The Value of Life and the Rise in Health Spending

TLDR

Over the past half century, Americans have spent an increasing share of their economy on health, gaining longer lives, while debates focus on limiting this growth amid rising income and declining marginal utility of consumption. The study examines whether rising health spending is a rational response to increasing per‑person income, using a model grounded in standard economic assumptions. The authors construct a model using standard economic preferences, showing that health is a superior good with income elasticity above one, and that spending on health to extend life purchases additional utility periods whose marginal utility does not decline. The model predicts that as income rises, the optimal share of spending on health increases, likely surpassing 30 % of total spending by mid‑century.

Abstract

Over the past half century, Americans spent a rising share of total economic resources on health and enjoyed substantially longer lives as a result. Debate on health policy often focuses on limiting the growth of health spending. We investigate an issue central to this debate: Is the growth of health spending a rational response to changing economic conditions—notably the growth of income per person? We develop a model based on standard economic assumptions and argue that this is indeed the case. Standard preferences—of the kind used widely in economics to study consumption, asset pricing, and labor supply—imply that health spending is a superior good with an income elasticity well above one. As people get richer and consumption rises, the marginal utility of consumption falls rapidly. Spending on health to extend life allows individuals to purchase additional periods of utility. The marginal utility of life extension does not decline. As a result, the optimal composition of total spending shifts toward health, and the health share grows along with income. In projections based on the quantitative analysis of our model, the optimal health share of spending seems likely to exceed 30 percent by the middle of the century.