How Effective is Marginal Healthcare Expenditure? : New Evidence from England for 2003/04 to 2012/13

BACKGROUND: The endogenous nature of healthcare expenditure means that instruments are often used when estimating the relationship between expenditure and mortality. Previous English studies of this relationship have largely relied on statistical tests to justify their instruments. A recent paper proposed that exogenous components of the resource allocation formula, used to distribute the national healthcare budget to local health authorities, be used as instruments. OBJECTIVES: To estimate the relationship between healthcare expenditure and mortality by disease area for England from 2003/4 to 2012/13 using exogenous elements from the resource allocation formula as instruments for expenditure. To use these disease-specific estimates to calculate the marginal cost per quality-adjusted life year (QALY) for English NHS expenditure. To compare these estimates with those that relied on statistical tests to justify their instruments. METHODS: The two-stage least squares estimator is used to determine the annual relationship between mortality and healthcare expenditure by disease area across 151 local authorities. These disease-specific outcome elasticities are combined with information about survival and morbidity disease burden in different disease areas to calculate the marginal cost per QALY for English National Health Service (NHS) expenditure. RESULTS: The results suggest an annual marginal cost per QALY of between £5000 and £10,000. This is similar to that reported previously by studies that used statistical tests to justify their instruments. CONCLUSION: These cost per QALY estimates are much lower than the threshold currently used by the UK's National Institute for Health and Care Excellence (NICE) (£20,000 to £30,000) to assess whether a new pharmaceutical product should be funded by the NHS. Our estimates suggest that guidance issued by NICE is likely to do more harm than good, reducing health outcomes overall for the NHS. There may be legitimate reasons why such harms are deemed appropriate, but it is only through the type of empirical analysis in this paper that the reasons for these 'harms' are likely to be articulated and explicitly justified.