Building the Case
Hearing on the "Impact of the Nation's Investment in Medical Research: Economic Benefits and Emerging Scientific Opportunity." Washington, DC. May 10, 2001
Chairman Jeffords, members of the Committee. My name is Robert Topel. I am the Isidore Brown and Gladys J. Brown Professor of Economics in the Graduate School of Business at the University of Chicago, and a Research Associate of the National Bureau of Economic Research.
My remarks today are based on work that I have done investigating the value of medical research. This work was done with my colleague Kevin M. Murphy, also of the University of Chicago.
The United States invests substantial public and private resources in maintaining and improving the health of its population. Part of this investment takes the form of basic medical research. By the late 1990s, the United States was investing over $35 billion annually into medical research, of which about 38 percent was supported by federal government expenditures. Yet even with this substantial level of investment, the social return from even greater investments in medical knowledge may far outstrip costs, so that current investment is too low.
Our work has estimated the value that Americans have received from the fruits of medical knowledge — improved longevity and health. Armed with an understanding of the economic value of medical research, we can begin to answer important questions of public policy and public health: Are research expenditures at their current levels warranted? Do we invest enough? What have we gained from past research expenditures, and what might we gain in the future from new advances in medical knowledge?
How big are the returns? Our results imply that the economic value of changes in life expectancy over the past several decades has been enormous. Between 1967 and 1997, improvements in life expectancy alone added about $2.8 trillion per year (in constant 1992 dollars) to national wealth. For comparison, real GDP in 1992 was $6 trillion, so the flow of uncounted additions to national wealth due to declining mortality was nearly half of measured GDP.
Before I discuss some of the implications of these values, it is important to understand what they are, and what they are not. Our estimates of the economic value of improved longevity are based on the economic definition of value — what people are willing to pay for something that they want. Here the thing that people are willing to pay for is a longer life due to reduced probabilities of dying from various ailments. So the estimates I have referred to represent peoples' value of additional years of life that they can expect to enjoy. They do not represent higher measured GDP because more people are alive and working, additional tax dollars collected by governments, or additional public and private expenditures on health care. Those things are not directly relevant to the valuation of medical knowledge.
While some of the growth in life expectancy is due to factors other than improvements in health care or medical knowledge, narrowly defined, the magnitudes of overall gains suggest that the contributions of improved health care and medical knowledge are similarly large. Indeed, we estimate that more than half of the $2.8 trillion annual value of increasing longevity can be attributed to declining mortality from cardiovascular disease, for which medical advances are known to have been important contributors.
More important than these historical gains, our analysis also demonstrates that the prospective value of further improvements in health care is large. For example, we estimate that curing heart disease would generate about $48 trillion in economic value. Eliminating deaths from cancer would be worth $47 trillion. One might argue that such dramatic improvements in health are not on the immediate horizon. Yet our calculations mean that even a 1 percent permanent reduction in mortality from cancer would be worth about $500 billion. To put this value in perspective, consider a federal commitment of an additional $100 billion for cancer research to be spent, say, over the next 10 years. Such a program entails a 75 percent increase in federal expenditures on medical research, with all of the increase devoted to a single disease. A 1 percent reduction in death rates from cancer would be worth $500 billion. So our estimates imply that the program would be worthwhile if it had only a one-in-five chance of producing a 1 percent reduction in cancer mortality, and a four-in-five chance of producing nothing.
The economic gains from increasing life expectancy have been rising, and they will continue to rise in the future. Our analysis shows that the economic return to improvements in health are greater: (a) the larger is the population, (b) the higher are average lifetime incomes, (c) the greater is the existing level of health, and (d) the closer are the ages of the population to the age of onset of disease. These factors point to a rising value of health improvements over the past several decades and into the future. As the U.S. population grows, as lifetime incomes grow, as health levels improve and as the baby-boom generation ages toward the primary ages of disease-related death, the economic reward to improvements in health will continue to increase. The growth and aging of the population alone will raise the economic returns to advances against many diseases by almost 50 percent between 1990 and 2030. Projected increases in real incomes and life expectancy will add at least that much again.
Beyond these surprisingly large values, there are a number of public policy issues that connect the valuation of improvements in health, health research and the growth in health expenditures. For example, the annuitization of many public and private retirement benefits (Social Security, private pensions, Medicare and private medical coverage) and the prevalence of third-party payers increase the incentive to spend on medical care. These distortions also skew investments in research away from cost-decreasing improvements in technology. In the presence of such distortions, it is important to account for the induced effect that research has on expenditures when evaluating the social returns to improvements in medical knowledge.
Economic analysis also implies that improvements in health are complementary with one another — for example, improvements in life expectancy (from any source) increase the economic value of further improvements by raising the value of remaining life. This means that advances against one disease, say heart disease, raise the economic value of progress against other diseases, such as cancer or Alzheimer's. This is of significant public policy relevance, as it implies that the well-documented historical progress against heart disease, for which mortality has fallen by roughly 30 percent since 1970, has increased the economic returns to research on cancer and other diseases.
Basic medical research is what economists call a public good — something that produces large social benefits, but also something that private firms are unwilling to produce. It is a classic case of productive government funding. The only question is whether current funding is high enough, or should it be higher? Consider the past and prospective returns once again. Over the past three decades, the flow of value from declining mortality comes to about $2.8 trillion per year. On average, expenditures on medical research were less than 1 percent of this value. It is difficult to make a case that the economic returns on medical research have not been enormous. In sum, based on our findings, there is a strong case to be made for increased funding of basic medical research.