Wednesday, August 19, 2009

How To Calculate the Payoff From Investments in Prevention

Charles Krauthaumer has taken issue with the claim that health care reform can actually save the government (and private insurance companies) money by encouraging more tests and procedures that will detect diseases and other conditions early, thereby eliminating the need for more expensive treatments later on. As Krauthaumer points out, many Democratic proponents of health care reform have in fact claimed that mandating or subsidizing additional expenditures on prevention (not always well-defined) can actually save money for the government and private insurance companies. President Obama, for instance, has claimed that such reform can save lives and money. Krauthaumer argues that these claims are incorrect, and offers some logic and evidence to back up his assertion.

Here is a link to the Op-Ed, which originally appeared in the Washington Post.

As Krauthaumer points out, a particular procedure may, ex post, turn out to be cost-beneficial for an individual patient. For instance, a procedure that costs the patient $1,000 might save the patient (or his insurance company) the costs of a much more expensive (say, $100,000) operation a few years later. The test might also save his life. This does not mean, however, that increasing expenditures on prevention across the board will thereby save money overall. If, for instance, there are one million 40 year olds, and each undergoes the $1,000 procedure, we have spent $1 Billion on that procedure. Let's say that the procedure detects 1,000 conditions that can be treated (at some expense) , thereby avoiding the $100,000 operation just mentioned. The result is a $900 million loss or so, at least if one is simply looking at the out of pocket expenses in question. While each of the 1,000 individuals who avoid the expensive operation are made better off by the invesment, the other 999,000 individuals in question receive no benefit, except perhaps the peace of mind that they do not have the particular condition in question.

And, in fact, Krauthaumer quotes a letter from the Congressional Budget Office concluding that:

"Researchers who have examined the effects of preventive care generally find that the added costs of widespread use of preventive services tend to exceed the savings from averted illness."

Thus, Krauthaumer concludes, mandating and encouraging additional prevention may well increase the costs of health care borne by the government and the private sector.

At the same time, this is not the only way to frame the inquiry. That is, an investment in prevention can do more than just reduce future medical expenses. Such investments can also save lives and/or reduce the time an individual is away from work. The $100,000 operation mentioned above might require the patient to be away from work and/or family for 6 or 8 weeks, convalescing at home or in a hospital. Even after the operation, the individual in question might be less productive than he would have been had the condition been detected earlier. He might retire sooner and/or die earlier. Thus, any true assessment of the benefits of expenditures on prevention must take into account more than just any resulting reduction in public and private health expenditures down the line. Such an assessment must also take into account the increased productivity of individuals who, because of investments in prevention, avoid illnesses that would otherwise reduce their productivity. And, of course, such an assessment must include, as President Obama has suggested, the value of human lives saved.

None of this is to say that Krauthaumer or the Congressional Budget Office is incorrect. And, I'll also note that society already spends billions of dollars on prevention of one sort or another. My only point is that, when determining whether such prevention is cost-beneficial, one must look at more than just the out-of-pocket costs borne by government and/or health insurance companies.