The Value of Life and the Rise in Health Spending

Health care extends life. 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 the rational response to changing economic conditions—notably the growth of income per person? We estimate parameters of the technology that relates health spending to improved health, measured as increased longevity. We also estimate parameters of social preferences about longevity and the consumption of non-health goods and services. The account that emerges is that the marginal utility of non-health consumption diminishes faster than the marginal utility of health spending. As a result, the composition of total spending shifts toward health. The health share continues to grow as long as income grows. In projections based on our parameter estimates, the health share reaches 33 percent by the middle of the century.