Value+of+life+-&nbsp;human+capital+approach?+Willingness+to+pay+approach?

=Value of Life= The phrase **[|value of life]** refers to the monetary worth of a human life. The concept of assigning worth or value to an individual life is a crucial part of cost-benefit analysis involving health and the healthcare industry. Decisions involving healthcare spending levels are an everyday part of any health related profession. These decisions, like other economic decisions, require comparing the marginal costs of the healthcare to the marginal benefits received. Based on the fact that most medical care is performed with the intent of extending or improving the quality of life, one must know the value of life in order to make effective medical decisions.**Value of life** can be determined using either the **human capital approach** or the **willingness to pay approach**. Each approach has benefits as well as drawbacks which lead to controversy concerning which method is superior.



Human Capital Approach
The human capital approach equates the value of a human life to the [|discounted market value] of the output produced by an individual over an expected lifetime. This approach, which is the most commonly used, estimates the discounted value of future earnings that result from an extension or improvement in life. The figure below provides some average estimates of the present value of lifetime earnings by age and gender, discounted using a 2.5% real discount rate. The general trend of discounted lifetime earnings initially increases as an individual ages from infancy through mid- 20’s. The peak discounted value of lifetime earnings for females is approximately $644, 000 at the age 24 compared to $1.16 million at age 20 for males. This gender-based discrepancy in values is the first sign that approach has significant drawbacks. Along with gender, the human capital approach is also subject to market imperfections like race and other types of discrimination. Furthermore, the human capital approach fails to recognize the value of pain and suffering that can be avoided through medical means as well as the value of leisure time. Nor does it consider the value an individual receives from the pleasure of life itself. Using the human capital approach, a person who continually unemployed but yest still lives and breathes each day has effectively a zero value of life.



Willingness to Pay Approach
The willingness to pay approach attempts to account for the shortcomings of the human capital approach by considering more than just the workplace output of an individual. The willingness to pay approach determines the value of life based on a person’s willingness to pay for small reductions in the probability of dying. A person’s willingness to pay is expressed through choices such as wearing or not wearing a seat belt, installing carbon monoxide and/or smoke detectors, and choosing to engage in unhealthy behaviors such as smoking or excessive drinking. The following formula can be used to estimate the lower bound for the value of human life:


 * V= C / Π**

V = value of life C =cost of life-saving good/service Π = reduced probability of dying

The willingness to pay approach generally estimates the value of life to be higher than that estimated using the human capital method. This is a direct result of the willingness method’s greatest advantage- measurement of total value of life rather than just job market value. The higher value estimated using willingness includes the value of forgone earnings as well as the value from leisure and simply life itself.

Attempts to combine both approaches including studies done by Keeler, an article in the American Journal of Public Health, and many other critics have concluded that a hybrid approach would in fact be the best possible option. However, agreeing on such an approach has been a difficult task. One possible method involves using a human capital based approach that values all time, not just hours spent at work, at the market wage rate. Such an approach highlights the fact that people place a very high value on time spend outside of work, a concept researchers must keep in mind when determining value.

Questions:
a. subtracting the expected future medical costs from the expected future earnings b. the amount of personal capital a person is willing to give up in exchange for a medical procedure c. estimating the discounted value of future earnings resulting from improved/prolonged life d. inclusion of both work and non work related value to compute the value of life
 * 1. The standard human capital approach to valuing human life techinically involves:**

Answer: c - The human capital approach equates the value of life to the market value of output produced by an individual during his or her expected lifetime. The techinical calculation involves discounting the the value of future earnings resulting from an improvement or extension in life.


 * 2. Julie is a 35 year old mom who was employeed for the past 15 years at a local bank earning $80,000 a year. Recently, Julie was diagnosed with a medical condition possibly caused by the high stress nature of her lifestyle while working at the bank. Julie and her husband decided she should quit her job and hopefully reduce the stress in her life, thus improving her overall health. Julie does not plan to re-enter the work force. She thoroughly enjoys he days now filled with her children's activities, exercise classes, normal household tasks, and time spent in lunch and book clubs with her friends. Using the human capital approach, what is Julie's value of life? Is this an accurate measurement?**

Answer: Using the human capital approach, Julie has a zero or near zero value of life since she is unemployed. This measurement is argued by many to be inaccurate due to the value of life gained from time outside of the workplace including leisure time and pure enjoyment of life. Most people would argue that Julie has a very high value of life because she is young and happily raising her family. The willingness to pay approach would be a much better approach to measure value of life in this situation.


 * 3. True or False? The willingness to pay approach states that the cost of a life saving good or service is equal to the value of human life minus the reductions in probability of dying.**

Answer: False. The willingness to pay approach states that the value of a human life is equal to the cost of a life saving good or service divided by the reductions in probability of dying.


 * 4. If Joe chooses to undergo a medical procedure costing $ 300,000 that will reduce his chance of dying from a rare disease from 80% to 65%, what is the computed value of Joe's life?**

Answer: Using the formula V = C / Π V= $300,000 / .15 V = 2,000,000


 * 5. Sarah has a life concerning disease, and she has the option of choosing treatment A that saves 1 more life out of 50 than treatment B. Treatment A costs 5 times more at $2500 than treatment B. Use the willingness-to-pay approach to calculate the value of Sarah life for each treatment? Which treatment would she choose to undergo?**

Answer: Sarah would choose to undergo treatment A. Treatment A Treatment B V=$2500 / 1/50 V= $500 / 1/50 V= $125,000 V= $25,000

References:
//Value of Life.// Wikipedia. 28 Feb 2007. < http://en.wikipedia.org/wiki/Value_of_life >

Neun, Stephen P., and Rexford E. Santerre. //Health Economics: Theories, Insights, and Industry Studies.// 4th Ed. Mason: Thomson South-Western, 2007.

//The Economic Value of Life: Linking Theory to Practice.// Am J Public Health. 2 Mar 2007. <__[||http://www.pubmedcentral.nih.gov/articlerender.fcgi?artid=1650128]__>