Living standards. institute view

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1 institute view by ross devol and armen bedroussian Living standards in the United States have never been higher. But in sharp contrast to the routine miracles brought by a vibrant economy, the country still faces a harsh reality: the personal misery and financial losses associated with avoidable chronic illness are high and growing rapidly. This failure to contain the containable is undermining prospects for extending health insurance coverage and for coping with the medical costs of an aging population without breaking the budget. steve liss/polaris Every year, serious chronic diseases are diagnosed in millions of Americans. The consequences are, of course, greatest for those who become ill and for their families. Indeed, in work for the Milken Institute, Kevin Murphy and Robert Topel of the University of Chicago have estimated that Americans would willingly divert trillions of dollars in income annually to substantially reduce morbidity and contain premature death. In this research we focused on the narrower, more tangible costs of chronic illness: the medical resources used to treat avoidable illness, the impact on the labor supply (and thus GDP), and the drag on long-term economic growth. Specifically, we analyzed the impact of 11 chronic diseases and estimated ROSS DEVOL is director of the Center for Health Economics at the Milken Institute and ARMEN BEDROUSSIAN is a research economist at the Institute. the economic costs that could be avoided through more effective prevention and treatment. Even if one were to ignore the suffering of the victims, the magnitude of these potential economic benefits would justify a sharp tilt toward preventive health measures. The news about Americans health is a mixed bag. Death rates for colon cancer began to drop in the early 1980s, while breast, prostate and lung cancer followed similar patterns 87

2 institute view in the early 1990s. The most dramatic improvements in morbidity and longevity have come from advances in the treatment and prevention of heart disease: the likelihood of dying from a heart ailment began waning in the mid-1960s, while the number of diagnosed cases has been falling since DIRECT COSTS BY CHRONIC DISEASE, 2003 CHRONIC DISEASE EXPENDITURE PRC* EXPENDITURE/PRC ($BILLIONS) (MILLIONS) ($THOUSANDS/PERSON) Cancer $ $4.5 Breast Cancer Colon Cancer Lung Cancer Prostate Cancer Other Cancers Pulmonary Conditions Diabetes Cardiovascular Diseases Hypertension Heart Disease Stroke Mental Disorders TOTAL *PRC is Population Reporting Condition source: Milken Institute report, An Unhealty America: The Economic Burden of Chronic Disease Other chronic diseases, however, are becoming more common. The incidence of strokes is rising, in large part because more people are surviving to old age. More puzzling, perhaps, pulmonary diseases have also risen in recent decades. And reported cases of mental disorders, including depression, are growing, too. The most disturbing news, though, is the rising incidence of diabetes and hypertension, due in large part to increases in obesity. In fact, skyrocketing obesity may herald an epidemic that pushes America s ad hoc publicprivate system for financing medical care to the breaking point. current treatment costs Federal survey data makes it possible to catalog the number of cases of chronic illness and the costs of treating them. Pulmonary conditions led in terms of the numbers of reported cases, with hypertension and mental disorders not far behind. Heart disease, stroke and various cancers absorb a disproportionate amount of resources because treatment typically involves very expensive bouts of hospitalization. Nationwide, expenditures on these diseases totaled $277 billion in 2003, the latest year in which comprehensive data is available. This is a conservative estimate because it excludes costs for the institutionalized population. Note that the total population reporting a condition (PRC) is 162 million, but the number of Americans afflicted with these chronic diseases is smaller (109 million) because many have more than one condition for example, diabetes, hypertension and heart disease. And the incidence is not evenly distributed by region. Differences in lifestyles (smoking, alcohol abuse, diet and exercise), along with demographics (age distribution, ethnicity and urbanization), partly explain differences in stephen wilkes/the image bank/getty images 88 The Milken Institute Review

3 disease rates among the states. We created an index in which the state with the fewest PRCs per person (Utah) is benchmarked at 100. A value of 70, for example, means that a state s PRC per capita is 30 percent worse than Utah s in The worst-ranked states tend to have the highest readings on behavioral risk factors, the highest percentage of elderly residents and a demographic mix predisposed to one or more chronic diseases. These least-healthy states lie in a belt of obesity and smoking that runs from New England to the Northeast through Oklahoma. West Virginia, Tennessee, Arkansas, Kentucky and Mississippi are the bottom five. The low scores for Massachusetts and Maine result from the high incidence of cancers and, perhaps, more complete reporting. avoidable treatment costs To quantify the potential savings in treatment costs from healthier lifestyles and plausible advances in therapies, we compared a business-as-usual baseline scenario with an optimistic scenario that assumes substantial improvements in health-related behavior and treatment through the year The difference between the two scenarios the direct avoidable costs is broken down by chronic illness. The major behavioral changes contemplated are weight control, exercise, further reductions in smoking and more aggressive early detection and treatment. The impact varies widely by condition thus gains against diabetes depend largely on reductions in obesity, while advances against colon cancer depend on early screening. A full description of the (admittedly critical) assumptions on which these scenarios are based can be found in the text of the Milken Institute s newly released report, An Unhealthy America: The Economic Burden of Chronic Disease. STATE CHRONIC DISEASE INDEX, 2006 COMPOSITE STATE RANK SCORE Utah Alaska Colorado New Mexico Arizona California Hawaii Idaho Washington Wyoming Minnesota Texas Nevada North Dakota Illinois Kansas Nebraska New Hampshire Montana Virginia Wisconsin New York Indiana Iowa Missouri Vermont Maryland Michigan Ohio Oregon Georgia New Jersey North Carolina Connecticut Delaware South Dakota Louisiana Florida South Carolina Massachusetts Alabama Oklahoma Maine Rhode Island Pennsylvania Mississippi Kentucky Arkansas Tennessee West Virginia source: Milken Institute report, An Unhealthy America: The Economic Burden of Chronic Disease All told, the optimistic scenario would cut treatment costs in 2023 (adjusted for inflation) by about $217 billion. And the cumula- 89

4 institute view TOTAL MEDICAL EXPENDITURE PROJECTIONS ($BILLIONS) BASELINE OPTIMISTIC CHRONIC DISEASE Cancer $48.1 $86.6 $146.3 $48.1 $77.6 $108.9 Breast Cancer Colon Cancer Lung Cancer Prostate Cancer Other Cancers Pulmonary Conditions Diabetes Cardiovascular Diseases Hypertension Heart Disease Stroke Mental Disorders TOTAL source: Milken Institute GDP-BASED INDIRECT IMPACT ($BILLIONS, 2003) INDIVIDUAL CAREGIVER LOST LOST CHRONIC DISEASE WORK DAYS PRESENTEEISM WORK DAYS PRESENTEEISM TOTAL Cancer $13.82 $ $1.00 $22.68 $ Breast Cancer Colon Cancer Lung Cancer Prostate Cancer Other Cancers Asthma Diabetes Cardiovascular Diseases Hypertension Heart Disease Stroke Emotional Disturbances TOTAL , source: Milken Institute tive avoidable costs through 2023 would total a whopping $1.6 trillion. Note that this would be a gift that keeps on giving, also saving hundreds of billions of dollars annually in the years beyond avoiding output losses The potential savings on treatment represents just the tip of the proverbial iceberg. Chronically ill workers take sick days, reducing the supply of labor and, in the process, the GDP. Apparently worse, they often show up for work to avoid losses in wages, but perform below par a circumstance dubbed presenteeism in contrast to absenteeism. Output losses due to presenteeism are immense with most diseases it is several times greater than losses associated with absenteeism. Last, avoidable illnesses divert the productivity of family members, effectively reducing the supply of labor for other uses. Combined, the indirect impacts of these diseases totaled just over $1 trillion in Again, we use baseline and optimistic scenarios to estimate the potential gains (that is, avoided losses) associated with better prevention, detection and treatment of chronic diseases. For all chronic diseases covered, the difference between the baseline and optimistic scenarios in 2023 is a remarkable $1.05 trillion in today s dollars, while the cumulative difference over two decades is $6.9 trillion! Plainly, absenteeism and lower productivity on the job linked to chronic disease is a major factor limiting economic output and reducing living standards. impact of major behavioral risk factors In large part, the high (and rising) toll from chronic diseases is simply a function of aging. But our analysis implies that avoidable factors unhealthy behavior, environmental risks and the failure to exploit the potential of early 90 The Milken Institute Review

5 lauren greenfield/vii detection and innovative treatment will lead to 40 million more cases of illness, $218 billion more in treatment expenditures in today s money and a loss of over $1 trillion in labor supply and efficiency. To get a clearer sense of the relative impact of the two most important behavior factors obesity and smoking we again compared alternate scenarios holding all other factors at the baseline values. As the table shows, obesity was the prime cause of some 14.8 million illnesses in 2023, which added $60 billion in real terms to the national treatment bill and reduced GDP by $254 billion. A parallel calculation for smoking alone suggests that tobacco was responsible for an extra 9.4 million illnesses in 2023, along with $31 billion in treatment costs and $79 billion in lost productivity. forgone economic growth The long-term impact of chronic disease on economic growth a consequence of less investment in both human and physical capital is likely to be of even greater magnitude than the impact of treatment costs and lost labor supply. We used a standard economic model of the relationship between inputs (capital, labor, skills) and output to simulate this impact, with health helping to determine the rate of investment and thus the rate of economic growth. We used life expectancy at age 65 as a plausible proxy for this health variable, which affects both decisions to invest in physical capital and human capital (education). Comparing a baseline business-as-usual scenario with an optimistic scenario assuming substantial (but plausible) reductions in chronic disease cases yields a gap of $1.2 trillion in real terms in 2023, which widens to $5.7 trillion by This represents a difference of about three-tenths of a percentage 2023 PROJECTIONS OF GDP-BASED INDIRECT IMPACT BY TYPE OF DISEASE, $BILLIONS DIFFERENCE CHRONIC DISEASE BASELINE OPTIMISTIC ABSOLUTE PERCENT Cancer $960 $587 -$ % Breast Cancer Colon Cancer Lung Cancer Prostate Cancer Other Cancers Asthma Diabetes Cardiovascular Diseases 1, Hypertension Heart Disease Stroke Emotional Disturbances TOTAL 3,363 2, source: Milken Institute 91

6 PROJECTED DIFFERENCES DUE TO OBESITY DIFFERENCE BETWEEN BASELINE AND OPTIMISTIC, 2023 DIFFERENCE IN GDP $BILLIONS $6,000 5,000 4,000 3,000 2,000 1,000 0 institute view PRC TOTAL EXPENDITURE TOTAL INDIRECT IMPACT* CHRONIC DISEASE (THOUSANDS) ($BILLIONS) PERCENT ($BILLIONS) PERCENT Cancer -1, Breast Cancer Colon Cancer Prostate Cancer Other Cancers -1, Diabetes -2, Cardiovascular Diseases -10, Heart Disease -4, Hypertension -5, Stroke Total -14, *Based on Nominal GDP Absolute difference Percent difference YEAR sources: BEA; Economy.com; Global Insight; Milken Institute point in average annual economic growth resulting from lower rates of investment in physical capital and education. the big picture It has long been understood that chronic disease is a significant factor in determining living standards and economic growth. Disciplined simulations, which allow us to quantify the impact on the basis of reasonable assumptions, show just how significant. One striking conclusion is 2050 PERCENT that while the avoidable treatment costs of less-than-optimal policy are large, the avoidable impact on GDP through reduced labor supply and lower rates of investment is gigantic. In 2003, the United States spent $227 billion on treating the chronic diseases studied here. But, accounting for the loss of labor, chronic illness reduced GDP by over $1 trillion. By the same token, poor health can be expected to reduce capital accumulation (physical and human) and reduce the rate of economic growth by three-tenths of a percentage point annually a small number that, with the benefit of compound interest, adds up to a $5.7 trillion larger real GDP in The good news implied, of course, is that the potential economic returns to initiatives that lead to a healthier population are simply enormous. To that end, we offer some suggestions for change. First, the incentives in the health care system should be tilted toward prevention. Health care providers should be compensated for stopping and delaying the onset of disease, as well as treating it. In many respects, we ve gotten what we paid for: only a tiny fraction of health care spending is devoted to promoting healthier behavior, despite the fact that preventable chronic diseases are linked to smoking, obesity, lack of exercise 92 The Milken Institute Review

7 and drug and alcohol use. The nation also needs a healthy body weight initiative. Rising obesity rates and an aging population threaten to send treatment costs for diabetes and related pathologies hypertension, heart disease, stroke, adult blindness and life- and limb-threatening infections soaring over the next 20 years. Yet there is no coordinated national effort to address the health risks of obesity or to change the sort of food marketed to the young and the poor. During the past quarter century, the United States has made tremendous progress in reducing death and disability attributable to many chronic diseases notably, heart disease and related conditions. Behavioral changes (especially the reduction in smoking) along with early screening and innovations in pharmaceuticals, minimally invasive diagnostic procedures and surgery, are largely responsible. Yet the gains against many diseases threaten to be overwhelmed by setbacks in others, like diabetes. And this drama is being played out against the sobering financial realities of rapidly rising demand for care by the aging baby boom population. America s health care debate is rightly concerned with the extension of coverage to the uninsured and the design of a financing mechanism that is both fair and efficient. We suggest that the mix of services now provided the failure to invest in prevention deserves an equal place on the table. An increased emphasis on prevention would both improve the health of Americans and offset some of the costs of an aging population by increasing economic productivity. M Note: the research summarized here was supported in part by a grant from the Pharmaceutical Research and Manufacturers Association. lauren greenfield/vii 93