HEALTH ECONOMICS, VOL.

1: 71-79 (1992)

DEBATE

In each issue of the Journal we shall address an issue of particular concern in the development of health economics and on which there is no consensus within the profession. These articles are published to stimulate debate and to encourage new thinking. Responses are invited in the form of letters to the Editors, comments, notes or full length articles which can be published in this section in future issues of the Journal. The first issue raised is the question of discounting health benefits. In the first paper, Neuburger and Parsonage argue that there is no justification for the current practice in economic evaluation of health programmes of discounting both the costs and benefits at the same rate. This is relevant to current policy discussions on the comparative effectiveness of programmes giving immediate or delayed health gains. Cairns offers a different perspective and provides a conceptual and practical critique of Neuburger and Parsonage’s views.

DISCOUNTING AND HEALTH BENEFITS MICHAEL PARSONAGE AND HENRY NEUBURGER Economics and Operational Research Division, Department of Health

SUMMARY This paper argues that non-monetary health benefits should not be discounted at the same rate as variables expressed in monetary terms. It argues instead that the appropriate discount rate should be at or close to zero. It explores the various influences of rising income, age and pure time preference on the relative value of current and future health states. It examines various arguments advanced to justify the current practice of discounting health benefits at the same rate as monetary costs. These include uncertainty and delay. The article concludes with an analysis of the likely impact of adopting a zero discount rate on the ranking of health interventions KEY

WORDS-Discounting, investment appraisal, health benefits, quality-adjusted-life-years.

An important technical issue in the economic appraisal of health policies is the treatment of costs and benefits arising at different points in time. For example, in health promotion and prevention a common feature is for the bulk of costs to be incurred early on whereas the benefits stretch many years into the future. This issue is not of course unique to health, and the practice of discounting has long been established in investment appraisal as a means of putting differently dated costs and benefits on a common footing. For appraisals carried out by government departments in the United Kingdom, a standard rate is promulgated for this purpose. For many years this rate was 5 % in real terms. Following a review in 1988-89, it is now 6%, as announced by the then 1057-9230/92/01007 1-09$05 .OO 0 1992 by John Wiley & Sons, Ltd.

Chief Secretary to the Treasury in reply to a written Parliamentary Question on 5 April 1989. The 6 % rate applies throughout Central Government including the NHS; there are different arrangements for the nationalised industries and other such commercial trading bodies. For a detailed account of discount rates in the public sector, see Spackman. This standard rate is widely used in UK health’ appraisals, including those carried out by academic researchers, and has almost invariably been applied in like fashion to both the costs of health policies and their benefits. The basic rationale for discounting is relatively uncontroversial when applied to variables expressed in monetary terms, such as real income or consumption, when real incomes are increasing

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over time. However, the rationale needs some amendment when applied to variables which are measured in non-monetary terms, and health benefits are typically of this form. The remainder of this paper accordingly explores how nonmonetary health benefits should be discounted, and its main conclusion is that in practice, for most purposes, it is appropriate to use a zero discount rate for future health benefits. For purposes of exposition, non-monetary health benefits are represented by quality adjusted life years (QALYs). QALYs AND INCOME The discounting of income-or any other variable expressed in equivalent, i.e. monetary, terms-reflects the fact that individuals generally prefer income today to income tomorrow and so expect to be compensated for any deferral, for example by receiving a positive real rate of interest on their savings. The extent of this preference depends on: (i) the likely future growth of real incomes; (ii) the rate at which the marginal utility attached to an extra f declines as real incomes rise; and (iii) ‘pure’ time preference, i.e. any preference for the present over the future irrespective of whether real incomes are rising through time. Application of this framework to the discounting of QALYs raises two main issues. First, what is the relationship between QALYs and income? And second, how does the concept of pure time preference apply in the specific context of health? The importance of the first of these issues is that if the welfare attached to QALYs is independent of income, then there is no case for applying the argument that as society becomes richer, so the value of additional benefits tends to decline. In other words, the first two elements of discounting identified above are not relevant to QALYs. The relationship between QALYs and income at different times does not appear to have been extensively discussed in the literature. It is taken for granted that at any given point of time the value of a QALY is the same whatever the income of the recipient. It is at least arguable that the same principle applies over time and that the marginal utility of health improvements has for practical purposes a negligible income elasticity. As far as extending human life is concerned, there seems to be no good prima facie case for saying that a life

CAIRNS

year saved in a wealthier generation is worth either less or more than a life year saved in the present generation. As far as quality of life is concerned, there are arguments going both ways. On the one hand economic growth should mean that a healthy life year in 10 or 20 years time will be more enjoyable and so worth more. On the other hand greater prosperity may make health problems easier to manage, so that the welfare impact of ill health decreases. It is therefore possible that the value of different components of the QALY index may change at differing rates over the future. If there were reasons to expect strongly divergent trends, then this would be an argument for adjustments over time of the weights which go to make up the QALY index. In any particuIar study, special adjustments could be introduced to allow for a different trend. The above argument is equivalent to saying that if QALYs were measured in monetary terms, their value would rise over time in line with real income. On the face of it this seems much more acceptable than the assumption that QALYs are constant in money value and so decline relative to income, which is the necessary implication of applying without adjustment a discount rate which is intended for monetary variables. The argument brings out clearly the relationship between discounting and valuation. If the monetary discount rate is, say, 6% and the real value of a benefit is thought to be increasing at, say, 2% a year, then future monetary values should be adjusted before the discount rate is applied or the benefit can be expressed in non-monetary terms and discounted at the lower rate of 4% a year. Leaving aside pure time preference, the appropriate ‘own’ discount rate for a benefit whose value rises fully in step with real income is necessarily zero. (This line of reasoning is not, of course, unique to health; very similar considerations arise in relation to the discounting of environmental benefits such as clean air.)

QALYs AND TIME If the value of QALYs does not change with income, how does it change with time? Butler, Rabin and Rosser’ and Cairns3 have both made some attempt recently to make empirical estimates of people’s time preference for their own health. Their estimates suggest, on the basis of admittedly

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small samples, that the private discount rate for health is zero or even negative. It is sometimes argued that observation of peoples’ habits such as continued smoking or heavy drinking implies a lack of concern with the future. Such arguments, while initially plausible, depend on a large number of assumptions which may not be valid. First, not all individuals may be aware of the relevant health risks. It is certainly the case that in those countries where information on the hazards of tobacco have been widely publicised, there has been a marked decline in the prevalence of smoking. Second, even if individuals are fully aware of the health risks, they may still decide that the pleasure of smoking or heavy drinking outweighs the likely costs. Without further information, such behaviour says little or nothing about time preference as such, and the addictive element is a further complication. Taken together with the problems of information, this argument suggests that many smokers would not be smokers, if they had the opportunity to start again; they are not in equilibrium. And third, in order to establish the relevance of this argument for time preference, smoking and drinking behaviour needs to be compared with other risky behaviour when the threat is less distant in time. Some people engage in dangerous pursuits like hanggliding or rock climbing, while more engage in cycling, motor bike riding or crossing the road in dangerous places. In order to use the existence of smoking as evidence for strong time preference, it is necessary to establish that potential smokers exhibit less concern for smoking risks than other risky activities, where the hazards are more immediate. Olsen4 and Sheldon,’ among others, argue for a distinction between ‘selfish’ time preference and ‘policy’ time preference. People may respond differently to questions of timing depending on whether they are being asked questions about their own preferences, or the framing of policy for society. This distinction may be the best guide to the relationship between ethical judgements and individual preferences. A democratic discounting system is one in which individuals make their own judgements as to the relative weight of their own preferences and society’s needs. Arguments such as those of Sen6 suggest that uncertainty about the future causes individuals to value the future less than society. If so, ‘selfish’ time preference will normally be higher than ‘policy’ time preference.

The general question of whether the welfare of future generations should be given equal or less weight than that of the present generation is ultimately a political and ethical judgement. It is often argued that (setting aside risk) all generations should be given equal weight. This is argued by Parfit’ in the context of human life. Few people would argue for more than a very modest discounting over time on this account or on account of generalised risk such as either a world catastrophe or unforeseen technical advance which reduces the benefits from previous investments. QALYs AND AGE Some writers have argued that attitudes to health change with age and that there are certain ages at which good health is most important, such as the age of early child rearing-see for example Loomes and McKenzie.8 Even if such a factor is relevant for individuals, it has relatively little importance for society as a whole. Individuals age at the rate of one year per year. Societies rarely age at anything approaching this rate. The practical significance of an age effect for social discounting is therefore likely to be very small. Empirically it is difficult to detect the difference between age preference and time preference for individuals. The thought experiments which enable them to imagine themselves at the same age but at different dates are often highly unrealistic. It may be more practical to estimate age preference independently and then subtract this estimate from observed time preference. Care must be used with this argument to distinguish between the feelings of those at the relevant ages and the feelings of others about them. People may be more ready to contemplate a bedridden old age than to accept it when it comes. But even when this is allowed for, there may remain a genuinely stable age preference for health, and age-related QALYs may well be justified in such cases. To use discounting to reflect this effect, however, is to conflate time-related factors and age related factors. DELAY One possible objection to discounting costs and not benefits arises from the impact such a practice might appear to have on the delay of projects. The health economics literature, following Keeler

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and Cretin,’ seems to deplore the practice of dis- continually diminishing weight over time. In a counting benefits less than costs. Their argument world of low or zero discounting, few projects, in is that discounting costs and not benefits justifies any case, could genuinely and convincingly claim delay eternally. Their formal proof is correct, but benefits lasting much longer than a lifetime. It is incorrectly applied. Situations where the money only the existence of discounting which allows value of a given physical output rises with analysts the luxury of not examining the plausibilincome-such as environmental quality (e.g. clean ity of claimed benefits lasting beyond a lifetime. rivers)-are not uncommon. But this does not mean that action to achieve these outputs is never UNCERTAINTY worthwhile. If a worthwhile health benefit can be procured today, it should be procured. The fact that the benefit would be more highly valued in A final argument for applying a positive discount the future is irrelevant, unless the early and later rate to health benefits is as a means of dealing benefits are mutually exclusive. A similar and with risk and uncertainty. There are various equally misleading paradox can be generated in sources of uncertainty in health policy appraisals, the case of investment under conditions of techni- and some of these sources accumulate over time. cal progress. The fact that the next vintage of One such risk is that new technology will mean machine will be better than the present one is that past treatment was inappropriate. Wherever rarely a good case for postponing an investment. possible these risks should be handled directly in Much of Keeler and Cretin’s difficulty arises the appraisal rather than by adjusting the discount from a confusion of what measures of cost- rate, though it cannot always be assumed that this effectiveness are appropriate under what cir- is done. Particularly where the benefits of a cumstances. Imagine a project yielding the same proposed policy stretch well into the future, absolute benefit whenever it is carried out. If sensitivity analysis should include testing the senbenefits are not discounted and costs are, then sitivity of results to the use of different discount cost-effectiveness measures will always improve, rates. the longer a project is delayed. This illustrates, however, not the dangers of using a different discount rate for benefits, but of applying criteria THE EFFECTS OF CHANGING THE inappropriately. Net present value should only be DISCOUNT RATE IN PRACTICE used if all projects with a positive NPV are to be implemented. In that context, different levels One effect of reducing the discount rate for of NPV are irrelevant. A decision maker would QALYs will be to improve (i.e. reduce) the cost not-as Keeler and Cretin claim-be paralysed. per QALY rating of all projects. If there is a He or she would go ahead with the project now, cut-off cost-effectiveness (cost per QALY) rate and then review the possibility of doing it again for choosing policies, then this will need to later. In practice cost per QALY calculations are be lowered as the discounting of benefits is in any case used not for setting the size of abandoned. Changing the discounting procedure budgets, nor their distribution over time, but for should have no effect in itself on the overall health setting priorities within a fixed budget, year by budget. What will change, however, is the relative year. Provided cost per QALY is less than the cost-effectiveness of different procedures. Dispass mark which would use up the budget, the counting benefits tends to give lower priority to project goes ahead now. If it does not, then it can those procedures which have long-lasting effects. be looked at again for next year. A zero discount rate will therefore tend to Drummond, Stoddard and Torrance lo deploy improve the relative performance of treatments the argument that if there were no discounting, a for young people, like neo-natal care, or treatconstant eternal benefit would always be worth ments which affect future generations, like reductaking. To many people this might not appear to ing the incidence of infectious diseases. The likely be such a paradox as its opposite. In practice, scale of these changes can be gauged from even if we have accepted that the welfare of reworking some past cost per QALY studies, and distant generations should be given fully as much this is shown in Table 1. This exercise repeats the weight as earlier generations, risk and uncer- work of Carr-Hill, l 1 re-examining Williams’ tainty, as discussed below, would indicate some study of coronary artery bypass grafting l2 and

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Table 1. Cost per QALY league table CostlQALY (f 1990)

Treatment Hospital dialysis for kidney failure CABG 1 vessel disease, moderate angina Cont ambulatory dialysis kidney failure Ceftazidime for cystic fibrosis Breast cancer screening Nicotine gum for smokers male 65-9 Renal transplant Nicotine gum for smokers male 35-9 Teenage idiopathic scoliosis Shoulder joint replacement CABG severe angina, Main vessel Scoliosis + neuromuscular disease

Gudex’s article on the use of QALYs in the NHS. l 3 It also includes a reworking of the results of the Forrest Report on breast cancer screeningl4 and a recent US study which compared the use of a zero and finite discount rate.15 All figures are converted to 1990 f s . The table confirms that use of a zero discount rate has the predicted effects. Cost per QALY is reduced for all interventions, but the more important change is in the ranking or relative performance of the different procedures. One treatment stands out as being particularly sensitive to the choice of discount rate, namely surgical treatment of idiopathic scoliosis in teenagers. The sensitivity arises because action taken in teenage has almost no beneficial impact until middle age. For interventions providing more immediate benefits, such as renal dialysis, the impact of a zero discount rate is less pronounced. CONCLUSION The main aim of this paper is to challenge the conventional practice of discounting nonmonetary health benefits at the same rate as variables which are expressed in monetary terms. Such a practice carries hidden implications, for example about the future value of health benefits, which do not look to be well founded. More research is needed on individuals’ time preference

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for health, but such limited evidence as is available, combined with a priori reasoning, suggests that the appropriate discount rate for nonmonetary health benefits is at, or close to, zero. Use of such a rate appears to have important implications for the cost effectiveness ranking of alternative health service procedures. REFERENCES 1. Spackman, M. Discount rates and rates of return in the public,sector; economic issues. Working Paper 113. Government Economic Service, 1991. 2. Butler, C., Rabin, R. and Rosser, R. Global henlth indicators. Unpublished mimeo, 1988. 3. Cairns, J. Health, wealth and timepreference. Discussion Paper 07/91. Health Economics Research Unit, Aberdeen, 1991. 4. Olsen, J. On what basis should health be discounted. Mimeo, 1991. 5 . Sheldon, T. Private communication. 6. Sen, A. Choice of techniques. Oxford, Basil Blackwell, 1960. 7. Parfit, D. Reasons and persons. Oxford, Oxford University Press, 1984. 8. Loomes, G.and McKenzie, L. The use of QALYs in health care decision making. Social Science and Medicine. 1989; 28: 299. 9. Keeler, J. and Cretin, S. Discounting of life saving and other non-monetary effects. Management Science. 1983; 29: 3 . 10. Drummond, M . , Stoddart, G. and Torrance, G.

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Methods of economic evaluation of health care programmes. Oxford, Oxford University Press, 1987. 1 1 . Carr-Hill, R. QuALit Y control: a sensitivity analysis of QALYs. Paper presented at Health Economics Study Group, Brunel University, 1988. 12. Williams, A. Economics of coronary bypass grafting. British Medical Journal. 1985; 291: 326. 13. Gudex, C . QALYs and their use by the health ser-

vice. Discussion Paper 20. Centre for Health Economics, York, 1986. 14. DHSS. Breast cancer screening: the Forrest report. London, HMSO, 1986. 15. Oster, G., Huse, D., Delea, T. and Colditz, G. Cost-effectiveness of nicotine gum as an adjunct to physicians advice. Journal of the American Medical Association. 1986; 256: 1315.

DISCOUNTING AND HEALTH BENEFITS: ANOTHER PERSPECTIVE JOHN CAIRNS Health Economics Research Unit, University of Aberdeen

SUMMARY This paper reviews the argument advanced by Parsonage and Neuburger that the non-monetary benefits of health programmes should be discounted at a lower rate than that used for financial flows. The conceptual issues raised in that paper are discussed and others, such as the tradability of non-monetary benefits and the link between individual and social discount rates, are introduced. The collection and assessment of more evidence is needed before Parsonage and Neuburger’s proposition can be supported. KEY

WORDS-Discounting, time preference, health programmes, non-monetary benefits.

Parsonage and Neuburger (henceforth PN) argue that non-monetary effects should be discounted at a lower rate than that used for financial flows. They recommend, in particular, that health benefits, such as Quality Adjusted Life Years (QALYs), be aggregated with no allowance being made for their differential timing. PN present two types of argument in support of a zero discount rate for health benefits: They argue the case for zero discounting by considering the sources of time preference and arguing that in the context of future health benefits they are unimportant. 2. They reappraise the traditional arguments against departures from a common rate of discount for all effects (most commonly associated with Keeler and Cretin*). 1.

Their discussion is lent an added piquancy by the disclosure, at a recent health economics conference, that the Department of Health and the Treasury have agreed as to the desirability of such

a change in evaluative procedures (Parsonage and Neuburger3). TIME PREFERENCE AND FUTURE HEALTH BENEFITS PN’s discussion emphasises the sources of positive time preference and claims that they are not applicable in the QALY context. They suggest in the section on QALYs and Income ‘that the marginal utility of health improvements has for practical purposes a negligible income elasticity’ and that ‘there seems to be no good prima facie case for saying that a life year saved in a wealthier generation is worth either less or more than a life year saved in the present generation.’ It is not clear whether this latter statement is an empirical or an ethical one. The choice between present and future QALYs will generally also be a choice between beneficiaries A and B. If it is an empirical statement it overlooks the standard argument that

Discounting and health benefits.

This paper argues that non-monetary health benefits should not be discounted at the same rate as variables expressed in monetary terms. It argues inst...
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