Health policy through the social

welfare lens Marc Fleurbaey

1 XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

Topics • Socio-economic health inequalities • Inequalities of opportunities for health • Fairness in cost-benefit analysis

1. Why we need a social welfare criterion 2. How to construct a social welfare criterion 3. Illustration Sources: joint work with Koen Decancq, Brigitte Dormont, Stéphane Luchini, François Maniquet, Anne-Laure Samson, Erik Schokkaert, Clémence Thébaut, Carine Vandevoorde

2 XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

Part I

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 3

Why we need a social welfare criterion

Socio-economic health inequalities I

• Correlation between socio-economic status (SES) and health

• Concentration curve (and index)

• Problem: not sensitive to the relative importance of health, gives absolute priority to lower SES people

4 XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

SES

Cumulated health

CI in Spanish regions

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 5

Garcia Gomez and Lopez Nicolas, BBVA DT 2007

Socio-economic health inequalities II

• Disparity indicators o Average health per SES group o Need to standardize (different SES groups have different

sociodemographics)

• Relative risks across SES • Stochastic dominance of health distributions

conditional on SES

6 XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

Ratio of average SAH

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 7

RR of death in Europe

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 8

Mackenbach et al., NEJM 2008

RR of death in Spain (men)

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 9

Nolasco et al. International Journal for Equity in Health (2015) 14:33

RR of death (women)

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 10

Self-assessed health by SES in Spain

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 11

Ruiz de la Sierra 2007 http://ec.europa.eu/health/ph_determinants/socio_economics/documents/ev_070507_co05_en.pdf

Socio-economic inequalities: conclusion

• Problem: does not take account of the relative importance of health

• The correlation between SES and health matters little if either health or SES matters little

• It also matters much less if SES and health are complementary rather than substitutes

• One would need a SWF with utility indexes reflecting preferences to assess the impact of socioeconomic health inequalities on social welfare

12 XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

Complements : no correlation

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

13

75%

25%

Complements : perfect correlation

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

14

50%

50%

Substitutes : no correlation

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

15

50%

25%

25%

Substitutes : perfect correlation

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

16

0%

50%

50%

Inequality of opportunities I

• Circumstances versus effort or preferences • Health as a function of multiple factors, sorted out in

two categories: o Circumstances (type): parental SES or education level o Effort: rank in the distribution of health in one’s type

• Then compare average health by type, across types (standardization is needed here too)

17 XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

Inequality of opportunities II

• Direct approach: inequality of average health by type (= inequality between types)

• Indirect approach: total inequality – inequality of health divided by type average (inequality within types)

• The two approaches coincide if the mean log deviation is used as inequality index

• But there is no reason to choose the index on this basis

• Variant: o Direct unfairness = inequality in 𝑓 𝑐, �̃� o Fairness gap = inequality in 𝑓 𝑐, 𝑒 − 𝑓 �̃�, 𝑒

18 XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

Ineq. of opportunities in European countries

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 19 Jusot et al. 2010 HEDG Working Paper 10/26

Inequality of opportunities III

• Problems: o Circumstances not all observed underestimation of inequality o Niehues and Peichl (SCW 2014) have proposed a way to estimate an

upper bound: put individual fixed effects in the circumstances o What is effort? Metaphysical notion. Better to interpret the approach as

pointing out the influence (correlation) of certain variables o Then we are back to socioeconomic health inequalities, but with parental

characteristics instead of personal SES o Why take the average per type? Because inequalities within types do not

matter –but perhaps they should o Implicitly takes personal SES as a don’t care. Why focus on health only?

One should look at well-being o Opportunities is a popular concept, but controversial in ethics. Leads to

type I errors too easily: the “undeserving poor” have many deserving people

20 XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

Inequality of opportunities: conclusion

• Opportunities a deceptively attractive concept • At most it tracks the correlation between certain

variables (circumstances) and health • Alternative approach: respect people’s

preferences • Some are less interested in health than others, one

can respect that, instead of forcing everyone to have the same health or the same “opportunity set”

• A social welfare function with utility indexes that reflect individual preferences is the needed tool for this alternative approach

21 XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

Cost-benefit analysis in health

• Socio-economic health inequalities ignore the relative importance of health

• Inequality of opportunity in health ignore SES and its correlation with health

• CBA is not popular in health o QALYs and cost-effectiveness analysis o Which does not say how to trade off health against other goods o Willingness to pay (WTP) for a QALY

• But it is needed: o How to evaluate the share of health expenses in GDP otherwise? o Even in CEA, should one prioritize people ignoring their SES?

22 XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

Spain in “Health at a glance” (OECD)

23 XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

24 XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

25 XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

26 XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

27

• Nowhere in these data do the population preferences appear

• Imagine doing the same for food expenditures and nutrition

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

Why is CBA not popular in health?

• The sum of WTP counts a euro for a rich as the same as a euro for a poor

• The rich have greater WTP for certain treatments, it seems unfair to give them priority

• What does economic theory say? o Unweighted sum of WTP is unethical and inconsistent o Weighted sum of WTP, when the weights are equal the marginal social

value of income for the various individuals, addresses these issues o This requires a social welfare function (SWF) o What is so frightening about a social welfare function? Interpersonal

comparisons o So, either unweighted CBA is implemented, or no CBA at all

28 XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

How to construct a social welfare criterion

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

29

Part II

How to construct a SWF • Two ingredients: utilities, SWF • The SWF can be of the CES type and one can vary

the degree of inequality aversion to let this parameter be decided by the decision-maker

• The fairness literature (Fleurbaey Maniquet 2011) suggests the maximin is the best criterion (Pareto, Pigou-Dalton, informational simplicity): seems extreme?

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 30

How to construct utilities • This is a normative choice (who is better off?), not a

purely empirical question (Robbins 1932) • Respecting preferences implies a lot:

o An indifference curve that is everywhere above another curve signals a better situation (no matter where the bundles are)

o Even if they belong to different individuals with different preferences o Important caveat: the relevant dimensions must be recorded o So, purely ordinal preferences can help in interpersonal comparisons o This excludes happiness data, because individuals use scales of

satisfaction differently and the person with the better situation may declare a lower satisfaction

• What to do when indifference curves cross? o Impossible to answer in general, or in an abstract model with unnamed

commodities o A concrete model gives meaning to the dimensions of the space

31 XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

The health-income model

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 32

Income

health 0 1

Where preferences matter

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 33

Income

health 0 1

Where preferences don’t matter (?)

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 34

Income

health 0 1

Healthy equivalent income

Note: it respects preferences when indifference curves don’t cross

The endogenous reference health

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 35

Income

health 0 1

Healthy equivalent income in social welfare analysis

• Equivalent income is a utility function • It is fully interpersonally comparable and

measurable • Therefore it can be put into any social welfare

function • It incorporates the relative importance of health for

the diverse preferences of the population • Therefore it can be used for

o Inequality analysis: does the SES-health correlation matter? o CBA: it provides social marginal values of income, i.e., distributional

weights for the summation of WTP o Trends in comprehensive living standards

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 36

Part III

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

37

Illustration

Estimated preferences

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 38

Schokkaert et al. 2013

Inequalities

• Income inequalities matter more than health inequalities

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 39

Schokkaert et al. 2013

CBA: hypertension treatments

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 40

Samson et al. (in progress) A: placebo B: less costly, less effective in the LR C: more costly, more effective LR

CBA: Costs

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 41

CBA: Social welfare comparison

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 42

Conclusion: B dominates, the extra cost of C is not worth the additional health benefits

Trends in living standards

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 43

Boarini et al. (in progress)

2000 2002 2004 2006 2008 2010 2012

GDP

Estimated preferences

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015

44

Conclusions • Social welfare function framework useful for

o Inequalities: do socio-economic inequalities matter? o Cost-benefit analysis: do we spend too much on health? o Living standards growth: beyond GDP

• Interpersonal comparisons are possible o Equivalent income is one possibility o Respecting preferences has strong implications o Yes, value judgments are needed, how could it be otherwise? o The role of experts is not to make value judgments, but to explore the

implications of various value judgments

Samuelson (1947): “It is a legitimate exercise of economic analysis to examine the consequences of various value judgments”

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 45

Further reading • Fleurbaey M., F. Maniquet 2011, A Theory of Fairness and Social Welfare,

Cambridge University Press. • Fleurbaey M., E. Schokkaert 2011, "Equity in health and health care", in M.Pauly, T.

McGuire and P. Pita-Barros (eds) Handbook of Health Economics, vol. 2, North-Holland.

• Fleurbaey M., D. Blanchet 2013, Beyond GDP. Measuring Welfare and Assessing Sustainability, Oxford University Press.

• Fleurbaey M., E. Schokkaert, S. Luchini, C. Muller 2013, "Equivalent incomes and the economic evaluation of health care", Health Economics 22: 711-729.

• Schokkaert E., C. Van de Voorde, Brigitte Dormont, M. Fleurbaey, Stéphane Luchini, Anne-Laure Samson, Clémence Thébaut 2013, "Equity in health and equivalent incomes", Research on Economic Inequality 21: 131-156.

• K. Decancq, M. Fleurbaey, E. Schokkaert 2015, "Inequality, income, and well-being", in A.B. Atkinson and F. Bourguignon (eds.), Handbook of Income Distribution 2A, Elsevier.

• Anne-Laure Samson, Clémence Thébaut, Schokkaert E., Brigitte Dormont, M. Fleurbaey, Stéphane Luchini, C. Van de Voorde, “Fairness in economic evaluation: an application to antihypertensive treatments”, in progress.

• Boarini R., M. Fleurbaey, F. Murtin, P. Schreyer, “From subjective well-being to living standards measurement”, in progress.

XXXV Spanish Health Economics Conference, Granada 17-19 June 2015 46