An economic evaluation of the war on cancer

Eric Sun, Anupam B Jena, Tomas Philipson , Darius Lakdawalla, Carolina Reyes, Dana Goldman 11 January 2010

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Current efforts at healthcare reform in the US have forced policymakers and stakeholders alike to justify healthcare dollars. As evidence builds on the costs and benefits of specific medical treatments, companies must increasingly demonstrate that the therapies they produce indeed generate health benefits in excess of their (often large) costs. Nowhere is this more true than in cancer treatment – an area where new therapies that the cost of tens of thousands of dollars can yield life-expectancy gains on the order of several weeks.

Cancer treatment: Benefits and costs

Cancer treatment has made tremendous progress. From 1975 to 2000 alone, the five-year survival rate for individuals diagnosed with cancer increased from 50% to 66% (American Cancer Society 2009). Improvements in life expectancy have been particularly dramatic for certain cancers (e.g. breast cancer) while less impressive for others (e.g. lung and pancreatic cancer). These gains in life-expectancy have come at significant costs, however. Between 1991 and 2002, the cost of treatment during the first twelve months of lung cancer and colorectal cancer increased by $7,319 and $5,345, respectively (Warren et al. 2008). Indeed, in some instances, payers have denied treatment on the grounds that the survival benefits are not worth the costs.

Discussions about the costs and benefits in cancer care are complicated by the fact that cancer screening grew tremendously in the last several decades. As such screening improves survival rates, it is difficult to separate the impact of better cancer treatments from better screening.

In fact, critics of cancer research and development argue that this has mainly produced treatments whose expense outweighs their clinical benefits. They assert that cancer survival gains have been primarily driven by technologies and public health efforts that promote earlier detection of the disease (Faguet 2005 and Epstein 2005). In response to these criticisms, others have suggested that cancer therapies have indeed been cost-effective (Lichtenberg 2004) and that both improved treatment and detection have been responsible for cancer survival gains (Cutler 2008).

We evaluated the merits of both of these arguments in an economic evaluation of the recent war on cancer (Sun et al. 2009). As we discuss below, our analysis yields several important findings about the costs of cancer R&D, the costs of subsequent medical therapies, and the separate roles that better screening and better treatments have played in the war on cancer.

The individual value of cancer survival gains has been large

Using cancer registry data from the National Cancer Institute, we estimated life expectancy for cancer patients between 1988 and 2000. We calculated the value of life expectancy gains from 1988 onwards using a willingness to pay model (Becker et al. 2006). According to this model, the dollar value to individuals of better cancer survival (say, in 1998) is simply the amount they would be willing to pay to avoid the less favourable cancer prospects of 1988 (the baseline year). Overall, our results suggest that the value of cancer gains has been tremendous (Table 1). For example, for all cancers combined, we find that life expectancy increased by 3.9 years between 1988 and 2000, and that this increase was worth $322,000 (slightly less than half of expected lifetime income). Table 1 also shows the estimated increase in lifetime costs of cancer care by year of diagnosis, as well as lifetime consumer surplus, which is simply the lifetime value minus the lifetime costs of cancer care. Consumer surplus is positive for all cohorts, implying that the dollar value of improvements in cancer survival have outpaced the increase in costs of cancer care.

Table 1. Value of cancer survival gains, 1988-2000

 

Year
Change in life expectancy
(years)
Lifetime willingness to pay
(USD thousands)
Increase in lifetime cost
(USD thousands)
Lifetime consumer surplus
(USD thousands)
0.4
65
34
31
1990
0.8
124
41
83
1991
1.3
187
44
143
1992
1.7
215
44
170
1993
1.8
217
44
172
1994
2.2
246
44
202
1995
2.5
259
43
216
1996
2.7
274
41
232
1997
3.1
300
41
259
1998
3.4
308
40
268
1999
3.6
312
38
273
2000
3.9
322
37
285
Notes: All dollar values are in 2006 dollars, discounted to 1988 at a 3% rate. Changes in life expectancy are compared to 1988 levels.

 

Better treatments drive increased cancer survival

At a first glance, our analysis suggests that cancer treatments have been cost-effective. However, the total value of survival gains shown in Table 1 reflects advances in treatment and detection. Analogous to the well-known Blinder-Oaxaca decomposition in labour economics (Oaxaca 1973 and Blinder 1973), we can decompose the total value of survival gains into the component driven by changes in detection probabilities, holding survival constant, and the remaining component driven by changes in survival profiles alone. Our results suggest that from 1988 onwards, greater than 90% of the value of survival gains has been driven by treatment advances, as opposed to improvements in detection.

Value of survival gains to patients vastly exceeds the R&D costs

Building on the results shown in Table 1, we calculated the social value of cancer research and development by multiplying the lifetime consumer surplus shown for each cohort by the number of incident cases and aggregating across cohorts (Table 2). In all, we estimated a consumer surplus of $1.9 trillion. Thus, even when increases in cancer costs are taken into account, cancer survival gains were of tremendous value to patients. By comparison, we estimated total cancer R&D between 1971 and 2000 to be at most $300 billion (arising from both public and private investment), suggesting that the economic returns to cancer R&D have been enormous.

Patients, not firms, have been the primary beneficiaries of cancer R&D

Table 2 also shows our estimates of producer surplus from cancer innovations. The ranges for producer surplus represent different means by which costs of care are translated into profits. We assume that profit margins range from the high margins (80%) enjoyed by producers of patented pharmaceuticals (Caves et al. 1991, Berndt and Griliches 1996, Grabowski and Vernon 1992), to the lower margins (25%) enjoyed by hospitals (Gaynor and Vogt 2003). Since healthcare spending on cancer is, of course, a combination of drug therapies and physician and hospital compensation, actual profit margins are likely to fall somewhere between the two bounds we use. Even with the most generous assumptions on producer surpluses, Table 2 illustrates that while producers have benefited from increases in cancer surplus, these gains have been small relative to the gains experienced by cancer patients.

Table 2. Aggregate consumer and producer surpluses for all cancers combined, 1988-2000

 

Year
Cancer incidence (thousands)
Aggregate consumer surplus (USD billions)
Aggregate producer surplus (USD billions)
1989
669
21
7-27
1990
702
58
8-33
1991
739
106
9-35
1992
773
132
9-35
1993
757
130
9-36
1994
765
154
9-35
1995
780
169
9-34
1996
797
186
8-33
1997
835
217
8-32
1998
867
233
8-32
1999
897
245
8-31
2000
925
264
7-30
Total
 
1,920
98-393
Notes: All dollar values are in 2006 US dollars, discounted to 1988 at a 3% rate.

 

Conclusions

From 1988 onwards, much of the gain in cancer survival came from direct therapies rather than improvements in screening. Given the tremendous improvements in cancer survival, our analysis suggests that, on the whole, investments in cancer R&D have been quite worthwhile – producing a value to society far in excess of costs. The vast majority of this value has gone to patients, not firms.

Despite our findings, an important caveat remains. Our analysis focuses on the average return to cancer research, which may be very different from the marginal return to cancer R&D. While the war on cancer appears, on average, to have paid dividends, it may be that cancer R&D spending is too large or too small on the margin. Future research should be directed at clarifying whether the marginal benefits of R&D outweigh its costs in the case of cancer. The same should be done for other diseases.

References

American Cancer Society (2009), “Cancer Facts and Figures 2009”, Atlanta: American Cancer Society.

Becker, G.S., T.J. Philipson, and R.R. Soares (2006), “The Quantity and Quality of Life and the Evolution of World Inequality”, American Economic Review, 95(1): p. 277-91.

Berndt, E., I. Cockburn, and Z. Griliches (1996) “Pharmaceutical Innovations and Market Dynamics: Tracking Effects on Price Indexes for Antidepressant Drugs”, Brookings Papers on Economic Activity, Microeconomics, p. 133-199.

Blinder, A.S. (1973), “Wage Discrimination: Reduced Form and Structural Estimates”, Journal of Human Resources, 1973. 8(4): p. 436-55.

Caves, R.E., et al (1991) “Patent Expiration, Entry, and Competition in the US Pharmaceutical Industry”, Brookings Papers on Economic Activity, Microeconomics. p. 1-66.

Cutler, D.M. (2008) “Are We Finally Winning the War on Cancer?”, Journal of Economic Perspectives, 22(4): p. 3-26.

Epstein, S.S. (2005) Cancer-Gate: How to Win the Losing War on Cancer, Amityville, NY: Baywood.

Faguet, G.B. (2005), The War on Cancer: An Anatomy of a Failure, a Blueprint for the Future. New York: Springer.

Gaynor, M. and W.B. Vogt (2003), “Competition among HospitalsRand Journal of Economics, 34(4): p. 764-785.

Grabowski, H.G. and J.M. Vernon (1992), “Brand Loyalty, Entry, and Price Competition in Pharmaceuticals after the 1984 Drug ActJournal of Law and Economics, 32(2): p. 331-350.

Lichtenberg, F. (2004) “The Expanding Pharmaceutical Arsenal in the War on Cancer”, NBER Working Paper 10328.

Oaxaca, R. (1973), “Male-Female Wage Differentials in Urban Labor Markets”, International Economic Review, 14(3): p. 693-709.

Sun, Eric C., Anupam B. Jena, Darius N. Lakdawalla, Carolina M. Reyes, Tomas J. Philipson, Dana P. Goldman (2009). “An Economic Evaluation of the War on Cancer”, NBER Working Paper 15574.

Warren, J.L., et al (2008) “Evaluation of trends in the cost of initial cancer treatment”, J Natl Cancer Inst, 100(12): p. 888-97.

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Topics:  Health economics

Tags:  R&D, Cancer, healthcare

Chair in Health Economics and Founding Director of the Bing Center for Health Economics at RAND. Adjunct Professor of Health Services and Radiology at UCLA

Massachusetts General Hospital and Harvard Medical School

Director of Research at the Leonard Schaeffer Center for Health Policy and Economics at the University of Southern California

Professor in the Irving B. Harris School of Public Policy at the University of Chicago and faculty member in the Department of Economics and the Law School

Senior Health Economist at Genentech, Inc. and Adjunct Assistant Clinical Professor in the Department of Clinical Pharmacy at the University of California, San Francisco

MD/PhD student in the Graduate School of Business and the Pritzker School of Medicine at the University of Chicago