The value of life near its end and terminal care by

Medical care at the end of life, estimated to contribute up to a quarter of US health care spending, often encounters skepticism from payers and policy makers who question its high cost and often minimal health benefits. It seems generally agreed upon that medical resources are being wasted on excessive care for end-of-life treatments that often only prolong minimally an already frail life. However, though many observers have claimed that such spending is often irrational and wasteful, little explicit and systematic analysis exists on the incentives that determine end of life health care spending. There exists no positive theory that attempts to explain the high degree of end-of life spending and why differences across individuals, populations, or time occur in such spending. This paper attempts to provide the first rational and systematic analysis of the incentives behind end of life care. The main argument we make is that existing theoretical and empirical analysis of the value of life do not apply, and often under-values, the value of life near its end and terminal care. We argue that several factors drive up the value of life near its end including the low opportunity cost of medical spending near ones death, the value of hope including living into new innovations, and potential positive effect of on the value of life from being frail. We calibrate the ex-post value of hope associated with treatments for HIV patients to be as much as five times as high as standard estimates of treatment value. 1 We are thankful to Yang Lu and Eric Sun for valuable research assistance and for comments from Anupam Jena, Darius Lakdawalla, and Eric Sun as well as seminar participants at The University of Chicago, Washington University, the 2007 IHEA Meetings in Copenhagen, and RAND. Financial support from National Institutes of Aging (Grant P30 AG 12857) is gratefully acknowledged. Section 1: Introduction Medical care at the end of life often encounters skepticism from payers and policy makers who question its high cost and often minimal health benefits. Indeed, many studies have found that a large share of overall life-time spending on medical care, about a quarter, occurs at an individual’s last year of life, regardless of whether that care is privately or publicly financed (Hogan et al. 2000; Lubitz and Riley 1993). It therefore seems generally agreed upon that medical resources are being wasted on excessive care for end-of-life treatments that often only prolong minimally an already frail life. This excessive care at the end of life partially affects the overall distribution of health care spending as it is highly skewed, average spending levels driven many times by extreme spending levels on dying individuals. For example, it has estimated that about close to half of the overall spending on old individuals in the US stems from the top 5 % of the spending distribution (Garber et al (1998)). From an economic standpoint, it seems obvious that much of this extreme end of lifespending is irrational in the sense that the value of a life year is often estimated to be in the range of 100 thousand dollars, but overall spending in extending life a few months near death can sometimes be in the millions. Indeed, it can be argued that this vast misallocation of resources induced by excessive end of life health care has important consequences for the overall economy as end of life care makes up a substantial share of the 16% or so of the economy spent on health care. This over-spending on terminal care also has important implications for the public programs, such as Medicare and Medicaid in the US, that pay for much of this excessive end of life care, as well as Social Security, which ends up financing the longer but lower quality lives it induces. However, though many observers have claimed that such spending is often futile and wasteful, it persists and is growing both in the private and public sector presumably indicating there are some less understood benefits to these activities. Indeed, little explicit and systematic analysis exists on the incentives that determine end of life health care spending. We argue that a positive analysis of why and when high levels of terminal care spending occurs is the prerequisite before any normative claims can be made and before any policy proposals aimed at limiting such care can be justified on an efficiency basis. In this paper, we attempt to provide a rational choice analysis of the incentives behind end of life care. The main argument we make is that existing theoretical and empirical analysis of the value of a life do not apply to the valuation of life near its end, and as a consequence to the demand for terminal care. In particular, several forces operate in 2 It is interesting to note that this estimate of the value of a life year is in the range of a simple valuation of the time of a year in the US using wages as the lower bound on the value of leisure time. More precisely, if average labor earnings are in the range of $30-40 thousand per year and working time makes up about a third of total time awake (8 hour work day during weekdays and 7 hours of daily sleep) then the range for a lower bound on the value of a life year is $90-120 thousand. Also, see Hirth et al (2000) for a survey indicating larger values. allocating resources towards extending life at its end that implies that the value of extending life in those situations appear larger than previous analysis suggests. First, if resources have no value when dead, a self-interested individual would be willing to forego his entire wealth to extend his life when dying, even if only for a few months. A substantial amount of spending on futile care is rational when there is no or less value of leaving wealth behind. The desire to spend ones wealth on terminal care is highly related to existing evidence suggesting that about of half of personal bankruptcies are associated with unforeseen health care spending, often taking place when faced with life-threatening diseases (Himmelstein (2005)). We argue, similar to other goods, that there is a declining willingness to pay for additional year as a function of how many years one has to live. This is related to how the value of a statistical life year is taught and explained as it is often prefaced with claiming that it is not about how much people are willing to pay to avoid the choice of having a gun put to their head, presumably ones wealth. However, terminal care decisions are often of exactly that nature. Second, we argue that an important ignored component of spending on end-of-life care concerns preserving the hope of living, and that preserving hope raises valuation. We define the value of hope explicitly as the current consumption of future survival. If a patient is given a death sentence in 6 months, he values those 6 months less than if he knew he would live after that. The fear of knowing that the end is near is a bad. We derive how this value of hope raises the willingness to pay for what appears as otherwise futile treatments. Related to such a value of hope is the option value of seeing a new treatment being discovered before one’s death. Indeed, many celebrities, e.g. Michael J Fox and the late Christopher Reed, have invested a large share of their wealth in speeding up the arrival of a cure for themselves. Third, the social value of terminal care is often greater than the private value of the same treatments. However, existing analysis of the value of a life year may sometimes only concern private valuation. If the extension of a given persons life has positive external effects on others (family members, altruistic tax-payers, or interest groups benefiting from public provision of care), larger spending than what is privately optimal, and estimated, would be observed, whether efficient or not. Indeed, as the willingness to pay for life extension is limited privately by ones wealth, the mere existence of the Medicaid program for the poor in the US seems inconsistent with a private valuation approach being relevant, as it would be infeasible for those patients to pay the end of life care they receive. Rich countries many times don’t tolerate poor people dying when existing technologies can save them. Fourth, we argue that rational terminal care often is larger for frail patients than commonly argued. In particular, we show when the value of terminal care may be the same regardless of the “quality” of life of the patient whose life is extended. Therefore, even though a person may be frail and in very ill health, it may nevertheless be rational for him to value terminal care as much as a perfectly healthy person. There is a vast 3 See Becker, Philipson,, and Soares (2003) who discusses the general R&D implications of a wedge in the social and private value of health care. health economic literature arguing that there is less value in prolonging a life of lower quality, as is the driving assumption of so called “quality-of-life-year” (QUALY) analysis. Because of these factors, the value of terminal care may exceed the levels currently attributed to such care. To empirically assess the importance of one of these factors, the value of hope, we calibrate the option value of new innovation associated with terminal care for HIV patients in the 1990s . We find that the ex-post value of hope associated with treatments for HIV patients to be as much as five times as high as standard estimates of the value of treatments extending life marginally. The paper may be briefly outlined as follows. Section 2 discusses the non-linearity of the value of life. Section 3 discusses how the value of hope raises spending. Section 4 discusses altruism within and across families affects terminal care. Section 5 discusses the impact of quality of life on rational terminal care. Section 6 discusses terminal care insurance and Section 7 R&D for new terminal care technologies. Section 8 provides our calibration