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Theoretical bounds on the value of improved health

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  • Herrera-Araujo, Daniel
  • Hammitt, James K.
  • Rheinberger, Christoph M.

Abstract

Policies that improve health and longevity are often valued by combining expected gains in quality-adjusted life years (QALYs) with a constant willingness-to-pay (WTP) per QALY. This constant is derived by dividing value per statistical life (VSL) estimates by expected future QALYs. We explore the theoretical validity of this practice by studying the properties of WTP for improved health and longevity in a framework that makes minimal assumptions about the shape of an agent's utility function. We find that dividing VSL by expected QALYs results in an upper bound on the WTP for a marginal improvement in the quality of life, as measured by gains in health status or longevity. Calibration results suggest that analysts using this approach to monetize health benefits overestimate the value of a program or policy by a factor of two on average. We also derive a lower bound on the WTP for improved health and longevity that permits a novel empirical test for the descriptive validity of the QALY model. Our calibrations suggest that this lower bound is on average 20% smaller than the actual WTP.

Suggested Citation

  • Herrera-Araujo, Daniel & Hammitt, James K. & Rheinberger, Christoph M., 2020. "Theoretical bounds on the value of improved health," Journal of Health Economics, Elsevier, vol. 72(C).
    • Handle: RePEc:eee:jhecon:v:72:y:2020:i:c:s0167629619303042
    DOI: 10.1016/j.jhealeco.2020.102341
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    Cited by:

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    4. Bartczak, Anna M. & Budziński, Wiktor & Jusypenko, Bartosz & Boros, Piotr W., 2024. "The Impact of Health Status and Experienced Disutility on Air Quality Valuation," Ecological Economics, Elsevier, vol. 217(C).
    5. Dan Cai & Si Shi & Shan Jiang & Lei Si & Jing Wu & Yawen Jiang, 2022. "Estimation of the cost-effective threshold of a quality-adjusted life year in China based on the value of statistical life," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 23(4), pages 607-615, June.
    6. St-Amour, Pascal, 2024. "Valuing life over the life cycle," Journal of Health Economics, Elsevier, vol. 93(C).
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    More about this item

    Keywords

    Health valuation; Willingness-to-pay; Value per statistical life year; Quality-adjusted life years;
    All these keywords.

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • Q18 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Agriculture - - - Agricultural Policy; Food Policy; Animal Welfare Policy
    • Q51 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Environmental Economics - - - Valuation of Environmental Effects

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