The Value of Medical Spending

It's no secret that medical costs have skyrocketed over the past few decades. Annual medical spending per person has gone from about $700 in 1960 to more than $6,000 today—and that's adjusted for inflation. In any public discussion about whether such spending increases are excessive, it's important to understand the true relationship between medical spending and life expectancy. A new study of medical spending between 1960 and 2000 has found that increased spending does have clear health benefits.

Dr. David M. Cutler, an economist at Harvard, and his colleagues set out to examine how medical spending has translated into gains in survival. With funding from NIH's National Institute on Aging (NIA) and the Lasker Foundation, they measured the increase in medical spending from 1960 through 2000 and compared it with the number of additional years of life lived, focusing on the gains in life expectancy that were likely to be due to medical care. They assumed, based on results from previous studies, that about half of the improvement in longevity resulted from medical care.

Their analysis was published in the August 31, 2006 issue of the New England Journal of Medicine. Between 1960 and 2000, they found, the life expectancy for newborns increased by about seven years. At the same time, estimated lifetime medical spending, adjusted for inflation, increased by about $69,000. From birth, they calculated, each year of life gained cost an average of $19,900 over the entire period from 1960 through 2000.

A closer look showed that the average cost per year of life gained increased within the years studied, from $7,400 per year of life gained in the 1970s to $36,300 in the 1990s. It also increased age. The average cost per year of life gained over the entire study period was about $31,600 at 15 years of age, $53,700 at 45 and $84,700 at 65. Taken together, the researchers painted a picture of rapidly rising costs, particularly for older people. The costs for each year of life gained for those over 65 had risen from $75,100 between 1960 and 1970 to $145,000 between 1990 and 2000.

This study and others of its kind can help health care systems make judgments about how to use health care dollars more efficiently. However, the indirect costs of medicine, such as improvements in worker productivity, weren't taken into account in this study. Neither were the improved functioning and quality of life for older people that medical research has made possible. These are harder to put a value one, but they certainly would make recent gains look even better, especially for the older population.