How much is good health worth?

Policy Sciences 49

How Much is Good Health

Worth? V I N C E N T TAYLOR* The RAND Corporation, Santa Monica, California

ABSTRACT A consumer-demand or subjective-value approach to valuing government health activities is recommended. The human-capital valuations generally used in cost-benefit analysis are unrelated to peoples' preferences and, therefore, irrelevant to political decisions. A number of important policy conclusions emerge from applying the suggested principle that government activities be valued on the basis of what people would be willing to pay for them: Beyond programs to aid the poor, government health efforts should be restricted to overcoming deficiencies in the operations of the private marketplace; that is, to regulatory actions, control of infectious disease and environmental pollution, and aid to biomedical research. Free services provided to the poor should be justified by the willingness of the nonpoor to pay for them. Thus, the preferences of the nonpoor are important in designing optimal poverty programs. Under present circumstances, direct money transfers to the poor seem preferable to further increases in poverty medical programs. The value of existing programs could be increased by giving more weight to what the poor want instead of what medical experts say is most important for their health.

Introduction What is the appropriate role of the government in the health field ? How should government agencies decide on which of the many possible health programs they should under take ? In recent years, economists and other policy analysts have at tempted to provide answers to these questions by applying the techniques of cost-benefit analysis. Al though the theoretical concept of compar ing costs and benefits of different programs to determine which are most desirable is widely accepted, such analyses in the health field have not been very satisfying. Some of the results, part icularly those relating to the relative "benefits" of reducing mortal i ty in different age groups, just do not seem right. For example, one study indicates that the life of a 20-year old is worth the lives of two babies. As the parent of two children who were recently babies, I

*The people who have assisted in the preparation of this paper are truly too numerous to mention in total. I am particularly indebted to Ed Park and Jim DeHaven of Rand for their helpful discussions, to Paul Feldman of the Institute for Defense Analysis for ideas, stimulation, and encouragement, and to Dick Zeckhauser of Harvard for his perceptive comments on an earlier draft.

Policy Sciences 1 (1970), 49-72 Copyright �9 1970 by American Elsevier Publishing Company, Inc.

50 Vincent Taylor

can' t agree. In any event, the influence of the analyses on the content and character of government participation in health seems to have been minimal.

This paper analyses the reasons for the deficiencies in past analyses of government health programs and proposes remedies. Although the paper focuses specifically on health programs, the discussion is relevant to most government activity. In order to derive an appropriate approach to evaluating health programs, it was necessary to explore the general problem of the justification for government action. The concepts derived from this analysis are applied to evaluating both nonpoverty health programs and health programs for the poor. Much of the discussion is applicable to evaluating poverty and nonpoverty programs outside of health.

This paper argues that cost-benefit analysis in health has been seriously defic!ent-- not because the concept is bad but rather because the measures of benefit used have been based on a seriously inadequate understanding of how to value government activities. The paper takes as its starting point that the only legitimate justification for government action is to increase the satisfaction of individuals. There are no goals of government separate from the goals, wants, desires, demands of the individuals that comprise the society. Although this should be an unremarkable premise, little attention has been paid to its implications for cost-benefit analysis. As a result, such analyses have often been seriously in error.

A restriction on the scope of this paper should be clearly understood. The analysis applies only to government programs that provide or subsidize medical care or health research. These types of programs represent the bulk of government health expenditures and the ones to which cost-benefit analyses have been applied, but they are not the only government health activities. Regulatory activities to deal with the effects of consumer ignorance and imperfect competition make up another category of government health programs. Evaluation of government regulatory activities is a separate, complex subject beyond the scope of this paper.

To foresee the major conclusion of the paper, government health programs ought to be evaluated on the basis of their appeal and desirability to the public. The answer to the question raised in the title is that, "Good health is worth as much as people are willing to pay for it." At first glance, this answer may appear to be so obvious and uncontroversial that it is hardly worth making, but as the remainder of this paper will demonstrate, rigorous application of the principle implied in the answer leads to conclusions that are neither obvious nor uncontroversial.

H e a l t h as an Investment

For a long time, economists have been in the business of attaching dollar figures to human life. 1 With the great rise in the popularity of cost-benefit analysis as an aid to government decisionmaking, economists have applied their experience in valuing life to measuring benefits from programs that reduce disability and improve health. The concept of valuation of life generally used to estimate the benefits of disease reduction is the "human capital" concept. This concept views a human being as a productive

1 For a historical review of efforts to calculate the value of human lives, see Dublin and Lotka [1 ].

Policy Sciences 1 (1970), 49-72

How Much is Good Health Worth? 51

asset, one who will generate a stream of earnings through future years. Capitalizing these future earnings at some appropriate interest rate allows one to attach a capital value to an individual. By analogy with the theory of investment in physical capital, any investment which raises the capital value of a human being by more than the cost of the investment is worth undertaking.

Cost-benefit analysis in government had its origins in analysis related to physical capital investments (water resources). As the idea of applying cost-benefit analysis spread to other types of government programs, the methodology developed in evaluating water-resource projects tended to be carried along. It is not surprising, therefore, that alternative health programs tended to be evaluated on the basis of their profit- ability as an investment. As a result, the human capital approach to measuring benefits has been the standard procedure in cost-benefit analysis related to health programs. 2

In spite of considerable disagreement over the exact procedure to use in calculating the magnitude of benefits from mortality and disability reduction, there has been surprisingly little controversy (at least among economists) over the appropriateness of treating health programs primarily as investment decisions. To be fair, almost every economist in the field has qualified his use of human capital measures by indicating that not all relevant factors are included in this measure. Some economists have noted that health services are consumption goods as well as investments; thus they conclude that some extra amount must be added to the human capital value of health programs in order to obtain a realistic total value.3 Still, there is little disagreement over using human capital measures as the starting point for measuring benefits from government health programs.

I find the lack of controversy surprising because its seems so obvious that decisions about medical care, especially where they may affect life, are consciously detached f rom questions of profit and loss. The image of a father sitting down and calculating the return to be expected from his child if he lives, before deciding whether or not to pay for a lifesaving operation, seems to us grotesque. There is no profit in providing medical care for an aged parent, but who among us would deny such care ?

People seek medical care for many reasons:

(1) Reduce pain and suffering

(2) Reduce fear and anxiety about the seriousness of illness. (Most illness is minor, but until its minor nature is confirmed by a physician, uncertainty about this can cause more loss of well-being than the illness.)

(3) Hasten recovery f rom illness (4) Improve appearance (5) Repair disabilities (6) Reduce risk of future disability (7) Extend life

2 See, for example, Fein [2] ; Weisbrod [3] ; Klarman [4] ; Health, Education, and Welfare Publication [5]; and Rice [61.

3 Klarman [4] and Mushkin [7] both make this point explicitly. Most others make it either explicitly or implicitly.


52 Vincent Taylor

M a n y o f these reasons for seeking care p romise no mone ta ry gain ( that is, the cost o f care exceeds any gain in the present value of future income). Reducing anxiety has a pure ly psychic payoff , a n d reduct ion o f pa in and repai r o f disabi l i ty are sought far more for their effect on overall p leasure of life than for any mone ta ry gain. In fact, cons idera t ions o f profi t appear to p lay an extremely minor role in most persons ' decisions abou t medical care. I d o n ' t go to a doc to r because i t 's prof i table , nor is this the reason why I get a pa i r o f glasses, obta in a hear ing aid, get a b roken leg set, send my wife and chi ldren for checkups, take my chi ldren to be vaccinated against pol io , d iphther ia , etc. There are many different reasons for doing these things, but it is s tr iking how li t t le prof i tabi l i ty has to do with them.

A l though economis ts have suggested tha t h u m a n capi ta l calculat ions be used as the basis for decisions on government hea l th p rograms , I doub t very much tha t those p ropos ing them would want to use them as cri ter ia for their own decisions. I doub t tha t any indiv idual would. Table 1 presents da ta on the capi ta l ized earnings value o f individuals in different age brackets . W o u l d you be willing to base your medical care decisions on such a table ? W o u l d you pay $60,000 to save your newborn infant if it were male bu t only $35,000 i f it were female ? W o u l d you pay exact ly twice as much to save your own life as tha t o f your wife's ? Suppose you live to be 85. I f you are a

TABLE 1

Present Value of Lifetime Earnings, 1963: Amount Discounted at 4 %, by Age and Sex a

Age Males Females

Under 1 $59,063 $34,622 1 to 4 64,989 37,938 5 to 9 79,333 46,289

10 to 14 96,736 56,422 15 to 19 t14,613 64,936 20 to 24 126,688 67,960 25 to 29 128,698 66,826 30 to 34 122,904 64,389 35 to 39 111,956 60,998 40 to 44 97,301 56,608 45 to 49 80,325 50,896 50 to 54 63,027 44,371 55 to 59 45,948 37,467 60 to 64 28,387 30,164 65 to 69 15,043 23,579 70 to 74 9,264 18,118 75 to 79 5,344 12,888 80 to 84 2,935 6,916 85 and over 210 1,123

a Source: D. P. Rice, "The Direct and Indirect Cost of Illness," Reprinted from subcommittee on Economic Progress, Joint Economic Committee, Congress of the United States, FederalProgramfor the Development of Human Resources, A Compendium of Papers, Vol. 2, Part IV. Health Care and Improvement (Washington D.C.: Government Printing Office, 1968); pp. 469-490, Table 10, p. 489.

Policy Sciences I (1970), 49-72


man, would you be willing to forego any lifesaving operat ion that cost more than 8210 ? It seems unlikely that very many individuals would want to be guided exactly in their decisions on health expenditures by whether or not they are "profi table" in the human capital sense.

I f personal decisions about health made solely on human capital criteria do not seem entirely satisfactory, neither do government decisions. At tempting to maximize the current value o f the future earnings o f the populace is equivalent to at tempting to maximize future-growth in G N P (gross national product). Wiseman (8) has made it clear that most o f us would not want to have our health programs decided strictly on these grounds :

The young (with the longest expectancy of working life), the basically fit, and those with the highest expected earnings, would provide the highest rate of return and would therefore be given access to medical resources on the most favorable terms. The old, in con- trast, constitute a liability . . . . Indeed, if growth is the sole aim of our policymaker, there might be a strong case for providing only one medical service for those who can no longer work: euthanasia . . . .

Let us consider an even more extreme case. Suppose our concern is with the medical services of a poor country in which malnutrition is a serious health problem. Then, given our policy aim, the "appropriate" policy might incorporate cannibalism: those with the most favorable cost-benefit ratios would be permitted (required .9) to eat those whose contribution to growth was negative.--that is, the old and perhaps some of the children.

It seems clear that benefit measurements based on human capital considerations are so contrary to individual valuations o f health that they are of little value to government decisionmakers whose tenure in office is related to the satisfaction o f the electorate. The unrealism and irrelevance o f such calculations are well illustrated by the fact that Medicare was the program that opened the door to major federal participation in payment for medical care. H u m a n capital calculations would indicate that medical care to persons over 65 is relatively unimportant . Politicians knew full well that such care was extremely impor tant not only to the recipients but to the (voting age) children of the recipients. Nor is it mere chance that the only new major program proposed by the Adminis t rat ion in 1968 was the child and maternal health program, even though women and children do not count heavily in human capital calculations.

Evaluating Government Activities I f we are not to use human capital calculations as the basis o f cost-benefit analysis, what are we to substitute ?

The answer to this question requires going back to first principles of government. There is no abstract right or wrong government action. The desirability o f a government activity can only be determined in relation to the purposes assigned government. I take as given that government in the United States has no goals separate f rom the goals o f individuals in the society. There are no fixed "goals o f society," but only the goals of individuals. The purpose o f government in this country is to facilitate the achievement o f higher levels of well-being by individuals, not to specify what goals individuals ought to pursue and then to promote those goals. This view of the role of


54 Vincent Taylor

government has important implications for the evaluation of government activity. Proper government action would be far different if a set of fixed objectives rather than the well-being of individuals were the guiding concern of government.

The theorems of welfare economics have demonstrated that perfectly operating markets4 where buyers are free to purchase what they wish and producers to sell what they wish, lead to the condition where no individual's well-being can be increased without decreasing the well-being of another. The "happiness" or well-being of the population will not be at a maximum unless this "Pareto optimum" condition is satisfied. So long as the welfare of individuals is the dominant consideration, and in the absence of imperfections in the market, the government should not intervene in the operations of the free market. Such intervention will lower the actual well-being of the population below the maximum attainable. If the distribution of well-being among members of society is not "optimal" at the point of competitive equilibrium, lump- sum money transfers provide the best means of changing it. Where markets are perfect, such transfers are always preferable to subsidies or government production as a means of improving the distribution of well-being.

In our ~society, then, government should restrict actions to provide or subsidize goods or services to areas where market imperfections or externalities of consumption exist. I want to emphasize that this important limitation upon government activity derives from ethical judgments about the proper role of government as well as from economic theory.5 Schelling [10, p. 161] has made this point specifically in connection with government action related to saving lives. As always, Schelling is worth quoting:

As an economist I have to keep reminding myself that consumer sovereignty is not just a metaphor and is not justified solely by reference to the unseen hand. It derives with even greater authority from another principle of about the same vintage, "no taxation without representation." Welfare economics establishes the convenience of consumer sovereignty and its compatibility with economic efficiency; the sovereignty itself is typically established by arms, martyrdom, boycott, or some principles held to be self-evident. And it includes the inalienable right of the consumer to make his own mistakes.

Even if the government restricts itself to activities justified by market imperfections, a problem still remains in evaluating alternative government programs. The problem arises because alternative government actions benefit different individuals to different degrees. Many actions harm some individuals as well as benefiting others. In other words, a specified government activity is not characterized merely by some total "benefit" but by a distribution of costs and benefits across the individuals of a society. How does one compare the desirability of two programs that have different distribu- tions of costs and benefits ?

One approach is to place explicit weights on the persons affected by the program, so that a weighted sum of the costs and benefits can be constructed. One weighting scheme

4 "Perfectly operating markets" are defined as those where there are perfect knowledge, mobility, and competition, and there are no external effects of consumption or production.

5 The importance of understanding this point before prescribing roles for government was first brought home to me by the excellent paper of Feldman [9] on the proper role of government. I am indebted to his paper for many of the ideas contained in this section.


How Much is Good Health Worth ? 55

is to consider every individual to be of equal importance. These are the implied weights used when health programs are evaluated in terms of the number of lives saved. Another common approach is to assign weights according to the income or wealth of individuals--usually with the poor being assigned higher weights because of their deprived circumstances. This implicit weighting scheme underlies statements such as, "Medicaid is a good program because it gets medical services to those who need them most." Another approach, of course, is to weight individuals by their human capital values.

The difficulty with such weighting schemes is that they represent value judgments about the relative importance of different individuals. One is left without an objective measure of value. Which program is better depends upon personal preferences about the distribution of well-being among individuals. Since almost all government activities will make some people worse off, are we forced to accept the position that the desirability of an activity depends upon subjective judgment about the relative importance of different individuals ? Although it is impossible to give an unequivocal answer, a strong case can be made for replying in the negative.

The apparent need for value judgments about distributional effects of a program results from the tendency to consider the undertaking of each program as an isolated event, unrelated and irrelevant to other government actions. But, as the exemplary phenomena of logrolling and pork barrel bills make dear, government undertakings are interrelated. Therefore, the final impact of a specified activity on the distribution of well-being may be far different from its impact viewed in isolation. It is only the combined effect of all government activities on the distribution of well-being that is meaningful. In assessing the distributional implications of an individual activity, the appropriate question is how undertaking it would affect the total impact of government on distribution, after allowing for its influence on decisions about other government programs.

To answer this question, one needs to understand the determinants of the distribution of well-being. This is no simple requirement. The distribution of well-being Ys determined jointly by market and political forces. At any point in time, each individual has certain endowments of wealth, skills, and rights that he employs in the market economy and through the political process to promote his well-being. The actual distribution of well-being over time is the result of the coming together of all of these individual actions in the private sphere and in the government sphere. Within the market sector, there are forces and behavioral rules that determine what is produced and who receives the benefits. There is a corresponding dynamic process in the govern- mental sector. Government activities and the distribution of the costs and benefits of these actions are determined by the desire of elected officials to be reelected. In general, each legislator and member of the executive branch is attempting to change the set of government activities (including revenue-raising activities) in ways that will improve his likelihood of being reelected.

The struggle of elected officials for political survival is the mechanism that translates individual preferences into government activities. The way in which this translation takes place, the weight that politicians place on the preferences of various individuals,

Policy Sciences 1 (1970), 49-72 5

56 Vincent Taylor

these are largely de termined by the rules of the poli t ical process (for example, who has the r ight to vote, how nominees for office are determined, how campaigns are financed) and the s tructure of government (for example, the number of different legislative bodies, the relat ion of the executive to the judic iary , the terms of office for elected officials).6 Governmen t p rog rams would be far different f rom what they are t oday if only p roper ty owners could vote, if the President ia l te rm of office were 10 years, if legislat ion required a two- th i rds vote to pass but a simple major i ty to rescind, if the only na t ional legislative body were the Senate, etc. Those who are dissatisfied with the current d is t r ibut ion of benefits of government should direct their ire at the a t t i tudes of the populace or the rules of the system, not the pol i t ic ians or the p rograms . As W o o d r o w Wilson stated in 1885:

The Senate of the United States has been both extravagantly praised and unreasonably disparaged, according to the predisposition and temper of its various critics . . . . The truth is, the Senate is just what the mode of its election and the conditions of public life in this country make it. 7

There would seem to be, at best, only a subtle l ink between the decision to unde r t ake a specified p rogram, with its associa ted d is t r ibut ion o f benefits, and the final dis- t r ibu t ion o f well-being in the society. I t even appears reasonable that there may be a kind of "equ i l ib r ium" d i s t r ibu t ion of benefits, such that if the to ta l impact of government deviates too far f rom this equi l ibr ium, pol i t ical forces arise to move the balance of government activit ies back toward equi l ibr ium. I f this is the case, implement ing a p r o g r a m that p r imar i ly benefits the rich may well be essential to the passage o f a piece of legis lat ion that p r imar i ly benefits the poor .

The conclusion that I d raw f rom the above line of reasoning is that there are good conceptua l and pract ical reasons for separa t ing d i s t r ibu t iona l issues f rom evaluat ion o f the desirabi l i ty of a specific government activity. I f d i s t r ibu t iona l impl icat ions of an act ivi ty are not impor tan t , it is possible to app ly a powerful , object ive cr i ter ion to de te rmine the desirabi l i ty o f specific government act ivi t ies: Define the "subject ive va lue" of an act ivi ty as the combined to ta l o f the max imum prices that all individuals in the society would pay to have the act ivi ty carr ied out. Then, a government activity is worth undertaking i f its cost is less than its subjective value.8 The ma x imum price an indiv idual would pay for a service is a true measure of its value or "benef i t " to him. I f he can ob ta in the service for less than this max imum price, his well-being is increased. F o r any act ivi ty that is "wor thwhi le" in the sense jus t defined, it would be possible to charge everyone less than his m a x i m u m price and still ob ta in sufficient funds to cover the cost of the activity. Implement ing a worthwhile activity, therefore, creates the

6 See Downs [11]; Buchanan and Tullock [12]; and Lindblom [13] on the dynamics of the political process.

7 Quoted by Haynes [14] on the title page. 8 The precise "optimum" level of activity involves equality between marginal cost and the combined

marginal price people would be willing to pay for the marginal change in activity level. Also, implicit in the stated condition is the assumption that the private sector is free to produce an activity if there is a demand for it; so potential government activities are additive to private activities, not substitutes for them.



potential for increasing the well-being of all individuals. In the language of welfare economics, it moves society closer to the Pareto-optimum utility frontier.

A "good" political process would result in the implementation of all government activities (and only those) whose aggregate subjective value exceeded their cost. If the resulting distribution of well-being did not conform to the desired distribution (as defined by the 'joint political-economic process) income transfers would be used to bring it into conformity.9 Such policies would lead to the maximum attainable well- being for all individuals. Exactly how "good" our political system is in this respect is uncertain. In the absence of solid reasons to the contrary, however, it would seem desirable for analysts to evaluate programs in a way consistent with attainment of maximum individual well-being. The only grounds for rejecting this approach to evaluation is a concern over its distributional implications. But, as argued previously, this concern is generally exaggerated and may be totally unfounded.

The remaining sections of this paper discuss the implications of using aggregate subjective value to evaluate government health activities.

Government Health Programs for the Nonpoor 1~

The discussion of this section assumes that there is no need for government to provide or subsidize medical care or health research on the grounds that some cannot afford to purchase adequate amounts. Under this assumption, government action is only justified to correct or compensate for imperfections in the operations of the private marketplace for health services. (The effect of eliminating the assumption that no one is poor will be discussed in the next major section, which deals with the evaluation of health activities directed to the poor.)

There are three major types of market imperfection that may create the need for government action in the health field: (1) imperfect competition, (2) imperfect knowledge, and (3) external costs or benefits associated with the production or consumption of health services. The third market imperfection provides the major justification for the types of government programs being considered in this paper--those programs that provide or subsidize health care or research. The first two imperfections are important in the medical field, but they provide little rationale for the types of programs we are interested in evaluating. Rather, these imperfections given rise to government regulatory activities, which although an important class of government activity, are not the subject of this paper.

Externalities in Health

An "externality" is defined as existing whenever the activities of one individual or firm affect the utility or welfare of another individual or firm. Medical care and public health measures aimed at preventing or reducing the incidence of infectious disease

9 If there are external costs associated with money transfers, this and the previous sentence must be qualified. See the discussion later in this paper under "Health Programs versus Income Transfers."

10 Schelling [10] grappled with the problem of valuing lifesaving efforts of the government and came to many of the conclusions presented in this section. Readers of his paper will recognize my debt to him.


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provide a classic example of external benefits. A carrier of tuberculosis who is not suffering ill consequences from the disease will have no personal reason for seeking a cure, yet all other individuals in the community will benefit f rom the cure. My obtaining a vaccination for polio reduces your chances of catching the disease, and vice versa. Every individual in a community benefits from any action a person takes to reduce his own likelihood of obtaining an infectious disease.

A reduction in the incidence of infectious disease, thus, creates benefits external to those directly saved from the disease. Because of these external benefits, private decisions may not lead to sufficient resources being expended on efforts to reduce infectious disease incidence. Government action may therefore be justified, but the question arises, "How should the government decide whether the benefits of a particular infectious disease control program justify its cost ?" To answer this question, we apply the criterion developed in the previous section : The program should be undertaken if its cost is less than its subjective value, that is, less than the combined total of the maximum prices that all individuals in the society would pay for the program.n

Good health is worth as much as people are willing to pay for it. The question of whether a health program is profitable or unprofitable simply should not arise. It is irrelevant whether production, savings, or what have you is increased by more or less than the cost of the program. I f people are willing to pay for it, they ought to have it. Consumer preferences ought to be decisive with respect to expenditures related to health just as they are for other consumer expenditures. It is true that some health programs have strong externalities associated with them. This does not invalidate the relevance of consumer preferences, it simply means that consumer preferences cannot be properly translated into preferred health programs through the private marketplace-- thus creating a role for government.

Approached from this viewpoint, it is clear why public health programs dealing with infectious disease are so uncontroversial. The rapid, exponential growth of infection and the dire consequences of most infectious diseases (for example, scarlet fever, polio, diphtheria, smallpox) are such as to justify large expenditures to prevent or control them. It is worth considering that venereal diseases represent the one class of infectious diseases where public health programs sufficiently large to keep them to a nominal level have not been undertaken. Only part of the explanation lies in the impediments to control caused by the social stigma of the disease. Our expenditures on VD control ($6 million in 1962 according to Klarman [4]) are small compared to the amounts spent on vaccination programs for polio, smallpox, measles, etc. Why? Venereal diseases differ from other infectious diseases in a number of pertinent ways: (1) individuals can, to a considerable extent, control their risk of contracting VD, independent of the general prevalence-of the disease in the community; (2) the consequences of infection are not severe if treatment is prompt ; (3) cure of VD is relatively simple and inexpensive. As a consequence, the price that individuals are willing to pay to "wipe out VD" seems likely to be considerably smaller than for many other

11 As noted previously, the precise optimum level of an activity involves equality between marginal cost and marginal value; thus the "best" should be chosen by comparing estimates of the cost and the amounts people would be willing to pay for various-sized programs.



infectious diseases. (How much would you personally be willing to pay for a guarantee of immunity ? How does your answer compare with the worth that you would attach to a comparable reduction in risk of contracting smallpox ?)

Externalities are also important in the areas of air and water pollution and public sanitation. Only a fraction of the full costs of pollution or poor sanitation fall upon the responsible person or firm; thus once again government action may be justified. In these instances, government programs primarily involve enforcement of standards with respect to cleanliness and allowable amounts of pollution. The major costs are not incurred by the government, but rather by the individuals and firms who must expend more money in order to meet the standards. In calculating the cost of the program, cost incurred both by the government and by firms and individuals outside of government should be included. Once again, the question of the desirability of a particular program can be answered by comparing these total costs with the subjective value society attaches to the program.

What Externalities Do Not Justify

Before considering other government health expenditures that can be justified on the basis of externalities, it is important to understand the limitations on this type of justification. The existence of external benefits can justify government involvement in the provision of medical care, but the truth of the matter is that the benefits from most medical care purchases are confined to the purchaser. Because infectious disease control programs have been so effective in our country, most medical care today does not concern such diseases. Most medical care decisions are made by the family as a unit, and almost all the benefits from such care are captured by them. An operation that cures a crippling condition in a child or one that saves the life of a father is clearly beneficial, but most of the benefits are to the members of the family unit. In the case of the child's operation, the child benefits directly and the parents benefit indirectly by a lessened burden of caring for the child and increased enjoyment in raising him. The benefits to the rest of the community are small. The major loss associated with the father's death and the major benefits associated with his continued life are to himself and to his family. Although the father's death would have some influence on the rest of the community, it is minor relative to the impact on the family.

The conclusion that a matter of life and death is primarily a private affair or at most a family affair, seems contrary to the often expressed views that human life is priceless and that no effort should be spared to save the life of any person. These are really two separate points, but neither of them contradicts the view that an individual life is mainly the concern of those most directly involved. The issue of the "pricelessness" of human life has been dissected by Williams [15, pp. 1, 2] in his critical essay on traffic safety efforts:

We accept it as a creed that human life is priceless, and react involuntarily against anything which kills [that is, the automobile]. I believe that in so doing we confuse the values of the individual and of the society. For instance, my life is in a sense, priceless to me; there are probably things for which I would give it up, but it isn't something I regard as part of my normal stock and trade. It is worth a lot to my family, but clearly it is less


60 Vincent Taylor

fundamental to them than to me. It is worth less to my associates than to my family, less to my community than to my associates, and so on. Finally, by the time we consider its value to our society, it is clearly sheer romanticism to say it is priceless. The fact is that the loss of my life would not produce an observable effect on the society, and this is literally true for most of us.

In mat ter of fact, we d o n ' t even t reat our own lives as priceless. Otherwise, none of us would smoke or dr ink, all o f us would buy all the safety features we could afford and would cut out of our lives all o f those things which most o f us th ink make life wor th living.

As for the widespread acceptance of the idea that noth ing should be spared in the effort to save a life tha t is in danger , I believe it represents a k ind o f taci t " insurance agreement" a m o n g us all. I t is not so much tha t we gain a lot i f the l ifesaving a t tempts are successful o n , s o m e b o d y else, but ra ther the poss ibi l i ty that we might be in a s imilar s i tua t ion some day in the future. I f we are, we want everything possible done for us. The way to ensure tha t this is the case is to make it a basic rule of our society.

To re turn to the ma jo r point , the fact tha t the benefits o f most medical care accrue a lmos t ent irely to the fami ly uni t which purchases them implies tha t the government should not be in the business o f p rov id ing or subsidizing such care. 12 Government in tervent ion in this instance will reduce welfare by causing people to consume more medical care than they would i f they had to pay the ac tual costs o f such care. I t fol lows direct ly, therefore, tha t the amoun t tha t people would be willing to pay for the care will be below the cost o f p rov id ing it, and by our cr i ter ion such government p rograms are not wor th under tak ing .

This conclus ion would appea r to have direct app l ica t ion to the quest ion of whether or not the government should cover the costs of p rov id ing k idney dialysis and trans- p lan ta t ion , hear t t ransplants , art if icial hearts, and other artificial organs which are ei ther wi th us or upon the hor izon, to all who could benefit f rom them. The answer is, " N o . " I f there is sufficient d e m a n d for insurance coverage o f such services, they will come to be included in nongovernment medical insurance plans. I f the demand is not sufficient, the government should do nothing.

Biomedical Research

A l t h o u g h externali t ies do not jus t i fy government provis ion or subsidizat ion of medical care related to such majo r noninfect ious diseases as hear t disease, cancer, stroke, they do provide an a rgument for government suppor t of research on these and other diseases. The jus t i f icat ion for government subs id iza t ion of research (nonmedica l as well as medical) rests on the fact that those do ing research cannot be assured o f cap tur ing all of the benefits o f it. Thus, for instance, i f a d rug c ompa ny per forms basic research on cell d ivis ion in the course o f its search for a cancer cure, its com- pe t i tors as well as i tself will reap the benefit. A l t h o u g h the final step in the research

12 Except as part of efforts to deal with the undesired effects of uneven wealth. See the next major section.



chain may be patentable, most of the prior links in the chain will not. Because private companies cannot expect to capture all of the benefits coming from their research efforts, they will tend to underspend on research. I f given the opportunity, people would prefer to put more into medical research than will private industry. The government can provide such an opportunity.

Once again, the question arises as to how the government should value research on different diseases in order to make decisions on the allocation of research funds among various alternatives. The expected value of returns from a research project is the product of: (1) the probability that the research project will lead to results that can reduce disease, and (2) the value of such reduction in disease. Our concern is with the second part of the equation--est imating the value to be placed on reduction in disease. Our approach yields the answer that the value assigned to disease reduction ought to be equal to what people would be willing to pay for such a reduction.

From the point of view of decisions on how much to spend on cancer research, for example, the question that should concern the government is, "How much is the population willing to pay to reduce the risk of cancer ?" The total should be estimated by adding together the maximum prices that individuals would be willing to pay. Estimating the subjective values attached to the reduction of cancer, ulcers, syphilis, tuberculosis, or what have you, does not of course solve the overall problem of allocating research funds. One still needs to weight the value figures by estimates of the productivity of research (i.e., the probabilities of success) in order to obtain estimates of the expected return from alternative research programs. Still, putting price tags on success at reducing various kinds of disease would seem to be extremely helpful in deciding on the broad outlines of a research program.

Consumer Demand Compared to Human Capital Values

[ want to emphasize that the approach being suggested here will often lead to substantially different policy recommendations than the standard human capital approach. Consumer preferences with respect to protection against different diseases often bear little relationship to their relative economic costs. An example makes this very clear:

Back in the early 1950s, mention of the word polio was enough to send a shiver of fright through any parent. The price that most parents would have been willing to pay to guarantee their children immunity from polio was very high. I have no doubt in my mind that the aggregate market price for polio protection far exceeded the price people would have been willing to pay for protection against, for example, tuberculosis. To most people, neither the chances of contracting tuberculosis nor the consequences of doing so seemed nearly as frightening for tuberculosis as for polio. Because of the publicity given to polio epidemics, and perhaps because polio struck more evenly across socioeconomic classes than did tuberculosis, the numbers and purchasing power of the people strongly concerned about polio far exceeded the comparable figures for tuberculosis.

Although it is impossible to estimate in restrospect the exact prices that the nation


62 Vincent Taylor

would have paid for polio immunity as compared to tuberculosis immunity, some indication of public preference is provided by the figures on research spending on these diseases. Research spending on polio in the years 1951 and 1952 (the peak years) was approximately five times as large as that on tuberculosis research. But, even these figures underestimate the extent of the disparity in consumer preferences, since polio research was largely financed by voluntary contributions, while tuberculosis research was largely government financed. As we have noted previously, all persons share in the benefits of research (e.g., development of a successful polio vaccine), whether or not they have paid to support the research program; thus the actual value the public attributed to research on polio undoubtedly far exceeded the amount paid through voluntary contributions. Since a much smaller fraction (averaging about 30 ~ between 1951 and 1956) of tuberculosis research was supported by nongovernment sources, the value of the research program to consumers was almost certainly closer to the actual amount expended than in the case of polio. Therefore, it seems safe to conclude that consumer willingness to spend on polio as compared to tuberculosis research was greater than the five-to-one ratio of actual expenditures. Since it seems unlikely that persons attached greatly differing probabilities to the productivity of further research in the two areas, relative consumer willingness to spend on research probably approxi- mated the relative consumer value attached to cures for the two diseases.

The relative price or consumer value placed on these two diseases is strongly in disagreement with the relative economic or human capital costs associated with the two diseases. Weisbrod [3, p. 84] calculates that the total economic costs associated with new cases in 1954 were ten to fifteen times greater for tuberculosis than for polio ! Not only are the human capital estimates in the wrong relative order, but the relative magnitudes differ from the consumer-based estimates by perhaps as much as a factor of 100. Weisbrod [3, p. 87] was disturbed that the allocation of research funds did not parallel his estimates of the relative economic losses associated with polio and tuberculosis. But, it seems clear that for Weisbrod to have been satisfied, the general public would have to have been greatly dissatisfied.

The proper way to value measures to improve health is by reference to the amount people would be willing to pay for such improvement. It may be misleading, therefore, to apply the term cost-benefit analysis to the evaluation of alternative health measures. The word "benefit" implies that the costs are to be compared to some tangible return, when in fact the appropriate comparison is with the subjective values of individuals. Although the price a person will pay for something is the best indicator of the "benefit" he expects to receive from it, common usage of the word benefit is somewhat different. We are not in the habit of saying that a person receives $50 of benefit f rom attending a night club, $400 of benefit f rom a weekend in Las Vagas, $12,000 of benefit from a Ferrari, etc. We tend to use the word benefit to refer to something that is tangible and countable. So long as analysts must search for benefits in order to perform cost- benefit analyses, they may be tempted to utilize "objective" measures of value. To emphasize that it is the subjective demand of consumers that is relevant, it might be helpful to change the phrase from cost-benefit analysis to a more descriptive one, such as consumer value analysis or consumer demand analysis.



Determining Consumer Preferences

I f consumer preferences are to be the deciding factor in the choice of government health programs, there is a need to ascertain what these preferences are. In part, this task is performed by government officials who serve at the pleasure of the electorate. The greater the number of satisfied voters, the greater the chances for reelection. Legis- lators, well aware of this equation governing survival, work assiduously to ascertain the preferences of their constituencies. But in addition to the efforts of individual legislators, there would seem to be real benefit to be gained f rom a formal and direct attempt to sample consumer preferences. Such a sampling of consumer preferences would seem particularly useful in providing guidance to the National Institutes of Health. It would be interesting and instructive to know what a representative sample of the population would be willing to pay for cure of or immunity from cancer, arthritis, multiple sclerosis, tuberculosis, schizophrenia, and other diseases on which the government is spending substantial sums of research money.

There are shortcomings of consumer polls as a means of obtaining a true indication of preferences, but these do not entirely negate the value of consumer surveys. A great deal of experience has been accumulated in the fields of market research and consumer buying surveys. This experience shows that sampling of consumer opinions can be a valuable tool in attempting to measure consumer preferences. There are, o f course, clear differences between the usual kind of opinion sampling and that being proposed, the most important one being that it will pay individuals to exaggerate their own preferences if they expect the poll to influence government spending.

Careful design and analysis can help to minimize the biases introduced by individual exaggeration. Questions about the value of health programs could be placed in a context that emphasizes to the person being interviewed the necessity of considering his answers in the context of his own family budget. Moreover, the inter- viewer can emphasize that the results of the survey will provide an input to decisions on tax rates. Incorporating these and similar features into the survey should help to minimize the extent of exaggeration, and as experience is gained, it may be possible to develop factors to compensate for exaggeration.

An alternative suggestion (made by Charles Wolf) for incorporating consumer preferences into government decisions is to allow the taxpayer to choose the proport ion of his taxes (with constraints as to the maximum allowable allocations) to be spent on various health programs of the government. An advantage of this approach over consumer polls is that it gives real meaning to consumer decisions, thus one would expect more attention and thought to be given these decisions. On the other hand, such an approach has the disadvantage of being too demanding of taxpayers to be applied to very many government programs. Perhaps more important, the tax-allocation concept almost entirely eliminates ~ rc~le .of the_ legislntors ill determining t_h.e size of vnrlc~ns government efforts-:, thus it is difficult to see how to get them to adopt the concept.

A somewha~ related way of involving consumers directly in the decision on government expenditures in health is to finance these programs through a combination of priJiate payments and government matching funds. Instead of allocating a fixed sum


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for a health program (for example, a measles immunization program or a cancer research program), the government would establish a "matching rate" for the program. Private payments to the program would then be supplemented by the government according to the established matching rate. For example, if the matching rate for the measles vaccination program were five to one, the government would contribute 85 to the program for each $1 of private funds. The legislature would control the size of the matching rate and, thus, would still retain its role in influencing the direction and content of government activities.

The concept of allocating government funds by means of applying matching rates to private payments has a theoretical foundation: The rationale for government spending on health care and health research is that these activities have external benefits associated with them. In general, when external benefits exist, the price the consumer must pay in the private market is too high for him to purchase enough to optimize society's welfare. Subsidizing price in such instances will increase social welfare by causing individuals to increase their purchases. The opt imum subsidy will depend upon the degree of external benefits associated with the purchase of the commodity or service under consideration. The greater the degree of external benefits, the larger will be the opt imum subsidy. The main point to understand is that where sufficient externalities exist, lowering the market price through subsidies is one way of making private individual decisions more closely approximate the social optimum. But, the proposal for government matching of private funds is exactly a price subsidy. I f the matching rate is $5 to 81 a payment of $1 by an individual will buy $6 worth of the activity in question. In other words, the price as seen by the individual is only one- sixth its actual cost.

The government-matching concept has the great advantage of directly incorporating consumer preferences into decisions on the scale of various government activities. At present, government programs are completely removed from the requirements of meeting any test of market acceptablity. They are financed from general government revenues, thus there is no direct link between the size of a program and the willingness of individuals to pay for the services provided by the program. Under the matching concept, the legislature would still influence the size of programs through its choice of a matching rate (a matching rate of one hundred would be a much greater inducement to private purchases than would be a matching rate of one), but the final size would still depend upon consumer willingness to contribute. Further, the matching rate chosen by legislators would be open to public scrutiny, making it difficult to establish a matching rate for one program that is far out of line with those for other similar programs.13

Evaluating Health Programs for the Poor The preceding has assumed, in effect, that the only medical care to be provided through government is that care which people are willing and able to pay for, but

13 The matching concept is obviously applicable to many government programs besides those related to health. Multiple matching rates would not work, however, for income transfer programs (where donations by recipients of the transfer would result in multiple increases in the amount transferred).



which the free market fails to provide. This assumption is, of course, unrealistic. It is now thoroughly accepted in our society that government should ensure that everyone is provided with the basic necessities of- l i fe--and this includes medical care. Even further, medical care has become one of the major weapons employed in the attack on poverty. The government is sponsoring care to the poor not simply for its own sake but as part of the campaign to reduce the incidence of poverty and its effects on the rest of society.

Programs to provide increased medical care to the poor are the fastest growing parts of the federal health budget. The Medicaid Insurance Program and several neighborhood health center programs are directed explicitly at increasing medical care provided to poverty groups. The Medicare insurance program for persons 65 years and older also benefits many persons falling in the poverty categories. In 1970 the Depart- ment of Health, Education, and Welfare expects to spend over l0 billion dollars on the provision of health services, and much of this will go to persons in poverty groups. In addition, many cities, counties, and states have programs to assist the poor in obtaining health services.

Deficiencies of Human Capital Valuations

What criteria are appropriate for judging the value of such poverty health programs ? The use of human capital measures or other estimates of economic loss associated with disease are of little help here. Use of human capital concepts will generally yield the conclusion that less should be spent on the poor than is spent on the rich, since the poor earn less money. Further, there are serious questions as to the efficacy of increased medical care in reducing disease, disability, and death. In the United States as a whole," there has not been a perceptible increase in life expectancy since 1954, in spite of substantial biomedical advances and an increase of over 40 % in the per capita quantities of health services consumedA4 The impact of medical care on health seems likely to be even less effective on the poor than on the average person, since the poor person's health will continue to be negatively influenced by poor nutrition, inadequate housing, poor sanitation, and general living style in spite of any improvements in the medical care he receives. In many respects, the health problems of the ghetto are more similar to the health problems of developing countries than to the problems faced by the rest of society. In these circumstances, medical care is only one, and perhaps not the most important, factor in improving health levelsA s I f one combines skepticism about the efficacy of medical care in solving poverty health problems with the low earning ability of the poor, application of human capital valuations in cost-benefit analysis seems likely to lead to minimal poverty health programs.

The difficulty of justifying poverty health programs on the basis of their human capital implications may have been realized by the practitioners of cost-benefit analysis in the federal government. In 1966-67, the Office of the Assistant Secretary (Planning

14 Report of the National Advisory Commission on Health Manpower [16, pp. 35-89]. 15 McDermott [17] has commented perceptively on the limitations of medical care in dealing with

health problems both in urban slums and in developing countries.

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66 Vincent Taylor

and Evaluation) of Health, Education, and Welfare prepared a number of cost- benefit analyses of potential federal health programs. Although human capital valuations of benefits were rigorously applied to many disease control programs, use of human capital measures was explictly avoided in the analysis of programs to deliver health services for the poor.16 If human capital valuations were applied to the poverty programs, the cost-benefit ratios of these programs would have been far lower than those for many of the selected disease control programs. Since at the time the poverty programs were more popular than the disease control programs, such a result would have placed the Administration in a difficult position. Whether done by design or chance, measuring the benefits of programs for the poor in terms of reduced death and disability rather than in human capital terms avoided the possibility of unfavorable comparisons with nonpoverty programs.

Consumer Valuation of Poverty Programs

Just as with nonpoverty health programs, human capital valuations are so out of line with personal and political desires they are of little help in evaluating poverty programs. Also as before, the concept of subjective value provides the proper approach to measuring the benefits of poverty health efforts. The value of poverty as well as nonpoverty programs should be measured by the combined total of the maximum prices that all individuals in the society would pay for the programs. As a general rule, a poverty health program is worth undertaking if and only if its cost is less than its value measured in this way.17

It may be argued that such an approach to evaluation would lead to rejecting all poverty health programs, since the poor cannot afford to pay the full cost of the services being provided. Obviously, if the poor cannot afford the services, the maximum amount that the poor would be willing to pay, for example, for the benefits of a neighborhood health center, is going to be less than the actual cost of operating it. But this misses the fact that the total value of a poverty program includes the value attached to it by the nonpoor as well as by the poor. The nonpoor may attach value to the consumption of health services by the poor for a number of reasons: (1) providing medical care to those who cannot afford it may satisfy a sense of moral obligation of the nonpoor; (2) reducing illness among the poor may make the society a better place for the nonpoor to live in; (3) improving the health of the poor may increase their earning ability, thus reducing the burden of welfare on the nonpoor; (4) the provision of medical care in conjunction with other antipoverty efforts may lessen the possibility of riots and revolution that could threaten the property, patterns of living, and lives of the nonpoor. Because of such external benefits, the value that the nonpoor attach to poverty health programs may be substantial. When the value of a poverty program to the nonpoor is combined with its value to the poor, the total

x6 A summary of the analyses in which human capital measures were applied is presented in HEW publication [5]. The analyses of health services for the poor are presented in HEW publication [18l.

17 For an exception, see the discussion later in this paper under the heading "Health Programs versus Income Transfers."



value may well exceed the cost. Therefore, measuring value by the dollar worth to people by no means implies that all poverty programs are worth less than their cost.

Approaching the valuation of poverty programs from the viewpoint of subjective value leads to a number of observations. These are discussed in the following sections.

Importance of the Preferences of the Nonpoor

Since the poor (by definition) have limited ability to pay for health services, they may often be willing to pay far less for the benefits of a poverty health program than the nonpoor. Thus, the attitudes and preferences of the nonpoor toward features of the poverty program may be more important in determining its total subjective value than the preferences of the poor. This conclusion will trouble public health specialists because it implies that instead of basing program design on the objective health needs of the poor, it ought to be based largely on the subjective preferences of the nonpoor. The conclusion will also trouble many advocates of large-scale government attacks on poverty. To them, the only purpose of poverty programs is to improve the welfare of the poor; therefore, they view the attitudes of the nonpoor as irrelevant to the design of poverty programs.

The conflict between the criterion of maximizing subjective value and the judgment of health professionals is not surprising. Professionals in all fields believe that their assessment of "objective needs" should determine what is done, regardless of how the people affected feel about it. Professional educators, law enforcement officers, and military men all have strong views on what is required in their areas of specialization. Where these views conflict with the preferences of nonprofessionals, the criterion of subjective value implies that the preferences of the nonprofessional consumers ought to dominate. The conclusion that nonprofessional judgment ought to dominate professional judgment may seem peculiar, but it merely represents the application of the principle of consumer sovereignty to nonmarket areas. It places professionals in the role of advisors rather than dictators. To retain their position of influence, they would need to be responsive to the desires of consumers. This increased responsiveness would seem well worth the possibility that consumers may sometimes ignore good advice from the experts. Thus, the probable objection of health professionals to giving weight to the preferences of the nonpoor in the design of poverty health programs does not detract from the validity of the criterion of maximizing subjective value.

But, many persons other than health professionals are troubled by the suggestion that the rich ought legitimately to have a large say about government services provided to the poor. Treating welfare programs as consumption goods of the nonpoor seems somehow to remove the elements of ~ morality and ethics from decisions on these programs. To some, it connotes that the poor are being permitted to exist merely to please the rich. Persons who have these feelings are those who believe the present distribution of income is unjust. They feel that it is wrong for some to have so much when many have so little. Obviously a person who believes the present distribution of income is perfectly satisfactory is not going to object to taxpayers having a say in how tax money is spent to provide services to the poor. Only those who believe that the


68 Vincent Taylor

taxpayers ought not to have so much money, that some of it ought to go to the poor, can object to giving the nonpoor a say in how government spends their money.

Health Programs versus Income Transfers

People who view poverty health efforts as a means of remedying what they consider to be a maldistribution of welfare between rich and poor are likely to be unconcerned with the benefits to the nonpoor. They are perfectly willing to sacrifice these benefits in order to improve the well-being of the poor. Because their concern is only with the well-being of the poor, they do not believe the preferences of the nonpoor ought to be taken into account in program design. This is an error on the part of poverty advocates. To transfer the maximum well-being to the poor for any given loss in subjective value to the nonpoor, one should choose those actions which transfer the maximum subjective value to the poor per dollar decrease in subjective value of the nonpoor. Obviously, this cannot be done without consideration of the preferences of the nonpoor. There is a limit to the loss in well-being that the nonpoor will tolerate in order to aid the poor; therefore even those concerned only about the poor should pay attention to the impact of poverty programs on the well-being of the nonpoor.

Poverty programs which provide few external benefits to the nonpoor are likely to be inferior to money transfers as a means of redistributing well-being. The alternative of money transfers is often ignored by advocates of increased poverty health efforts. Money transfers may permit an equal or larger increase in the well-being of the poor at smaller cost to the nonpoor. Unless the external benefits to the nonpoor associated with the medical services are substantially larger than those associated with money transfers, the latter type of transfer will be more efficient.

Obviously a dollar of money transferred to a poor person is worth one dollar to him. On the other hand, the marginal dollar of medical care provided via government subsidy (at a small fraction of its actual cost or free) generally will be worth considerably less than a dollar to the poor person (that is, he would not purchase the care if the price were close to actual cost). Therefore, to transfer medical care worth one dollar to the poor person will require expenditure of more than one dollar of tax money. In terms of the money cost of transferring a dollar's worth of well-being to the poor, money transfers are less costly than medical care. I f medical care is to be a preferred means of transferring well-being, the external benefits associated with medical care relative to those associated with money transfers must be sufficiently large to offset the difference in dollar cost.

An example may help to make this clear. A visit to the outpatient clinic of a public hospital in a large city typically costs 825 to produce. To a person considered in the poverty category, the clinic visit will be given free of charge. In general, of course, the poverty person would have been willing to pay something for the visit. Suppose he would have been willing to pay as much as 86 for the visit he received for free. The "value" of the visit to the poor person is 86. The cost to the taxpayers is 825. First, we can ask if the visit constitutes a worthwhile government activity. I f in the aggregate the nonpoor receive more than $19 worth of value from the visit, total subjective value (to



both the poor person receiving the visit and to the nonpoor) would exceed the cost. If this is the case, it is worth providing the visit regardless of considerations about the distribution of well-being.

If the value of the visit to the nonpoor is less than $19, providing the visit will lower aggregate subjective value in the society. Suppose, for example, that the nonpoor receive 810 in benefits from the clinic visit. The would pay $25 to receive $10 in benefits and thus would suffer a welfare loss of $15. The poor person would receive an increase in welfare of only $6. The only possible reason, then, for providing the visit is to redistribute well-being. The question to be considered in this context is whether any way can be found to transfer 86 worth of well-being to the poor at a cost of less than $15 in well-being to the nonpoor. The dollar cost of a monetary transfer would be only $6 ; thus a money transfer would be preferred to the clinic visit if the external cost associated with the money transfer were less than 89.

At first glance, it may be difficult to see why there would be any external cost associated with a money transfer. After all, if a poor person receives more money it seems unlikely that he would spend it in ways that would decrease the welfare of other people. Most likely he would spend it on food, clothing, housing, entertainment, and other items that make him feel better. Such expenditures would seem more likely to benefit others in sc, ciety than to do them harm. We must remember, however, that we are dealing with subjective feelings, and it may very well be that the nonpoor would feel worse off if tax dollars were used to provide unrestricted money payments to the poor: A person may believe that if 810 is taken from him and given to a poor person, it will be spent on liquor, gambling, or women. The thought that this hard-earned money is going to support the vices of some shiftless person (who may well be black) might cause a loss in his well-being considerably larger than is respresented by the $10 decrease in his wealth.

If money transfers give rise to significant loss of well-being among the nonpoor, transfers in kind (that is, in goods or services rather than money) that decrease aggregate subjective welfare may still be preferred to money transfers as a means of redistributing well-being. To determine which is superior, one should compare the loss in subjective value of the nonpoor (cost) per dollar of subjective value transferred to the poor (benefit) for the two alternatives. In such instances, of course, the costs to the nonpoor will exceed the benefits received by the poor.

Should Poverty Health Efforts be Increased

Given the extent to which various federal, state, and local programs have made medical care services available to the poor, and given the limited money incomes of poverty groups, the dollar value that the poor would attach to further increases in medical services seems likely to be only a small fraction of the cost of providing them. Thus, the cost of such additional services will exceed aggregate subjective value unless they create substantial benefits to the nonpoor.

But, for a number of reasons the benefits to the nonpoor seem likely to be relatively small. First, since health services are generally available to the poor for all serious

Policy Sciences 1 ('1970), 49-72

70 Vincent Taylor

illnesses, additional services will not be satisfying the feeling of obligation of the nonpoor to provide the necessities of life to all members of society. Second, the "charity value" of additional health programs seems likely to be small. Charity value derives from a sense of satisfaction that a person gets from having supported a worthy cause, but gratitude on the part of the recipient seems essential to obtaining satisfaction from charity. Far from being grateful, the poor are vociferously proclaiming their antagon- ism toward current programs. Additional government sponsored programs are not likely to be greeted with more enthusiasm. ~ third possible source of value to the nonpoor would be in reducing the potential for riot and revolution. But, additional health services appear likely to make, at most, a tangential contribution to this end. Therefore, on all three counts, the value to the nonpoor of additional poverty health efforts appears likely to be relatively small. Since the value to the poor is also small, the sum of the values to the poor and the nonpoor seems likely to be considerably less than the cost of such efforts.

Additional poverty health programs do not appear to be worth undertaking as a means of increasing the aggregate supply of well-being in the society. They would also represent a costly means of redistributing well-being and would be justified for this purpose only if alternative means, including money transfers, are more costly in terms of aggregate loss in subjective value.

Responding to the Preferences of the Poor

Although major new poverty health efforts may not be desirable, there are substantial programs already in existence. How responsive should the content of these programs be to the desires and wants of the poor ? The preferences of the poor enter directly in calculating the subjective value of a program; thus they obviously must be given some weight. I t has been argued previously, however, that the preferences of the nonpoor ought to be given the most weight. Under present circumstances, this view does not lead to ignoring the preferences of the poor.

Although nonpoor support for poverty programs used to derive primarily from a sense of moral obligation (and thus it was important that the programs provided "necessities" and not "luxuries"), the present hostility of the poor, especially the nonwhite poor,~toward the rest of society has radically changed the motive behind poverty efforts. The nonpoor stand to gain direct, tangible benefits if poverty programs can reduce this hostility. The avoidance of potential conflict with the poor is, thus, a major value that the nonpoor attach to poverty health efforts. If these efforts are to be successful, they must be responsive to the desires of the poor. Also, as noted previously, the hostility of the poor has sharply lowered the potential benefits of designing programs to conform to middle-class concepts of "good charity"--since gratitude is unlikely to be forthcoming. Given these circumstances, shaping programs to the wants of the poor seems entirely consistent with attaching substantial weight to the concerns of the nonpoor.

In terms of program content, responding to the desires of the poor will probably lead to downgrading preventive care and upgrading the convenience and pleasantness



of acute care. The poor will gladly give up routine chest X-rays in order to reduce waiting times (which often exceed several hours) at public clinics. Prenatal and well- baby care may well be sacrificed to obtain more cosmetic surgery. Such changes in program content are not likely to lead to an improvement in health indices, but this should not cause undue concern. As pointed out earlier, health is only one facet of enjoyment in life, and people often sacrifice some health for other pleasures (over- eating, smoking, fast driving, skiing, etc.). The poor as well as the nonpoor are entitled to such choices. Further, as was also pointed out earlier, there are reasons for doubting the effectiveness of increased medical care in improving health; thus health levels may not differ all that much under the "best" health program and the one chosen by the recipients. In any event, if the reasoning presented here is correct, permitting some sacrifice in health will produce benefits to both the poor and nonpoor that far exceed the costs.

Summary

Measuring the impact on human capital values is not the appropriate method of valuing government health activities. Government activities are worth what people would be willing to pay for them-- tha t is, they are worth the subjective dollar value people attach to them. Applying the concept of subjective value to government health activities leads to the following major conclusions:

1. Outside the poverty area, the government should generally restrict itself to infectious disease and pollution control programs and to encouragement of biomedical research.

2. Poverty health programs may be justified either as a means of increasing total subjective value in the society or of redistributing well-being toward the poor. In either case, the preferences of the nonpoor should receive substantial weight in program design.

3. Additional poverty health efforts appear unlikely to increase aggregate subjective value. They may be justified as redistributive measures, but only if there are substantial external costs associated with money transfers to the poor.

REFERENCES

1 Dublin, L. I., and A. J. Lotka, The Money Value of a Man. NewYork: Ronald Press, 1946. 2 Fein, R., Economics of Mental Illness. New York: Basic Books, 1958. 3 Weisbrod, B. A., Economies of Public Health. Philadelphia: Univ. of Pennsylvania Press,

1961. 4 Klarman, H. E., "Syphilis Control Programs," in R. Dorfman, ed., Measuring Benefits of

Government Investments, pp. 367-410. Studies of Government Finance. The Brookings Institution, April 1965.

5 U.S. Department of Health, Education, and Welfare, Office of the Assistant Secretary for Program Coordination, "Disease Control Programs--Selected Disease Control Pro- grams," Program Analysis, September 1966, No. 1966-5.

6 Rice, D. P., Estimating the Cost of Illness, Health Economics Series Number 6, Public Health Service Publication No. 947-6. Washington, D.C., May 1966.

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7 Mushkin, S. J., "Health as an Investment," Journal of Political Economy, 70 (Part 2, Supp., October 1962), 129-157.

8 Wiseman, J., "Cost-Benefit Analysis and Health Service Policy," Scottish Journal of Political Economy, 10 (February 1963), 128-145.

9 Feldman, P., Benefits and the Role of Government in a ,~larket Economy. Institute for Defense Analyses, Washington, D.C., 8 March 1968 (mimeographed).

10 Schelling, T. C., "The Life You Save May Be Your Own." Proceedings of the Second Conference on Government Expenditures, Brookings Institution, Washington, D:C. (15- 16 September), 1966, pp. 127-176.

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18 U.S. Department of Health, Education, and Welfare, Office of the Assistant Secretary (Planning and Evaluation), "Delivery of Health Services for the Poor - -Human Invest- ment Programs," Program Analysis, No. 1967-12, December 1967.


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