Where Should the Money Go? Aligning Policies
with Preferences
Accounting for individual
risk preferences can help policymakers
allocate scarce tax dollars among programs.
Fred
Kuchler, Elise
Golan
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Budget
constraints force policymakers to choose
which programs to fund, even when human
health and safety are at risk. |
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New
Federal guidelines emphasize tallying
health outcomes to help decide among
programs. |
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Benefit
estimates based on money measures of
risk preferences provide better guidance
on programs most highly valued by society. |
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This
article is drawn from . . . |
Assigning
Values to Life: Comparing Methods for Valuing
Health Risks, by Fred Kuchler and Elise
Golan, AER-784, USDA, Economic Research Service,
November 1999, available at:
Valuing
the Health Benefits of Food Safety: A Proceedings,
compiled by Fred Kuchler, MP-1570, USDA, Economic
Research Service, April 2001
|
You
may also be interested in . . . |
ERS’ Foodborne
Illness Cost Calculator
Valuing Health for Regulatory Cost-Effectiveness
Analysis, by Wilhelmine Miller, Lisa
A. Robinson, and Robert S. Lawrence (eds.),
Committee to Evaluate Measures of Health Benefits
for Environmental, Health, and Safety Regulation,
Institute of Medicine (Washington, DC: The
National Academies Press), 2006. |
Homeland security, avian flu, floods,
health care, hunger, obesity—the list of life-and-death
issues competing for government funding is long
and seems to be growing. Policymakers are increasingly
faced with allocating scarce funds among critical
programs. Should more funding go to safer airports
or safer food? Nutrition programs or kidney machines?
Flood relief or avian flu control?
Though there are no rules for
making these types of decisions, economic principles
can help. The principle of weighing costs and benefits
can help policymakers determine which programs will
save the most lives or lead to the largest improvements
in health and well-being. But there are a variety
of ways to tally costs and benefits. Analyses using
health-based benefit measures—the type of
benefit measure newly required by the Office of
Management and Budget (OMB) for all economically
significant rules—provide information on health
outcomes. Analyses using money to estimate health-risk
preferences provide policymakers with information
on the types of risk reduction most highly valued
by society. Only by recognizing that preferences
for risk reduction vary across risks can we make
sense of how to best spend scarce funds.
Analysts Need a Standard Benefit
Measure To Compare Diverse Outcomes
The first step in determining
which regulations to fund is to devise a method
to compare diverse health outcomes. The list of
health risks regulated by the government is long
and varied, as is the list of government agencies
responsible for their administration. The Department
of Transportation, the Department of Labor, the
Environmental Protection Agency, the Department
of Homeland Security, the Department of Agriculture,
the Consumer Products Safety Commission, and the
Food and Drug Administration (FDA) are among the
Federal agencies responsible for programs affecting
life and health. These agencies all manage risks
associated with a daunting variety of health outcomes,
ranging from mild illnesses to death. Foodborne
pathogens alone pose risks that include kidney failure,
arthritis, paralysis, and death.
A comparison of health risks is
further complicated by the fact that the affected
population may also vary. Some hazards, like foodborne
pathogens, pose greater risks to children and the
elderly. Others, such as workplace chemicals and
machinery, are hazards mainly for working-age adults.
While it is difficult to compare the value of preventing
diverse health outcomes, such as renal disease and
paralysis, it is even more difficult to make these
comparisons when diseases afflict children and adults
at different rates.
To overcome the problem of comparing
diverse health outcomes in diverse populations,
analysts must translate improvements in health and
well-being into a common unit of measurement. Some
use health as the unit of measurement, others choose
money. Either unit of measurement entails difficult
philosophical choices about what to value and methodological
challenges about how to assign values. Analyses
based on one unit are not necessarily comparable
to those based on the other.
Health-Based Measures Provide
Information on Health Preferences
The most common approach for translating
diverse health outcomes into a standard health measure
uses health- or quality-adjusted life years (QALYs).
The QALY approach translates health outcomes to
healthy-time equivalencies using a health index
that accounts for changes in both length and quality
of life. To calculate QALYs, analysts use individual
assessments of health outcomes arrayed on a 0-1
scale, with 0 indicating death and 1 indicating
robust good health.
QALYs, and other nonmonetary health-based
benefit estimates, can be used to provide a ranking
of potential program benefits, with programs saving
the highest number of QALYs ranked highest. A ranking
of health outcomes by itself, however, does not
usually provide enough information to inform policy
decisions. Policymakers must also have information
on the costs of programs to determine which policies
are the most cost effective—yielding the greatest
increase in health per dollar. The need for economic
balancing is inevitable in a world of constrained
resources. It is impossible to protect everyone
from every threat to their health and safety.
If costs are not considered when
allocating funds among health or life-saving programs,
programs that save lives at great expense may be
funded before inexpensive programs that save just
as many. If funding is allocated efficiently, the
amount of money spent to save one life or prevent
a particular adverse health outcome should be similar
across programs. If funding is allocated inefficiently,
the amount varies and more lives could have been
saved and health better protected. All things being
equal, programs with the highest number of lives
saved per dollar or the highest QALY per dollar
cost ratio should be funded before those with lower
cost-effectiveness ratios.
Health-based cost-effectiveness
analysis is a relatively new step in the Federal
regulatory process. In 2003, OMB began requiring
that Federal agencies provide this type of cost-effectiveness
analysis for all economically significant rules.
This new requirement, bolstered by the 2006 guidance
document developed by the National Academy of Sciences’
Institute of Medicine, has focused Federal efforts
on cost-effectiveness analysis.
A ranking of policies by health-based
cost effectiveness is invaluable for helping policymakers
allocate funding among safety programs, but such
a ranking does not tell whether any program is worth
the price. For example, a cost-effectiveness ranking
may indicate that a $1 million kidney dialysis machine
that saves 10 lives is a better buy than a $2 million
nutrition program that saves 10 lives, but it does
not indicate whether either program is worth the
cost. Analysts must turn to dollar-based benefit
estimates for this type of information.
Money-Based Measures Provide
Information on a Wide Range of Preferences . . .
Analysts’ first attempt
at assigning money values to diverse health outcomes
relied on the actual expenses incurred because of
illness or premature death. This approach, known
as the cost-of-illness (COI) approach, became common
in health policy 40 years ago. With COI, economists
tally the dollars spent on medical expenses and
income forgone as a result of illnesses, accidents,
or premature deaths. COI estimates provide an ex-post
accounting of the economic impact of illness. Such
an accounting is the basis of liability or tort
law. When courts set compensation for wrongful death
or injury, compensation is usually limited to lost
earnings.
Until the early 1980s, most government
agencies calculated benefits from health and safety
regulations as the reduction in COI due to the regulation.
ERS has estimated the medical and productivity costs
(nonfatal) for Shiga-toxin producing E. coli strain
O157 (STEC O157) infections at $38.7 million. Like
health-based benefit measures, COI-based benefit
measures can provide a cost-effectiveness ranking
of policies. All things being equal, programs with
the highest COI averted per dollar cost should be
funded before those with lower ratios. In addition,
because COI is measured in dollars, it also provides
policymakers with information on whether programs
are worth the cost. Only when analysts use dollars
to measure both costs and benefits are they able
to calculate net benefits—the value of a program
minus the value of goods and labor services that
have to be used to carry out the program. Negative
net benefits indicate that the program is not worthwhile,
even if it is ranked higher than every other program.
In short, the goods and labor services that would
be used to secure the benefits are more valuable
elsewhere.
A money measure also allows analysts
to compare values and consider tradeoffs among all
goods and services. For example, the net benefits
of a nutrition program could be compared with those
of a college scholarship program. QALYs do not provide
a straightforward means for making comparisons with
nonhealth goods and services.
. . .Including Risk Preferences
COI was a major innovation in
health policy analysis as it highlighted the notion
that human capital has value just like physical
and financial capital do, and COI offered a way
to quantify those values. However, the approach
tends to place relatively low values on the lives
of children and the elderly because they are not
wage earners. The COI approach offers no way to
account for pain and suffering. Nor does COI measure
individuals’ preferences for risk reduction,
the major function of government health and safety
programs.
More recently, the willingness-to-pay
(WTP) approach has been used to translate projected
risk reduction into money values. With WTP, economists
measure the resources (dollars) individuals are
willing and able to give up for a reduction in the
probability of encountering a certain hazard. WTP
attempts to measure the value individuals place
on preventing risks to life and health.
The WTP method rests on the observation
that individuals can and do make tradeoffs between
health and other goods and services. Even though
individuals may place an infinite value on their
own lives (and the lives of those they hold dear),
they do not feel similarly about small changes in
risk. Individuals routinely and voluntarily accept
many small risks in exchange for finite benefits.
For example, driving a little faster than surrounding
traffic may raise the risk of injury but could result
in reaching a destination sooner. Or, a person might
enjoy attending a popular movie at a crowded theater,
recognizing that the activity raises the risk of
contracting a contagious disease. WTP estimates
are an ex-ante measure of the value individuals
place on reducing the risk of a particular injury,
illness, or death.
The WTP approach, unlike any other,
targets funding toward the type of risk reduction
most highly valued by individuals. There are profound
differences in the ways that individuals value reductions
in different risks. Some risks rank quite low when
preferences are considered. For example, skiing
carries a risk of injury and death, but very few
skiers (or nonskiers) would welcome a government
program that banned skiing on the basis of risk.
Saccharin may carry a cancer risk, but we know that
consumers are willing to accept the risk for the
benefit of a noncaloric sweetener. In the late 1970s,
FDA attempted to ban saccharin on the basis of potential
cancer cases, but consideration of consumer preferences
led Congress to stop FDA’s action.
Other risks rank quite high when
preferences are considered. For example, potential
exposure to cancer-causing pollutants may alarm
many individuals, even when risks are identical
to those of saccharin. Researchers have found, for
example, that a significant proportion of the population
values reductions in cancer risk much more highly
than reductions in the risk of automobile fatality.
If funding is prioritized without
any regard to consumer preferences, on the basis
of either non-monetized health outcomes or COI,
then deaths due to skiing would be ranked equal
to those due to childhood leukemia. WTP benefit
estimates provide policymakers with information
on the value of reducing specific risks, not just
health outcomes. Though QALYs may also indicate
individual preferences toward pain and suffering,
they only measure preferences over health outcomes,
not over source or type of risk.
Money-Based Measures for Food
Safety in Short Supply
Economists widely recognize the
value of accurate WTP measures for policy guidance,
and WTP is now commonly used to estimate the benefit
side of cost-benefit analyses. For data reasons,
many Federal agencies have adopted the practice
of using an estimate derived from compensating wage
studies to estimate a variety of WTP values. Compensating
wage studies calculate the amount of money workers
must be paid to leave them indifferent between jobs
that entail different likelihoods of fatal injuries.
Estimates of a “value of a statistical life”
from compensating wage studies range from around
$3 million to $7 million (in 1990 dollars). ERS
has estimated the WTP to avoid fatal foodborne E.
coli (STEC O157) illnesses at $392.8 million (2005
dollars).
The practice of using a single
value derived from compensating wage studies to
estimate WTP values flies in the face of empirical
evidence. For food safety risks, this practice could
potentially lead to large measurement errors because
both the population most vulnerable to foodborne
risk and the characteristics of foodborne risk are
quite different from those in most compensating
wage studies.
The value of preventing
premature deaths from E. coli swamps the cost-of-illness
estimates |
Cost-of-illness
(COI) approach: |
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Medical care |
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Medications |
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Office visits |
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Emergency room visits |
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Hospitalization |
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Chronic medical
conditions |
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Lost productivity
(nonfatal) |
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Total |
38.7 |
Willingness-to-pay
(WTP) approach: |
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Value of preventing
premature deaths |
392.8 |
Source: Calculated
by USDA, Economic Research Service using CDC
1999 incidence estimates. |
Those most vulnerable to complications
from foodborne illness are infants, the elderly,
and the immunocompromised—not the working-age
males at the heart of the compensating wage studies.
Empirical evidence suggests that people have different
risk preferences with respect to these vulnerable
groups. In investigating risk preferences toward
household chemicals, insecticides, and cleaning
products, researchers found a WTP to reduce risks
to children 2.3 times higher than for adults. Cost
estimates for foodborne illnesses that primarily
affect children will therefore probably underestimate
the value of risk reductions if they use compensating
wage estimates.
People may also be less willing
to accept involuntary risk, such as most foodborne
risks, than risk that is voluntarily assumed. As
a result, studies that measure response to voluntary
risk, such as compensating wage studies, probably
underestimate society’s aversion to risk that
is not contracted for, such as most foodborne risks.
Other factors, such as the possibility of defensive
behavior (for example, cooking hamburger longer)
and whether the risk produces consequences in the
near or distant future, may also influence the value
of the risk reduction.
To improve measures of WTP for
safer foods, ERS has funded two empirical investigations
into consumers’ attitudes about food risks
(see box, “Estimating Benefits
Is a Research Problem, Not an Accounting Issue”).
Only with additional studies targeted specifically
toward food safety risks will analysts be able to
estimate relevant demands for food safety risk reduction
throughout the population.
Better estimates of WTP over a
wider range of risks will also help Federal analysts
better comply with OMB’s longstanding requirement
to compare dollar estimates of policy benefits with
anticipated policy costs. Cost-benefit analysis
is still required for all economically significant
rules—OMB’s recent requirement of health-based
cost-effectiveness analysis did nothing to change
this. Cost-effectiveness analysis based on health
outcomes provides valuable information to policymakers.
However, only cost-benefit analysis using money-based
measures of risk preferences provides information
on the types of risk-reduction programs most highly
valued by society.
Estimating
Benefits Is a Research Problem, Not an Accounting
Issue |
The biggest
practical problem in estimating the dollar
value of a food safety rule or regulation
is the lack of a market for reducing food
safety risks. If food were marketed by risk
levels (say, probabilities of inducing cancer)
and consumers treated advertised risk levels
as they do other objectively measurable product
characteristics (weight or volume), valuing
food safety would be easy. Product prices
could be statistically associated with risk
levels, yielding consumers’ risk-dollar
tradeoff. That is, consumer purchases would
demonstrate the dollar value they attach to
particular types of risk reduction.
Unfortunately, there is no
obvious dollar value to assign to the major
benefits of food safety programs—a reduction
in the risks of foodborne illnesses—and
there is no price that can be tabulated from
commercial transactions. Although individuals
do take actions that might reduce these risks,
those actions do not leave a behavioral trail
that is easy for analysts to follow.
ERS is trying two approaches
to find out how much individuals value lower
risk of illness due to foodborne pathogens.
Through cooperative research with Harvard
University’s Center for Risk Analysis
and the University of Wyoming, two surveys
have been administered to consumers through
the Internet.
A contingent valuation survey,
conducted in summer 2004, asked respondents
about their behavior and what they would be
willing to pay for greater safety. It described
symptoms of gastrointestinal illness and then
presented respondents with information on
duration of symptoms and the likelihood of
death. Respondents were asked how much they
were willing to pay for foods (chicken, hamburger,
and deli meats) with lower risk of foodborne
illness. Respondents provided similar information
about risks incurred by children so that researchers
could assess the importance of protecting
children.
A second survey examined
actual food purchases and how purchases changed
when information about safety changed. This
survey, conducted in summer 2005, provided
respondents with information about the likelihood
of foodborne illnesses and asked them about
the foods they consume and their food safety
practices. Analysts will use the respondents’
grocery store receipts to link food choices
with the food safety information provided.
This will allow researchers to infer values
consumers place on reduced risk, recognizing
that values vary with individual ability to
self-protect and individual risk preferences. |
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