Mortality Risk, Insurance, and the Value of Life*

Public health insurance and public annuity programs account for half of federal spending, and have traditionally been viewed as unconnected. We develop an economic framework for valuing improvements in health and apply it to exploring the relationship between annuity programs and the value of life. Incorporating incomplete annuitization into the conventional economic theory of life-extension generates several novel findings. First, public annuity programs have boosted the demand for lifeextension. For instance, US Social Security adds $150 billion (or 12 percent) to the value of a 1 percent decline in mortality. Second, in contrast to the conventional theory, a given mortality improvement may be worth more, not less, to patients facing shorter lives. Holding income and wealth constant, the value of statistical life (VSL) for a 50-year-old with 15 years of remaining life expectancy is $1 million greater than it is for a 50-year-old with 35 years of life expectancy. Thus, existing economic analysis may be undervaluing treatment of severe illness relative to mild ones. This result also reconciles an empirical puzzle with the economic approach to valuing life, because consumers often report a preference for extending life among those with the bleakest survival prospects. Finally, our framework implies that treatments may be worth more than prevention, all else equal. For instance, we calculate that treating a chronic condition such as cancer is worth 50 to 100 percent more than achieving the same outcome through prevention. * We are grateful to Dan Bernhardt, Tatyana Deryugina, Sonia Jaffe, Nolan Miller, Alex Muermann, George Pennacchi, Mark Shepard, Dan Silverman, George Zanjani, and participants at the AEA/ARIA meeting and the NBER Insurance Program Meeting for helpful comments. Bauer acknowledges financial support from the Society of Actuaries. Lakdawalla discloses that he is the Chief Scientific Officer of Precision Health Economics (PHE) and an investor in its parent company, Precision Medicine Group. PHE provides research and consulting services to firms in the life sciences and health insurance industries.