Longevity Bias in Cost-Effectiveness Analysis

Abstract

The stated goal of medical CEA is to maximize health outcomes for a given amount of resources allocated to health care. The rationale for this goal seems to be that, for the overall optimality of medical resource allocation (which includes not only the allocation within a given medical budget but also the determination of the size of that budget), maximum health benefits must be achieved under any chosen medical budget. While this goal of medical CEA is widely accepted, there has been no formal, direct analysis of its welfare foundation, even though there have been extensive discussions on its theoretical foundation, especially in the context of the relationship between CEA and CBA. In this paper, we go one step further in the pursuit of a theoretical foundation of medical CEA by asking whether the widely accepted goal for CEA is itself appropriate. In particular, we are interested in the consequences of maximizing health gains for a given health care budget. We adopt a lifetime utility maximization model that leads to a welfare specification consisting of both a flow of regular consumption and a quality-adjusted life-year (QALY) measure of health outcomes. The QALY component in the welfare specification captures an individual's preferences over both life expectancy and health status, and serves as a natural measure of health outcomes from medical interventions. This welfare specification is then used to study two logically related problems in medical resource allocation: the budget and the budget size The fixed budget problem is about how a given medical budget should be allocated between improving longevity and improving health-related quality of life. The optimal budget size problem is about whether or not a further increase in the size of the medical budget is welfare enhancing. The focus of this paper is the fixed budget problem. We compare two alternative approaches to the fixed budget problem: the health gain approach that maximizes the QALY measure for a given medical budget and the total gain approach that maximizes total welfare for a given medical budget. The health gain approach implements the stated goal of CEA, but it is the total gain approach that is consistent with welfare maximization. We find that maximizing the QALY measure under a given budget for medical expenditures has a longevity bias: the resulting division of the given total medical expenditures between extending longevity and enhancing health-related quality of life gives the former a larger share than is called for by welfare maximization. Therefore, any true implementation of the stated goal for medical CEA would lead to a resource misallocation characterized by the population living too long while not being healthy enough. Such longevity bias resulting from standard CEA modeling deserves serious attention, when increased longevity (in addition to the wave of baby-boomer retirees) has financially strained government old-age programs such as Social Security and Medicare in the United States. One remedy to correct such longevity bias is to extend the QALY measure to include not only longevity and health-related quality of life, but also non health-related quality of life. The goal for medical CEA should be correctly stated as the maximization of the total health and non-health gains for any given amount of medical expenditure.