Imagine you are an economist in the Department of Transport advising the Minister who has to chose between two alternative transport options. One is significantly more expensive than the other but will have a greater impact on road safety because it improves a major blackspot, notorious for fatal accidents between pedestrians and cyclists. Alternatively, if you were working for a health authority, you might have to advise on allocating scarce resource between areas which particularly benefit the elderly, such as hip replacements, or putting the money into areas which benefit other sectors of the population such as paediatrics. Although it might seem difficult and subjective, economists working in these areas have to place monetary values on a human life.
One way of valuing a human life is the VSL (Value of a Statistical Life) which uses the money a person would pay to save one human life. This is not asking what they would pay to save their life or that of a member of their family or a friend, but the value they would place on an anonymous life. Alternatively, rather than carrying out surveys, economists consider future average earnings. Therefore the value of a life varies according to the age of the people being considered, hence actions which save a child’s life are more valuable than those which benefit the elderly. More problematical, this implies that saving lives in a high-income area is of greater value to society than in a depressed region. Unsurprisingly, there is very little international agreement about the answer. The UK government figure is around €2.02m while the USA Department of Transport figure is €8.75m, indicating the way the VSL varies according to income levels.
A study in Sierra Leone illustrated this by looking at people’s preferred transport options to get from the capital, Freetown, across water, to the airport. By examining the different methods of travel (ferry, water taxi or hovercraft) and considering the duration of the journey and the risks involved, the study found that the VSL of an African traveller ($577,000) was lower than that of a non-African traveller ($924,000) which was largely explained by the level of income, with higher income earners choosing the safest method – water-taxi- even though it was more expensive and took longer.
A new approach, used particularly in healthcare economics, estimates the “Value of a Statistical Life Year” (VSLY) which measures the value of one additional year of life. If a medical process, such as a heart transplant for an elderly patient, costs £50,000 and increases life expectancy by one year yet costs £60,000 then in economic terms it is not cost-effective. However if the same treatment were provided for a child which increased their life expectancy by fifty years, then it would be extremely cost-effective. This approach has been made more sophisticated by introducing the idea of a Quality-Adjusted Life Year which is defined by NICE (the National Institute for Health and Care Excellence) as:
“A measure of the state of health of a person or group in which the benefits, in terms of length of life, are adjusted to reflect the quality of life. One QALY is equal to 1 year of life in perfect health.
QALYs are calculated by estimating the years of life remaining for a patient following a particular treatment or intervention and weighting each year with a quality-of-life score (on a 0 to 1 scale). It is often measured in terms of the person’s ability to carry out the activities of daily life, and freedom from pain and mental disturbance.”
The World Health Organisation uses a range of between one and three times per capita GDP of the country per additional QALY while a value of £30,000 per QALY has been identified as the upper limit for treatments deemed cost effective in the UK, approximately the value of per capita GDP.
Whether this figure is too low is a question for politicians rather than economists.