The UK health budget is almost 10% of national income, rising 3% a year due to ageing and general increases in costs of living. Is our government spending more on our health than we would spend ourselves – or much less? And how much would we be willing to pay if the government wasn’t paying for us? This week’s blog comes from Paul Frijters – Programme Co-Director at the Centre for Economic Performance at LSE – who looks at the effect that changes in our health and income have on our wellbeing.

If our health changes, it clearly impacts our wellbeing. In our recent study, we found that people would have to be paid £25,000 to compensate for the wellbeing impact of each year lost to very poor health. And this is about equivalent to what the UK government currently spends on health interventions for what it calls ‘Quality Adjusted Life Years’ – essentially, each extra year of perfectly healthy life.

What we’d pay for another year of quality life

The impact of different medicines or health interventions are estimated in terms of how many ‘Quality Adjusted Life Years’ they can provide. One Quality Adjusted Life Year is an extra year of perfectly healthy life. The rule of thumb that the UK government uses when it buys medicines is that it is willing to pay £25,000 pounds for an extra Quality Adjusted Life Year.

In a recent study, my co-authors and I calculate what the impact would be of another year of perfectly healthy life – so, one Quality Adjusted Life Year – on wellbeing. We found it is equivalent to the effect that £25,000 would have on individual’s wellbeing if those individuals would have to pay that actual amount.

They’d be willing to pay a bit less if they are going to live with a long-term health condition.

How did we come up with that amount?

We deduce what individuals would be willing to pay to improve their own health by looking at how satisfied they are with their life when they are very ill versus perfectly healthy. Our data follows almost 20,000 Australians for over 15 years from 2001, who were asked each year how satisfied they were with their life and a large battery of questions about their health.

We use the same measure of health as is used in some of the Quality of Additional Life measurements – that is, a set of 36 questions that ask individuals mainly about aspects of their physical health, including vitality, pain and mobility.

Unsurprisingly, health is extremely important for life satisfaction. Going from perfect health to a ‘zero Quality of Life’ – which is ‘as good as dead’ according to these health measures- reduces life satisfaction on a 0-10 scale by 2.25 in the first year and by 3.02 if it lasts.

This makes health easily the most important single item in life satisfaction: even unemployment, which is terrible for people, only ‘costs’ about one point in life satisfaction.

Changes in money and associated change in wellbeing

To be able to find out how much money matters to these respondents, we look at how less satisfied they are in the years following a large financial shock, such as making a huge loss on the sale of a house or getting a much lower-paying job. Such things don’t happen often, but because we follow so many Australians for so long, we still have around 2,000 ‘financial worsening’ events in our data.

Money matters: the anxiety and stresses of having negative financial events also have strong effects on life satisfaction, such that a loss of £8,000 in a year reduces life satisfaction by nearly one point. By design, this strongly negative effect only happens when people notice the unexpected deterioration in their financial situation, which of course they do if they have to pay for very expensive health treatments.

Health and money – holding wellbeing constant

If you compare the two strong effects, you find that a Quality Adjusted Life Year is worth around £25,000 to the average respondent. Of course, the richer the respondent, the more they’d be willing to pay for health, so the effect holds for the average. For poorer individuals who would have less money to spend, an additional year would be not worth as much, but for the richer person it would be worth more.

Translated to the UK situation, the results suggest the following.

  • The UK’s spend on health is close to perfection in that it reflects willingness to pay: what the government is willing to pay is almost exactly what citizens would be willing to pay themselves. No less, but also no more. You see this confirmed in the very low number of Brits who buy additional health services outside the NHS: no more than 5% buy extras, confirming that the current budget is just right.
  • The mental stresses that make large unexpected expenses so detrimental to life satisfaction should alert us to the huge importance of mental health, rather than just physical health. The study finds that physical health is able to move life satisfaction about one third, but that mental health independently is important for the other two thirds of what matters to individuals.
  • The trade-offs look very similar to how people behave and the policies that their governments enact, when you compare how much money matters versus how much health matters. This validates the use of life satisfaction as a measure of what really matters to people.

Finally, the methodology in the study is novel and has many possible applications elsewhere, such as valuing very specific health conditions.