Healthcare Economics

After listening to RadioLab Podcast “Worth” on this link

Please respond to the following: when people are too poor to afford treatment costs for life-threatening illnesses, such as heart surgery or cancer treatments, how could the willingness to pay approach be higher than the human capital approach? Part 2. Based on the PodCast’s reference to the WHO’s formula (and the Lead’s examples) for countries to evaluate cost-benefit drug treatment versus life, pick a country and run the formula based on that country’s current GDP.

Willingness to Pay and the Human Capital Approaches

Under the willingness to pay approach, the value of life is determined based on the willingness of an individual to make payments and, in return, get little reduction in the probability of death occurring to that person (Penner, 2013). However, a person’s willingness to pay is manifested through the choices they make in their daily undertakings. The value estimated from an individual’s willingness includes the worth of earnings foregone and the value that could be accrued from leisure activities and life in general. On the other side, under the human capital approach, the value of human life is equated to a discounted market value derived from the total output that a specific individual could produce in a lifetime. Therefore, this approach estimates a discounted valuation of earnings to be earned in the future, which would result from life extension or improvement of the current living standards.

When life-threatening diseases strike whoever, poverty accompanies them as the cost of treating such diseases is extremely high. Under such circumstances, when valuations are done, it is ascertained that the willingness to pay usually exceeds the human capital approach. Based on narrations from the podcast ‘worth’, the following points support the above statement. Leonard, a doctor in a New York-based cancer center, discusses how he has noted an increasing rise in cancer treatment drugs. His focus is more so attracted to one drug called Zeltrap, which can potentially increase a patient’s life by forty-two days on average. Its high cost is, however, unbelievably high as the drug goes for thirty thousand for a three-month course. In addition, there are other extra charges as the drug requires specialized personnel to administer it as well as improvised equipment, which is expensive to acquire. Generally, people are ready to bear the costs if guaranteed that their lives will be extended by the promised period. On the contrary, people are not ready to incur costs just for what they could earn in a lifetime. 

QALY (Quality Adjusted Life year) is used to measure the burden of diseases generically. This is achieved by considering both the quantity and quality of life lived. Economic evaluation assesses the monetary value of medical interventions for disease. Taking Angola as an example, assuming 1 year is lived by an individual with a disease, and the person provides a utility of 0.7, then the person will have the following: 

           1yr x 0.7 value of utility = 0.7 QALYs.

If the person begins a new medication that improves his level of utility to 0.9, the new QALY will be 

                       1yr x 0.9 value of utility = 0.9 QALYs

The benefit of the new medicine, however, will be;

                       1yr x 0.2 value of utility increment = 0.2 QALYs

Out of the nation’s 28.81 million citizens, assuming 20% lives in the condition mentioned above, the GDP will be affected in the following way;

                       Current GDP = 89.63 billion USD

                       20% X 89.63 billion USD = 17.926 million USD

                       17.926 million USD X 0.2 utility increment = 3.5852 billion USD

The country will therefore benefit from the new medication by having its GDP grow by 3.5852 billion USD

When valuing human life, the human capital approach assigns a monetary value to death or loss, taking it as the economic productivity value lost. The human capital approach takes the present value of future earnings expected to estimate the total possible loss that a society in question would lose in the event of death or permanent incapacitation of an individual. An illustration is given of farmers whose income has already been estimated to be around 49 million dollars in the USA. Assuming such farmers die, an equal amount will be deducted from the nation’s economy henceforth.

Adverse selection is whereby a buyer could have some crucial information that the seller lacks or vice versa (Mullner, 2009). In insurance, adverse selection applies when insurers realize that people at high risk are ready and willing to take higher premiums for insurance covers. For example, a seventy-five years old man is willing to take insurance cover with monthly premiums of 400 dollars. In comparison, a thirty-four years old man is only willing to take insurance cover with monthly premiums not exceeding 15 dollars per month.