«THE ECONOMIC IMPACT AND COST OF HEARING LOSS IN AUSTRALIA A report by Access Economics Pty Ltd February 2006 Listen Hear! The economic impact and ...»
The 15.6% loading of on-costs comprises superannuation, workers compensation, payroll and Fringe Benefits Taxation allowances (ABS 2004a). Loadings for capital (3.6%) and administrative (16.3%) overheads are based on the relative shares of capital expenditure and administration costs to other areas of recurrent spending in Australia’s formal health sector (AIHW 2004a, 2005). When all these loadings are added, the hourly cost of employing a carer in the formal sector to replace an informal carer is $25.01 in 2005 (Table 5-11).
Based on this rate, the total value of family and other informal carer provided to Australians with hearing loss is $3.17 billion in 2005. It is acknowledged that this may well be an under-estimation of the true cost of caring for a child or spouse with significant hearing loss.
Two data sources were available to ascertain the number of people with hearing loss of working age on employment support benefits, the Disability Services Census (2003) and direct data sources available through Centrelink. According to the Disability Census, in 2003, 2,414 people with hearing loss used an open employment service in Australia (Table 5-12). This survey focused on users of Commonwealth funded disability service programs delivered by the States; 84% of these services were employment services.
TABLE 5-12: EMPLOYMENT SUPPORT SERVICES USED BY PEOPLE WITH HEARING LOSS
For people who reported having a hearing loss and who were receiving a Centrelink work related benefit, the Disability Support Pension was the main source of income (74%) (Table 5-13).
From Section 5.1.1, an estimated 158,876 people are not working due to hearing loss in 2005. Table 5-13 suggests that, of those who were not in paid work (1,620 of the 2,414), 1308 (81%) received welfare payments (DSP, Newstart and ‘other pension/benefit) and 312 did not. Thus, 81% of 158,876 suggests an estimated 128,278 people who received welfare payments due to hearing loss in 2005. Average
benefits are calculated using a weighted average of those in Table 5-14 below ($397.49 per fortnight), which reflect the main welfare payments to people with hearing loss.
The welfare payments calculated immediately above are, like taxation revenue losses, not themselves economic costs, but rather a financial transfer from taxpayers to the income support recipients. The real resource cost of these transfer payments is only the deadweight loss caused by the taxation needed to finance the welfare payments.
As previously, the deadweight loss is assumed to be 28.75 cents for each dollar of taxation required. In this case, a deadweight loss of $381.9 million per annum will be incurred to finance additional income support payments to people with hearing loss.
Finally, the revenue required to finance the Commonwealth share (46.7%) of the total health expenditure including hearing aids and cochlear implants ($674 million) will also incur a DWL, totalling $90.5 million.
Adding the health, welfare and taxation DWLs, the total of deadweight losses for people with hearing loss sum to $1.048 billion.
5.6 SUMMARY OF FINANCIAL COSTS The total real financial costs of hearing loss are thus estimated as $11.75 billion in 2005, summarised in Table 5-15 and Figure 5-3.
Lost earnings to individuals with hearing loss is the greatest cost, accounting for well over half (56.7%) of all financial costs ($6.7 billion).
The cost of carers is second at 27.0% of the total ($3.2 billion).
The deadweight costs from losing taxation revenue and having to find alternative sources of taxation to fund increased welfare and health services, cost $1.0 billion in 2005 (8.9% of total costs).
Direct health costs, including hearing aids and cochlear implants) account for only 5.7% of costs ($674 million).
Education and support services and various non-health communication aids comprise the remaining 1.6% ($191 million).
Annual costs per person with hearing loss are $3,314, $578 for every Australian and 1.4% of GDP in total.
6. BURDEN OF DISEASE To those experiencing hearing loss, less tangible costs such as loss of quality of life, loss of leisure, physical pain and disability are often as or more important than the health system costs or other financial losses. This chapter measures the burden of suffering and premature death from hearing loss.
6.1 VALUING LIFE AND HEALTH Since Schelling’s (1968) discussion of the economics of life saving, the economic literature has properly focused on willingness to pay (willingness to accept) measures of mortality and morbidity risk. Using evidence of market trade-offs between risk and money, including numerous labour market and other studies (such as installing smoke detectors, wearing seatbelts or bike helmets etc), economists have developed estimates of the value of a ‘statistical’ life (VSL).
The willingness to pay approach estimates the value of life in terms of the amounts that individuals are prepared to pay to reduce risks to their lives. It uses stated or revealed preferences to ascertain the value people place on reducing risk to life and reflects the value of intangible elements such as quality of life, health and leisure. While it overcomes the theoretical difficulties of the human capital approach, it involves more empirical difficulties in measurement (BTE, 2000, pp20-21).
Viscusi and Aldy (2002) summarise the extensive literature in this field, most of which has used econometric analysis to value mortality risk and the ‘hedonic wage’ by estimating compensating differentials for on-the-job risk exposure in labour markets, in other words, determining what dollar amount would be accepted by an individual to induce him/her to increase the possibility of death or morbidity by x%. They find the VSL ranges between US$4 million and US$9 million with a median of US$7 million (in year 2000 US dollars), similar but marginally higher than the VSL derived from US product and housing markets, and also marginally higher than non-US studies, although all in the same order of magnitude. They also review a parallel literature on the implicit value of the risk of non-fatal injuries.
A particular life may be regarded as priceless, yet relatively low implicit values may be assigned to life because of the distinction between identified and anonymous (or ‘statistical’) lives. When a ‘value of life’ estimate is derived, it is not any particular person’s life that is valued, but that of an unknown or statistical individual (Bureau of Transport and Regional Economics, 2002, p19).
Weaknesses in this approach, as with human capital, are that there can be substantial variation between individuals. Extraneous influences in labour markets such as imperfect information, income/wealth or power asymmetries can cause difficulty in correctly perceiving the risk or in negotiating an acceptably higher wage.
Viscusi and Aldy (2002) include some Australian studies in their meta-analysis, notably Kniesner and Leeth (1991) of the Australian Bureau of Statistics (ABS) with VSL of US2000 $4.2 million and Miller et al (1997) of the National Occupational Health and
Safety Commission (NOHSC) with quite a high VSL of US2000$11.3m-19.1 million (Viscusi and Aldy, 2002, Table 4, pp92-93). Since there are relatively few Australian studies, there is also the issue of converting foreign (US) data to Australian dollars using either exchange rates or purchasing power parity and choosing a period.
Access Economics (2003b) presents outcomes of studies from Yale University (Nordhaus, 1999) – where VSL is estimated as $US2.66m; University of Chicago (Murphy and Topel, 1999) – US$5m; Cutler and Richardson (1998) – who model a common range from US$3m to US$7m, noting a literature range of $US0.6m to $US13.5m per fatality prevented (1998 US dollars). These eminent researchers apply discount rates of 0% and 3% (favouring 3%) to the common range to derive an equivalent of $US 75,000 to $US 150,000 for a year of life gained.
DALYS AND QALYS6.1.1
In an attempt to overcome some of the issues in relation to placing a dollar value on a human life, in the last decade an alternative approach to valuing human life has been derived. The approach is non-financial, where pain, suffering and premature mortality are measured in terms of Disability Adjusted Life Years (DALYs), with 0 representing a year of perfect health and 1 representing death (the converse of a QALY or “qualityadjusted life year” where 1 represents perfect health). This approach was developed by the World Health Organization, the World Bank and Harvard University and provides a comprehensive assessment of mortality and disability from diseases, injuries and risk factors in 1990, projected to 2020 (Murray and Lopez, 1996). Methods and data sources are detailed further in Murray et al (2001).
The DALY approach has been adopted and applied in Australia by the Australian Institute for Health and Welfare (AIHW) with a separate comprehensive application in Victoria. Mathers et al (1999) from the AIHW estimate the burden of disease and injury in 1996, including separate identification of premature mortality (YLL) and morbidity (YLD) components. In any year, the disability weight of a disease (for example, 0.18 for a broken wrist) reflects a relative health state. In this example, 0.18 would represent losing 18% of a year of healthy life because of the inflicted injury.
The DALY approach has been successful in avoiding the subjectivity of individual valuation and is capable of overcoming the problem of comparability between individuals and between nations, although nations have subsequently adopted variations in weighting systems. For example, in some countries DALYs are ageweighted for older people although in Australia the minority approach is adopted – valuing a DALY equally for people of all ages.
The main problem with the DALY approach is that it is not financial and is thus not directly comparable with most other cost measures. In public policy making, therefore, there is always the temptation to re-apply a financial measure conversion to ascertain the cost of an injury or fatality or the value of a preventive health intervention. Such financial conversions tend to utilise “willingness to pay” or risk-based labour market studies described above.
The Department of Health and Ageing (based on work by Applied Economics) adopted a very conservative approach to this issue, placing the value of a human life year at around A$60,000 per annum, which is lower than most international lower bounds on the estimate.
“In order to convert DALYs into economic benefits, a dollar value per DALY is required. In this study, we follow the standard approach in the economics literature and derive the value of a healthy year from the value of life. For example, if the estimated value of life is A$2 million, the average loss of healthy life is 40 years, and the discount rate is 5 per cent per annum, the value of a healthy year would be $118,000. 18 Tolley, Kenkel and Fabian (1994) review the literature on valuing life and life years and conclude that a range of US$70,000 to US$175,000 per life year is reasonable. In a major study of the value of health of the US population, Cutler and Richardson (1997) adopt an average value of US$100,000 in 1990 dollars for a healthy year.
Although there is an extensive international literature on the value of life (Viscusi, 1993), there is little Australian research on this subject. As the Bureau of Transport Economics (BTE) (in BTE, 2000) notes, international research using willingness to pay values usually places the value of life at somewhere between A$1.8 and A$4.3 million. On the other hand, values of life that reflect the present value of output lost (the human capital approach) are usually under $1 million.
The BTE (2000) adopts estimates of $1 million to $1.4 million per fatality, reflecting a 7 per cent and 4 per cent discount rate respectively. The higher figure of $1.4 million is made up of loss of workforce productivity of $540,000, loss of household productivity of $500,000 and loss of quality of life of $319,000. This is an unusual approach that combines human capital and willingness to pay concepts and adds household output to workforce output.
For this study, a value of $1 million and an equivalent value of $60,000 for a healthy year are assumed.19 In other words, the cost of a DALY is $60,000. This represents a conservative valuation of the estimated willingness to pay values for human life that are used most often in similar studies. 20” (DHA, 2003, pp11-12).” As the citation concludes, the estimate of $60,000 per DALY is very low. The Viscusi (1993) meta-analysis referred to reviewed 24 studies with values of a human life ranging between $US 0.5 million and $US 16m, all in pre-1993 US dollars. Even the lowest of these converted to 2003 Australian dollars at current exchange rates, exceeds the estimate adopted ($1m) by nearly 25%. The BTE study tends to disregard the literature at the higher end and also adopts a range (A$1-$1.4m) below the lower bound of the international range that it identifies (A$1.8-$4.3m).
19 The equivalent value of $60,000 assumes, in broad terms, 40 years of lost life and a discount rate of 5 per cent. [Access Economics comment: More accurately the figure should be $58,278.] 20 In addition to the cited references in the text, see for example Murphy and Topel’s study (1999) on the economic value of medical research. [Access Economics comment. Identical reference to our Murphy and Topel (1999).]
The rationale for adopting these very low estimates is not provided explicitly. Certainly it is in the interests of fiscal restraint to present as low an estimate as possible.