When Peace of Mind Hits You in the Wallet
WHY YOU SHOULD CARE
An ounce of prevention is worth a pound of cure, right? Not so fast.
By Harold Winter
These days we have a near-mad obsession with prevention. Think of all the money we sink into our personal well-being and health care costs in hopes of thwarting disease. After all, doesn’t it usually cost more to fix what’s broken rather than preventing it getting broken in the first place? Paying to be proactive about our health seems like a sound idea, a good investment. Right?
No, that assumption may be completely wrong.
Let’s say you can undergo a preventive health screening test that costs $1,000. If the test successfully allows you to avoid a costly treatment procedure of $10,000, in this case, the prevention seems well worth the cure. However, consider what happens if you don’t take the test.
You may buy an extended warranty for your car, but I may not. There is no clear right or wrong decision. We simply have different values for risk avoidance.
Illness does not occur with 100% certainty, but instead with some probability — often far less than that. Let’s say we are talking about an illness that affects five out of every 100 people. If 100 people take the screening test, the cost of prevention in the aggregate will be $100,000. Without the test, if five people ultimately need the treatment, the cost of cure in the aggregate will be $50,000. In this example, prevention is not worth the cure; it is twice as costly.
Prevention sounds a lot like an insurance policy, and in many ways it is. You pay an annual premium to cover a loss of a larger amount in case that loss occurs. If during the year something bad happens to you, the insurance company reimburses you for your loss. But, at the end of the year, if nothing bad happens to you, you don’t get your premium back.
Prevention probability scenarios
A preventive health screening test that costs $1,000 may allow people to avoid a treatment procedure of $10,000. Prevention may be worth the cost.
– If the illness affects five out of every 100 people, and 100 people take the screening test, the aggregate cost is $100,000. Without the test, if five people ultimately need the treatment, the aggregate cost of cure is $50,000. In this case, prevention is not worth the cost.
– If the illness now affects 20 out of 100 people, the $100,000 spent on prevention now saves $200,000 in treatment costs. In this case, prevention is worth the cost.
It all depends on the probability of needing treatment if the preventive measure is not taken.
This is how insurance companies make money: They collect more in premiums than they pay out in claims. That has to be the case, or else insurance companies wouldn’t remain in business very long.
Thus, dollar for dollar, insurance is not a good deal for those who buy it. Yet people purchase insurance policies all the time. When you buy an insurance policy, you are paying to avoid the risk of a potentially large loss. Even with the premium payment being larger than what you expect to be paid back on average, you buy the policy because it gives you peace of mind. It’s not the dollar-for-dollar comparison you care about, but the dollar-for-risk-avoidance comparison.
Prevention can work the same way. In our example, the prevention cost is larger than the average treatment cost, but you may still prefer prevention to avoid the risk of undergoing the treatment. If everyone thinks like you, aggregate prevention costs will be twice the treatment costs — but everyone will feel better off.
Here’s the wrinkle. We are not all willing to pay the same amount to avoid risk; not everyone values prevention the same way. You may buy an extended warranty for your car, but I may not. There is no clear right or wrong decision. We simply have different values for risk avoidance.
But prevention is not exactly like insurance. While an insurance policy is a lousy dollar-for-dollar deal, prevention can be a good deal. Imagine that in our example the illness now affects 20 out of 100 people. The $100,000 spent on prevention now saves $200,000 in treatment costs. That’s a preventive measure worth encouraging.
Using numbers in a hypothetical example, however, is much easier than what real-world policy officials have to go through. The U.S. Preventive Services Task Force (USPSTF) created a major controversy in 2009 when revising their guidelines for breast cancer screening. Two of the most important updates: Routine screening of average risk women should begin at age 50 instead of age 40, and women should get screening mammograms every two years instead of every year.
For average-risk women, the USPSTF was now encouraging fewer preventive measures, primarily because the benefits of the old measures were no longer considered to be worth their costs. While the USPSTF guidelines don’t prevent women from following their own schedule for breast cancer screening, they may greatly affect doctors’ recommendations, or the amount of coverage insurance companies are willing to provide.
In the end, it comes down to a simple public-policy question: Should our health policy officials promote prevention over cure? Prevention may seem like common sense when it is a good deal. But when it’s a bad deal, encouraging prevention may actually make society poorer. The USPSTF understood that logic, and is still under fire for acting upon it.
Harold Winter is a professor in the department of economics, Ohio University, and author of a number of books on the economics of public policy, including Trade-Offs: An Introduction to Economic Reasoning and Social Issues (second edition, University of Chicago Press, 2013) and The Economics of Excess: Addiction, Indulgence, and Social Policy (Stanford University Press, 2011).
- Harold Winter, OZY AuthorContact Harold Winter