Interface Between Risk
Assessment and Economics:
Economic Valuation Methods
Presentation to IRAC Conference
Risk Assessment, Economic Analysis, and Foodborne Illness Regulations
Al McGartland, USEPA
November 16, 2007
The opinions in this presentation do not necessarily represent those of EPA.
Evolution of Risk Assessment at EPA
1970s
 beginnings of the field of risk assessment
 emphasis on oral route per FDA precedent
1980
s
1990s
2000s
 adopt RA/RM paradigm
 guidelines & basic methodologies
 data bases (IRIS)
 new tools/data bases
 refinement of existing tools
 understanding mechanisms
of action/interactions
 ecological assessment
 complex mixtures
 sensitive subpopulations
 non-linear dose-response
 input into economic
analysis
2
Roles of Risk Assessment
Risk Assessment
Risk Assessment
- cancer
- non-cancer
Risk Management
Protective
Policy Decision
- standards
- information
3
Roles of Risk Assessment
Risk Assessment
Risk Assessment
- cancer
- non-cancer
Predictive
Risk Management
Protective
Policy Decision
- standards
- information
Economic Analysis
- benefit-cost analysis
- cost effectiveness
- economic impacts
4
Damage Function Approach
Emissions
Environmental
Exposure
Concentrations
• Benefits analysis draws upon results of other
disciplines
Effects
(dose-response)
• Simplified linear process of benefits analysis,
but there may be feedback loops
– For example, changes in individual behaviors
evaluated in the benefits “box” may have
implications for emissions or exposure
Benefits
($ for each effect)
5
From Risk Assessment to Economics
• Should focus on well-defined health endpoints that have an
effect on individual sense of well-being.
– “hormone level” vs. hypothyroidism
• Should be probabilities to represent the expected changes in
risk to an individual
– probabilities not thresholds
– upper bound risk estimates
• Should provide information on when risks change due to
exposure changes
– substantial lags between exposure and cancer
6
Health Science Inputs and Economic
Valuation
• Epidemiological data are preferred for valuation in policy
analysis
– observed health effects in humans
– incorporates behavioral responses
• Results from animal studies may be used
– Cancer dose-response: risk estimates are still usable although their
applicability can be a concerns (e.g, upper-bound estimates)
– Non-cancer risk assessment: Reference doses and other measures
that don’t estimate probabilities cannot be utilized in benefits
analysis
7
Cancer vs. Non-Cancer Benefits
8
Economic Analysis
Predictive
Risk Assessment
Data
Analytic
Approach
Health
Value
Measure
Benefit-Cost
Analysis
Cost of
Illness
Willingness
to Pay
CostEffectiveness
Analysis
Quality
Adjusted
Life Years
Disability
Adjusted
Life Years
9
Economic Analysis
Predictive
Risk Assessment
Data
Analytic
Approach
Health
Value
Measure
Benefit-Cost
Analysis
Cost of
Illness
Willingness
to Pay
CostEffectiveness
Analysis
Quality
Adjusted
Life Years
Disability
Adjusted
Life Years
10
Benefit-Cost Analysis
• Simulates the private market test for public goods
– BCA quantifies all benefits and costs of producing environmental
protection
– Consistent with private markets, the efficient outcome is the option
that maximizes net benefits
– BCA is, therefore, an efficiency test for the production of environmental
protection
.
11
Benefits
• Rules for determining the benefit, or value, of environmental protection
are the same as those in the private market – quantify the willingness to
pay for the environmental commodity
• Value is determined by what consumers are willing to pay for a
commodity, not what the analyst believes the value to be
– Economists look to see what values society places on environmental goods
– Analysts do not assign their own values
• Because environmental protection it is a public good, the benefits of a
policy are the sum total of each affected individual’s willingness to pay
for the policy
12
Values for use
in Benefit-Cost Analysis
Cost of illness ($)
• Each avoided health effect converted to $-equivalent based on lost
production and health care costs
– lost production may include household production
• Clearly defined and measurable
• Limited measure
–
–
–
–
not necessarily based on individual preferences
incomplete, does not include pain and suffering
price of health care may not equal costs
generally, loosely, characterized as a lower bound on willingness to pay
13
Willingness to Pay
Willingness to Pay for risk reduction ($)
•
Each avoided health effect converted to $ based on preferences of the
individuals affected
Well-being is expressed in a general utility function: Utility=(health, all other
goods)
Willingness to pay is...
• One’s own WTP for one’s own risk reduction
– WTP for others may be included under strict conditions
•
Affected and constrained by income
– willingness to pay includes “ability to pay”
Willingness to pay is not…
• A measure of on ex post compensation experiencing health effect
– WTP is measured ex ante for risk reductions
14
Health Benefits & Methods
•
Methods are based on where people appear to tradeoff risk and wealth:
– Hedonics:
• Wage-risk: how much additional wages to workers require to take risky jobs?
• Housing prices: extra housing price for “safer” area or higher env. quality?
– Averting Behaviors: how much do individuals pay for safety devices and
safer vehicles, etc.?
– Stated Preference (Surveys): how much do individuals state they will pay
for a specified risk reduction
15
Value of a Statistical Life (VSL)
• The value of mortality risk reductions is often summarized
by calculating the value of a statistical life or VSL
• What is a “statistical life”?
– Suppose a public policy were to reduce mortality risk by 1 in 10,000
• If 10,000 were affected by this policy then, statistically, 1 death would be
avoided
– We have no idea before we implement the policy which life will be
“saved.”
• What is the Value of a Statistical Life (VSL)?
– Derived from the value or WTP individuals place on a small change
in risk
16
VSL Key Points
• VSL estimates do NOT capture the value of an identifiable
person
• VSL estimates do NOT capture how much an individual
would be willing to pay to save his own life with certainty or
the life of a loved one
• Instead, VSL estimates represent (or are derived from)
individual willingness to pay for a SMALL change in the
probability of dying
17
Example VSL Calculations
• Suppose that each of 10,000 people were willing to pay
$500 each for the 1 in 10,000 risk reduction
– The value of that statistical life is the sum of the total of the individual
amounts the 10,000 people would pay for the risk reduction
• Put more generally, the value of a statistical life is
calculated:
– VSL = WTP* (1/risk reduction)
• In our case this would amount to…
– VSL $500*(1/(1/10,000)) = $5,000,000
18
Issue: VSL and Life Expectancy
19
Valuing changes in morbidity risk
Morbidity (illness): ”value of statistical illness” based on WTP to reduce risks or
avoid illness
We lack WTP estimates for many non-fatal illnesses
• each illness is unique to some extent (severity, frequency, duration)
– requires unique research or systematic extrapolation from others
•
EPA policy and practice
– No set values for particular illness
– Often use WTP values for similar illnesses
• Non-fatal bladder cancer use range based on WTP per statistical chronic
bronchitis ($600,000) to non-fatal lymphoma ($3 million)
•
Cost-of-illness methods can be difficult
– Reporting is censored. Likely that many minor illnesses are never seen by
physician.
20
Additional Considerations (WTP)
• Equity Considerations
– WTP is related to income
– What if studies demonstrate the elderly have lower VSL?
– recent results suggest health status has little effect on valuing mortality
risks
• Economic criticisms
– sensitive to risk perceptions
– does not include people’s WTP for risk reductions to other people
• Dollar terms can be compared directly to costs
• Very flexible theoretically...
– incorporates broad range of health effects
– can incorporate context (source of risk)
21
Issue: Timing of Exposure changes and
risk reductions
The timing of risk reductions matters for the value of benefits
Generally, risk reduction like any economic good is preferred sooner
rather than later (time discounting)
Also, the shorter the cessation lag:
• The more cases are avoided (or lives saved) over the life of
the rule or the analysis
• The fewer deaths from other causes before the benefit is
realized
These data are not often part of the risk assessment
22
Impact of Cessation Lags on Benefits
D
C
B
A
“cases”
avoided
Benefits ($m)
3%
Benefits ($m)
7%
Immediate Benefits (A+B+C+D)
120
$ 429
$ 257
Exponential Decay (A+B+C)
100
$ 330
$ 176
Lagged Step Function (A+B)
60
$ 162
$ 64
30-year fixed lag (A)
30
$ 65
$ 18
Alternative Cessation Lag
23
Cost Effectiveness Analysis
• Benefits are not measured in non-monetary units
• Ranks alternatives by $ per unit,
– may determine the best alternative, but cannot determine if any of the
alternatives should be done.
• For mortality risks typical “units”
– Lives saved =>
– Life years =>
rank by $ per life saved
rank by $ per life-year saved
• Neither of these measures accomodates non-fatal illnesses
• Cost-effectiveness cannot accommodate mortality and morbidity
unless they are combined into some common measure
– Quality Adjusted Life Years (QALYs) combine fatal and non-fatal
illnesses into one measure
24
QALYs for Cost-Effectiveness
Quality-Adjusted Life Years (QALYs)
• health conceptualized as having two dimensions
– longevity (years)
– health-related quality of life
– outcome is total years weighted by quality in each year
• well-being is defined by health profile over time
– Utility = U(Quality, longevity)
• wealth does not enter into this framework
25
Quality-Adjusted Life Years (QALYs)
• Assume a policy extends the
baseline health profile (white)
• The gain in QALYs is shown in
gray
– Quality * years at that quality
• Note the risk assessment
requirements: a profile of
expected future health outcomes
and time in each health state
26
Additional Considerations (QALYs)
• Equity considerations
– interventions for young preferred to interventions for old
• Young have more life years remaining
– life extensions for healthy preferred to life extensions to less-healthy
• Healthy have a higher quality than chronically ill
• Economic criticisms
– assumptions are restrictive and may not reflect actual preferences
– concern about quality of surveys (data)
– How to deal with non-health effects (e.g., environmental) from the
policy in a cost-effectiveness framework
27
WTP & QALY:
Some Conceptual Comparisons
WTP
QALY
Benefit-Cost
Analysis
Cost-Effectiveness Analysis
Tradeoff basis
money and
risks to health
health and longevity
Endowment
/ Comparison
individual wealth
health profile
Max. self-assessed welfare
Sum (individual WTP ($) values)
Max. health - weighted longevity
Sum (quality * years)
Type of Analysis
Social Goal
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Concluding Thoughts
• Economics offers tools for risk management
– Risk assessment must be predictive to support economic analysis
• This kind of risk assessment is being actively pursued
– There are two widespread economic approaches to valuing changes
to health and risk: benefit-cost analysis and cost-effectiveness
analysis
– Benefit-cost analysis and cost-effectiveness analysis approaches
use very different metrics to assess the value of risk changes
• BCA and CEA will not necessarily point to the same policy or standard.
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