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date: 14 November 2018

The Economics of End-of-Life Spending

Summary and Keywords

End-of-life spending is commonly defined as all health costs in the 12 months before death. Typically, the costs represent about 10% of all health expenses in many countries, and there is a large debate about the effectiveness of the spending and whether it should be increased or decreased. Assuming that health spending is effective in improving health, and using a wide definition of benefits from end-of-life spending, several economists have argued for increased spending in the last years of life. Others remain skeptical about the effectiveness of such spending based on both experimental evidence and the observation that geographic within-country variations in spending are not correlated with variations in mortality.

Keywords: end-of-life costs, aging, demand for health, cost of dying, priority setting in health, return to health spending

Why Care About End-of-Life Spending?

There are at least three reasons to care about end-of-life costs. First, they are perceived to be a large and growing component of health spending. This perception shapes proposed policy reforms, which makes it important to ask whether it is accurate. Second, there is a debate about the optimal amount of end-of-life spending, including empirical discussions about the effects of end-of-life spending—whether there should be a threshold, and normative debates about priority-setting in end-of-life care. Some countries (the United Kingdom, for example) have special rules about the pharmaceuticals that can be used in end-of-life treatment. Last, there are disagreements about the importance of end-of-life costs when predicting future health spending. These disagreements lead to very different policy prescriptions regarding how much investment is needed to meet future demand for health services.

This article deals with all three reasons for examining end-of-life spending. First, it argues that end-of-life spending is not as large as commonly believed but is still interesting because a detailed examination of the pattern of end-of-life spending contains clues that have important policy implications for how to organize end-of-life care. The second part argues that the myth about cold-hearted economists who would like to cut end-of-life spending is only partially true. While some economists seem to favor cuts, there are also a surprisingly large number of economists who argue in favor of more health spending in the end-of-life phase. The argument in the last part of the article is that projections of future health costs are significantly lowered if end-of-life spending is separated from aging. However, if technological and political change and the cost of care are included, the effect is reduced.

End-of-Life Spending: How Much, on What, for Whom?

Some of the early, large-scale, empirical studies of health spending toward the end of life were conducted on Medicare patients in the United States (see Scitovsky, 1994, for a history of the early estimates). For instance, Lubitz and Prihoda (1984) estimated that, in 1978, 28% of Medicare spending in the United States was for patients in their last year of life. Hogan, Lunney, Gabel, and Lynn (2001) arrived at a higher estimate; they reported that 33% of all spending was for patients toward the end of their lives.

Although pioneering in their approach, and correct in their conclusion, the early studies were often misinterpreted in a way that exaggerated the role of end-of-life spending as a determinant of health spending in general. The studies were based on a subgroup of expenses for a subgroup of patients. Medicare collects information about the population 65 years old and older, and this age group has a larger share of dying people than the population as a whole. Ignoring this fact has created what Aldridge and Kelley (2015) called “the myth” about the high cost of end-of-life care. Using a larger population, a wider definition of health spending, and data from the Medical Expenditure Panel Survey (as well as other sources), they estimated that, in 2011, 13% of all health spending in the United States went to patients in the last year of their lives.

Studies from other countries based on the whole population also report lower end-of-life costs than the initial studies from the United States. For instance, Polder, Barendregt, and van Oers (2006) estimated that end-of-life spending represented 11% of all Dutch health costs. Häkkinen, Martikainen, Noro, Nihtilä, and Peltola (2008) included long-term care and many other cost categories, and they concluded that end-of-life spending represented 14% of all spending in Finland (for those older than 65). A study in Ontario, Canada, reported that end-of-life patients received 10% of all health spending (Tanuseputro et al., 2015). Finally, a large study by French et al. (2017) found that end-of-life spending in Denmark, England, France, Germany, Japan, the Netherlands, Taiwan, the United States, and the Canadian province of Quebec ranged between 8.5% and 11.2% of all health costs.

The studies’ results vary because, in addition to using different sample populations and different cost categories, the studies use different time periods for estimating end-of-life spending. The most common definition is to measure costs in the last 12 months before death. Some studies focus on the last six months, and some go back 24 months or more. Another approach is to examine the health spending for a year for all persons who died in that year. The last definition makes it easy to interpret end-of-life costs as a share of total health spending in a given year, but the disadvantage is that it does not use the same time period before death for all patients. On average, it includes expenses in the six months before death, but for some patients—those who died early in the year—it includes costs for a shorter time period, while those who die late in the year are included within a longer time period.

The diversity of definitions and approaches raises the question of how one should define end-of-life spending and how far back one should go. Studies have shown that health spending starts to increase several years before death (Seshamani & Gray, 2004). The problem is that health issues related to advanced age and those related to death are not easily separated. If by “end-of-life spending” one means only costs directly related to the cause of death, it may be a very short time period for some people and a longer time period for others. Given the practical difficulties of making this distinction, most studies have simply focused on a fixed time period before death regardless of whether the costs are related to the cause of death.

Patterns in End-of-Life Spending

Despite the differences in methods and conclusions, the studies present some consistent and interesting patterns. For instance, many studies have shown that end-of-life costs decline with age: Persons dying at age 80 typically have smaller healthcare costs prior to death than those dying at age 70 (see, for instance, Lubitz, Beebe, & Baker, 1995). One reason for this is that older people die from different diseases. Another reason is that older people may not be treated as aggressively because of their fragile health state, their age-related preferences, or the preferences of their substitute decision makers. Last, and more controversially, older patients may be given less-intense treatment even when they have the same disease and similar health as younger patients. The relative sizes of these causes is a topic for further research.

The size and pattern of end-of-life spending also contain clues about the factors that govern end-of-life spending. For instance, international comparisons of end-of-life spending on cancer patients in seven different countries suggest that some countries have more “hospital-centric” end-of-life care, while other countries focus more on hospice and home care. For instance, Bekelman and colleagues found that, in the United States, only 22% of the cancer patients died in hospital, while in Canada and Belgium more than 50% died in that setting (Bekelman et al., 2016). There are many possible reasons for this, ranging from cultural differences to financial incentives, but one key difference is that the U.S. system has special financial incentives that make it possible to go into hospice, while many other countries do not have the same reimbursement for end-of-life care outside of hospitals.

It has sometimes been suggested that the countries with a large share of hospital deaths could provide both better and less costly end-of-life care by expanding hospice capacity. The lesson from the United States suggests that, while hospice may improve the quality of care, neither hospice nor advance directives significantly change the overall costs (Emanuel & Emanuel, 1994; Klingler, Schmitten, & Marckmann, 2016).

What Is the Optimal Level of End-of-Life Spending?

An underlying question in the debate about end-of-life care is whether it attracts too much spending. The discussion has several distinct themes. First, the standard economic literature on optimal health investments over the life cycle emphasizes general considerations about marginal costs versus marginal benefits to determine optimal health spending, and it predicts that end-of-life spending should be low because the return to increasing health is lower in advanced age than for younger patients, who may return to work and go on to live many more years. A second and more recent strand in the literature presents a very different argument. The approach is still within the economic model of costs and benefits, but it widens the definition of benefits in a way that leads to the conclusion that high end-of-life spending is optimal. Last, a third strand of the literature relevant to determining optimal end-of-life spending focuses less on the question of demand. Instead, it takes an empirical approach, aiming to provide causal estimates of the return on end-of-life spending and to identify the threshold for when costs become so large they outweigh the benefits. The next section of this article considers what economic theory says and presents the three strands in more detail.

What Does Economic Theory Say About Optimal End-of-Life Spending?

A problem with estimates of end-of-life spending is that focusing on healthcare spending on those who die is like focusing on spending on lottery tickets by those who lose. The loss is only half the story. It is often not known in advance whether a patient will die, and the relevant decisions need to include the benefits for patients who gain longer lives because of a health intervention. This leads to the standard economic criterion for determining optimal spending: Spending should be increased as long as the expected marginal benefit is larger than the marginal cost.

To derive the optimal end-of-life spending from standard economic considerations, it is useful to distinguish between the perspective of the individual and a more utilitarian social perspective. From an individual’s self-interested perspective, there is good reason to spend a large share of your remaining wealth on treating a disease that threatens your life. Some end-of-life spending is governed by this perspective. Studies of out-of-pocket health spending show a significant increase toward the end of life. In the last five years before death, out-of-pocket health spending in the United States is estimated to be about $38,600 (Kelley et al., 2013), and in the last year before death it is $11,600 (Marshall, McGarry, & Skinner, 2010).

In addition to the out-of-pocket spending, a large share of the health spending in the United States, and more so in countries with a higher share of public finance, is governed by a different economic logic. The calculations that drive spending are not viewed from the perspective of a single individual, but as a trade-off between different types of spending on different individuals. In this perspective, more resources for end-of-life care means fewer resources for patients with chronic but not life-threatening illnesses. The individual perspective and the social perspective both use marginal net benefits as a criterion to determine optimal end-of-life spending, but they have different implications. Spending large sums when the chance of survival for a short time is very slim may sometimes be rational from an individual perspective, but it would not be classed as optimal from the social utilitarian perspective.

Standard theories of health spending in economics start from the individual economic perspective of comparing costs and benefits and extend the basic economic story to capture the special nature of health. For instance, Grossman’s (1972) model of the demand for health widens the consideration of costs and benefits by considering health as a good in itself, as well as something one might invest in—using time or money—to enjoy other goods. Taken to its logical conclusion, this means that the length of life itself is endogenously determined. In Grossman’s words (2017): “Biological factors associated with aging raise the price of health capital and cause individuals to substitute away from future health until death is ‘chosen’.”

Some economists have interpreted Grossman’s theory to be “inconsistent with increasing investment at the end of life” (Kohn & Patrick, 2008). “Inconsistent” may be too strong a term, since the demand for health services could be very large even if the optimal level of health goes down. As age increases, it costs more to maintain health, and increasing health spending as age increases is not inconsistent with Grossman’s prediction that the optimal level of health will go down as age increases. The extent to which it is possible within the model to have increasing investments would depend on the assumptions made about how fast health declines at various ages. Still, the general impression of Grossman’s model is that one would not expect it to be optimal to have very large health spending toward the end of life.

What to Include as a Benefit?

Central to active research in end-of-life care have been arguments related to what kind of benefits one should include in a cost−benefit evaluation of end-of-life spending. In contrast to Grossman’s argument, this literature often argues in favor of more end-of-life spending by widening the concept of benefits.

In a series of papers, several economists have argued that the traditional health economic perspective, with its focus on quality-adjusted life-years, fails to include several important benefits of end-of-life spending (Murphy & Topel, 2006; Philipson, Becker, Goldman, & Murphy, 2010). For instance, in some cases, extending life may give patients time enough to experience innovations that may further extend their lives. A very expensive treatment for HIV that gives the patient only a couple of months may be profitable if we also take into account the probability that during the two months a new intervention may appear that could further extend the life of the patient. A second argument concerns the value of hope. Even if it turns out that the intervention did not help, the hope that it engenders might give the patient an increased quality of life. Third, the benefits that family and friends experience should also be included, not just the benefits enjoyed by the patient. A fourth argument is that the marginal utility of extending life is very different from the (declining) marginal utility of most goods (Hall & Jones, 2007). Altogether, the arguments indicate that the optimal level of end-of-life spending is significantly higher than we find in the traditional economic framework. For instance, Philipson et al. (2010) argue that the value of hope for HIV patients was four times as large as traditional estimates of the treatment effect. However, the main message is not the precise number, but the conceptual argument that a narrow approach to measuring benefits fails to capture all relevant benefits from an extension of life.

Estimating the Return on End-of-Life Spending

In addition to the theoretical arguments related to models of costs against benefits, the economic literature on end-of-life costs has also sought to estimate the empirical size of the costs and benefits: To what extent does increased spending on high-risk patients translate to better health?

Some economists are very skeptical of the claim that health spending improves health. Hanson (2002, 2008) argued that much health spending, and end-of-life spending in particular, is more about signaling that we care about others than an effective investment in improving the health or longevity of the patients involved. This is supported by the results from the RAND Health Insurance Experiment, which did not show any clear improvements in health after increased spending (Newhouse & the Insurance Experiment Group, 1993).

The RAND study focused on the return on spending on health in general. This is different from the return on specific types of spending related to life-threatening diseases. As an illustration, consider medical interventions after a heart attack. To what extent does an increase in spending for the patients result in improved outcomes? Comparing the outcomes between rich and poor hospitals does not isolate the causal effect because the patients who enter rich hospitals are not the same type of patients who end up in poor hospitals. The difference in outcome may be due to the background characteristics and not the differences in the treatments provided and the associated costs.

The general problem is that it is very difficult to isolate the causal effect of health spending toward the end of life from other factors. The studies that do so can be divided into two main categories. First, there are studies that use large-scale variations in spending patterns and mortality over time or across geographic units to estimate the effect of increased health spending for patients who are at risk of dying (Skinner, Fisher, & Wennberg, 2005). The main conclusion from this literature is that, in the United States, geographic variations in end-of-life spending were not associated with differences in mortality (Fisher et al., 2003; Skinner & Wennberg, 1998).

The second type of studies reach the opposite conclusion. These studies exploit the existence of natural experiments to estimate the effect of very specific interventions. For instance, Doyle (2011) argued that one could compare the outcomes for patients in rich and poor hospitals for a subgroup of patients who were more randomly allocated between hospitals—such as tourists who suffered heart attacks. In this study, patients who ended up in rich hospitals had significantly lower mortality than patients in poorer hospitals. The same pattern was found in related studies for other types of interventions (Almond, Doyle, Kowalski, & Williams, 2010; Doyle, 2011).

The Threshold

The optimal level of end-of-life spending requires weighing costs and benefits using the correct empirical estimates of the effect of the spending and an appropriately wide definition of costs and benefits. However, even if the benefits are larger than the costs in an accounting sense, we still have to determine how much we want to spend on end-of-life care compared to other goods we might have. There is a large economic literature on the value of life, and the related value of extending life by one year (see the article “Valuation of Health Risks”). The purpose of this section is not to repeat the arguments, but to explore how they have been applied to end-of-life care.

Some countries (the United Kingdom, for example) have a system of priority-setting that uses an explicit threshold value for when to approve interventions that increase health-related quality of life and longevity. Other countries, like the United States, have rejected this approach. Economic constraints mean that they still have to prioritize, but it is done without an explicit threshold and without using the approach of measuring gains in quality-adjusted life-years. The different approaches have implications for end-of-life care. For instance, in the United Kingdom, interventions that costs less than £30,000 for each quality-adjusted life-year gained are usually approved, but those that cost more are usually not reimbursed by the public authorities. However, the U.K. system has an exception for end-of-life treatments. If the intervention under consideration is for patients with a short life expectancy, is relevant for a small patient group, and extends life by more than three months, then the limit of £30,000 per quality-adjusted life-year can be exceeded (Collins & Latimer, 2013). In addition, the United Kingdom has implemented a special Cancer Fund that finances new cancer pharmaceuticals (Linley & Hughes, 2013). For some people, the existence of special rules for some treatments goes against the economic logic of maximizing gains independent of the label of the disease and the type of patients involved. At the same time, the economic logic is to include the preferences of the population as inputs. This has led to a debate about whether end-of-life treatment and life extensions are valued more by the population than other interventions. The conclusion so far seems to be that end-of-life treatments are not valued more than, for example, efforts to help the chronically ill (Gyrd-Hansen, 2018, but see also Fischer, Telser, & Zweifel, 2018).

Economic discussions about a threshold for health spending have turned from studies of willingness to pay to estimating the opportunity costs of spending decisions (McCabe, Claxton, & Culyer, 2008). The starting point is simple, but the conclusion is in stark contrast to existing policy. Assume there are studies of the willingness to pay for improvements in health quality and increased life expectancy, and the studies indicate a threshold for how much society should be willing to pay for one quality-adjusted life-year. Based on this threshold, an intervention can be approved because the costs per quality-adjusted life-year are below that threshold. The problem is, if the budget is fixed, approval of the new intervention means that spending for some other health service must be reduced. If the original threshold is high, the result may be a situation where the new intervention pushes out something else that has a higher net benefit. To avoid this, the rule should be to approve a new intervention only if its value is higher than the intervention it would displace. With this approach, the threshold should be set equal to the marginal benefit of the displaced service. Studies based on the marginal benefit of health spending in the United Kingdom have suggested that the correct threshold using this approach would be around £13,000 per quality-adjusted life-year, which is significantly lower than the current threshold of £30,000 (Claxton et al., 2015).

End-of-Life Care and Predictions of Future Health Costs

Historically, projections of future health costs have been based on a simple multiplication of the number of people in different age groups and the current average health costs of individuals in the age group (Polder, Bonneux, Meerding, & van Der Maas, 2002; Strunk, Ginsburg, & Banker, 2006). This often leads to predictions of large future health costs due to the increase in the number of elderly, and because, on average, the elderly have larger health costs than the young. As an illustration, and using actual data on hospital expenses from Norway, the method shows that that, in order to maintain current standards of health care, health budgets would have to grow by 250% from 2010 to 2100 (Figure 1).

The Economics of End-of-Life SpendingClick to view larger

Figure 1. Projections of future hospital spending from 2010 to 2100 using three different methods.

A key problem with the naive version of the standard approach is the assumption that future 70-year-olds will have the same health costs as today’s 70-year-olds. As life expectancy increases, relatively fewer individuals will die in their seventies. If a major component of health spending occurs in the last year of life, and if more people live longer, the average cost of future 70-year-olds will go down, since relatively fewer will incur end-of-life costs in their seventies. If one makes the distinction between costs related to age and costs related to end of life, projections of future health costs are reduced to 217% because end-of-life costs are simply shifted up to an older age group and are reduced in the younger group.

The difference between the naive projection and the end-of-life approach depends on the degree to which health spending is related to age itself rather than end-of-life costs. There is a large and lively debate about this in the literature on health economics (for an overview, see the article on “Aging and Health Care Costs” in the Oxford Research Encyclopedia of Economics and Finance). However, the end-of-life approach to projecting future health costs also has problems. If life expectancy increases, it is plausible that future 70-year-olds will be healthier than today’s 70-year-olds. This means that not only will end-of-life costs move up in age groups, but also that the average 70-year-old will require less health spending than today’s 70-year-olds. Instead of only shifting the end-of-life costs, one could shift the whole age profile of health spending. For instance, in 10 years, the cost of a 70-year-old might look more like the cost of today’s 69-year-old. The size of the shift can be estimated using historical data. Future health costs can then be projected using the predicted average costs of different age groups—instead of using the current average costs.

The naive approach produces the highest cost projections (an increase of 252%) in hospital costs from 2010 to 2100, while the healthy aging approach generates estimates of an increase of 169%. The end-of-life approach produces results between the two, with an increase of 232%. Future health costs will be affected by many factors, and the estimates are not predictions, but projections based on demographic change that illustrate the importance of separating end-of-life spending from other health spending. This can help policymakers determine long-term investment strategies and the types of reform that are most needed.

Although projections of future health costs are reduced when end-of-life spending is accounted for, there are at least two important caveats. Average hospital costs have a very strong relationship with end-of-life costs, but some other health costs, for instance long-term nursing care, have a different distribution and a strong age-related component (Spillman & Lubitz, 2000). Average hospital spending may decrease for a given age group as life-expectancy increases, but, it is less certain that long-term nursing costs will change to the same degree.

A large increase in the proportion of elderly people within a population age distribution will also influence both political and technological changes that increase health costs. Politically, the median voter will be older, which may affect the priority given to health budgets. The increase in the number of elderly will increase the size of the market and create stronger economic incentives to invent new devices and pharmaceuticals that suit the needs of the elderly. These effects are endogenous consequences of demographic change and may lead to increased end-of-life spending.

Conclusions

End-of-life spending, defined as health spending in the year before death, represents about 10% of all health expenses in a given year. This is less than many appear to believe. The pattern of spending provides several interesting findings and hypotheses about the functioning of the health system. For instance, the existence of large geographic variations in end-of-life spending, even within countries, raises concerns about equality of access and potential inefficiencies. The difference in countries’ spending patterns on hospice versus hospital care underlines the importance of financial incentives. The decline in end-of-life spending as age increases leads to important questions for further research about the treatment of the elderly in the health system.

Economists disagree about whether there is too much or not enough end-of-life spending. The disagreement is the result of different beliefs about the empirical effect of end-of-life costs and different approaches to defining the benefits of end-of-life spending. Grossman’s theory of demand for health, based on marginal costs and benefits of investment in health, predicts low optimal health levels in old age. Building on the economic approach, several economists have started to widen the definition of benefits beyond the direct health effects for the patient, and this has led to a conclusion that end-of-life spending might be more cost-effective than previous theories predicted. In addition to the theoretical argument, some studies have shown a significant reduction in mortality tied to high spending for some specific diseases and interventions, but many economists remain unconvinced about the general utility of more end-of-life spending.

Last, end-of-life spending plays an important role in projections of future health spending. After distinguishing between costs for those who live and costs for those who die in different age groups, and adjusting for healthy aging, the projected inflation-adjusted hospital costs in 2100 dropped from an increase of 252% to an increase of 169% in an example based on real data.

Economic approaches to optimal end-of-life spending raise normative questions about which groups and diseases should be prioritized and where the threshold for saying No should be. Economists have contributed by doing studies revealing the preference structure of the population, which indicates that end-of-life spending should not be given higher priority than spending on the chronically ill. This would be an argument against special funds and special rules for some diseases. Economists have also contributed with a new and potentially very important approach to calculating the maximum one should pay—the threshold—for new health interventions, based on the opportunity cost of the resources as opposed to the willingness to pay.

Recommended Reading

Readers interested in learning more about end-of-life spending should start with a few classics. The papers by Scitovsky (Scitovsky, 1994; Scitovsky & Capron, 1986) presented an overview of the early history of the field. For more recent empirical overviews of end-of- life costs, see Aldridge and Kelley (2015) for information about the United States and French et al. (2017) for an international overview.

The literature regarding widening the definition of benefits is intellectually both provoking and refreshing. Hall and Jones (2007) made an engaging argument for why health is a special good with an income elasticity above one. Murphy and Topel (2006) provided a good discussion of the value of health and longevity. Readers who like to be provoked and/or stimulated by new ideas should read the papers by both Philipson et al. (2010) and Hanson (2002); the papers go well together because each presented new ideas that created intuitive resistance, and they also reached radically different conclusions about how beneficial health spending is.

A good starting point for reading about the estimation of benefits is the article by Dow, Philipson, and Sala-i-Martin (1999). As for the so-called “red herring” debate about the role of age versus end of life in health spending, there is a good article on the topic “Aging and Health Care Costs” in the Oxford Encyclopedia of Economics and Finance. Another useful presentation of some of the issues is found in the article by Seshamani and Grey (2004).

Last, more details about some of the topics not covered in the current overview are available in the article by Hammer, Melberg, and Fowler (2016), which has a stronger medical focus on end-of-life care as well as a wider range of international examples. The article by Singer, Martin, and Kelner (1999) is a good place to begin obtaining more information about patient perspectives and ethics. Ash and Arons (2009) provided a detailed overview of the legal issues and addressed many economic and policy topics. A comprehensive, thematically organized and and editable list of articles relevant to end-of life spending, can be found at: https://bit.ly/2NLIEoG.

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