cutler's and Richardson's work differs in that it seeks to measure health OUTPUT. Drawing on a seminal 1972 book, "THE DEMAND FOR HEALTH: A THEORETICAL AND EMPIRICAL INVESTIGATION" by Michael Grossman of the NATIONAL Bureau of Economic Research, which first set out the concept of "HEALTH CAPITAL", the economists set out to ELUCIDATE and then MEASURE CONDITIONS AT ONCE ELUSIVE AND YET EVEN MORE CENTRAL TO OUR WELL-BEING THAN OUR CASH. At FIRST GLANCE, HEALTH CAPITAL is simply the DOLLAR VALUE of the YEARS REMAINING TO AN INDIVIDUAL. The first step here is the HARDEST: What exactly is the DOLLAR value of a YEAR? The CONSENSUS ESTIMATE among economists is that a LIFE IS WORTH $4 million to $7 million in the UNITED STATES (BASED ON LIFETIME EARNINGS). With a DISCOUNT rate of 3 percent, a year of life is thus worth somewhere between $75,000 to $150,000. But WHAT KIND OF A YEAR? WELL_BEING is the ISSUE HERE. So the economists devise a SCALE. At 0, you're dead; at 1, you are enjoying a year of PERFECT HEALTH: Everything else falls somewhere in between. (Relying on SELF-DESCRIPTIONS, they estimate the value of a year of PARALYSIS to be 0.62; a year of BLINDNESS 0.73; a life without a LIMB 0.87; AND SO ON.) ARMED with the concept of QUALITY-adjusted years of LIFE--and various measures of the INCIDENCE of ILL-HEALTH in the population--CUTLER and RICHARDSON have BEGUN CALCULATING human capital. FINER MEASURES WILL COME LATER, they are QUICK TO ADD. MYRIAD DILEMMAS will keep bioethicists and measurement economists busy for MANY DECADES to come, PARSING PROBLEMS that now receive their FULLEST TREATMENTS IN THE ER, but certain magnitudes are striking from the outset.

First of all, THEY found, health capital is LARGE. A newborn in 1990 came into the world with an estimated $2.5 million worth of health to LOOK FORWARD to; were that person to EARN $30,000 a year from age 20 to 65, the value at birth of that individual's lifetime income would be only $450,000. MOREOVER, health is CLEARLY increasing. Between 1970 and 1990, health capital for NEWBORNS increased by $95,000; for the ELDERLY, it soared by $169,000 reflecting a DECLINE IN HEART ATTACK DEATHS. IN CONTRAST, MEDICAL SPENDING ON BABIES grew only $19,000 in the like period; on the ELDERLY, by $37,000 (in 1987 DOLLARS). The return on health care SPENDING COULD be quite LARGE. "THE VALUE OF HEALTH: 1970-1990" is quite SHORT, six pages with a couple of tables and notes. But it will DECISIVELY AND PERMANENTLY improve the TERMS of the health care DEBATE. As the authors say, We know a great DEAL ABOUT the RESOURCES WE PUT INTO THE HEALTH CARE SYSTEMPEOPLE, dollars, TECHNOLOGY, and the LIKEBUT VERY LITTLE about WHAT we GET OUT. Our methodology provides a mechanism for ESTOMATING WHAT return we get for our MEDICAL dollars.