When I exercise, get a check-up, get my flu shot or skip dessert (too rarely), I do it because I’m supposed to. I have a vague impression that the cost, pain or other inconvenience I experience today should be more than offset by savings or other benefits in the future. One thing I’ve never done, which will surprise those that know me, is try to calculate those costs and benefits. If I did such a calculation, would it change my behavior?
As a finance guy, I’d approach these decisions as an investment in my future ability to produce value, which could be higher earnings, greater knowledge and more happiness. I might even include the indirect benefits to my family and society. Called human capital, this has been defined at the level of the society as the “… sum of the capacities of all individuals in the community—their level of intelligence, education, creativity, and innovativeness, health and well-being, capacity for empathy, and caring.”
Usually, the business literature encourages businesses to improve their stock of human capital by investing in training, which is expected to pay dividends to the company as higher productivity and retention. The references below describe the analogous benefits of investments in preventative healthcare and related education.
In theory, people, companies and society ought to invest in human capital insofar as such investments produce positive returns. The returns may be economic, but they don’t have to be. (It turns out this is a good thing, because many preventative healthcare initiatives don’t save much money…except mental health.)
To calculate the return on investment in preventative care, we can use the tools of Cost Benefit Analysis. Whether at the level of the individual, organization or society, we’d measure the cost of a preventative action or program against its benefits. There can be direct and indirect costs. Direct costs are things like gym membership, co-pays or facilities and doctors’ salaries. Indirect costs include things like administrative costs and opportunity costs (what you could be doing instead). Benefits can include: increased productivity and earnings; avoided medical treatment costs; improved quality of life and happiness and greater social capital in society as a whole. We might try to quantify quality of life by estimating how much we’d pay to live one more year without disability or to feel more healthy. With a good sense of these values and their timing, we can use Excel to calculate the return on our investment in that exercise bike or new nutrition intervention.
This kind of analysis helps to illuminate the tension between short-term costs and long term benefits, and the conflicts that result when the costs and benefits affect different stakeholders. For example, we may under-invest in preventative healthcare because the costs are immediate and concrete while the benefits are long-term and uncertain. Indeed, the costs are often paid by the individual’s current insurer or employer, while the benefits accrue to the individual’s next insurer or employer (as well as the employee):
Even present-biased and procrastinating individuals may have little empathy for their “future selves” and may under-invest in their own future well-being. In finance terms, we may be applying a much too high discount rate to clean living and preventative healthcare.
What can be done about this for communities? Well, this finance guy (naturally) thinks social impact financing can help. These transactions attract new capital to social programs by giving investors a share of the risk and a portion of the rewards. For example, investors could purchase a security whose returns are linked by a formula to health outcomes like obesity, diabetes or heart disease. The proceeds fund education, preventative care, and healthy lifestyle programs whose outcomes are measured independently. Returns are paid by society (government, or maybe a consortium of healthcare providers and insurers) that benefits from lower costs and higher productivity. Esther Dyson’s HICCup promotes a similar idea in its “The Way to Wellville” challenge, which will serve five specific communities in five health and economic measures over five years.
And how can we help individuals make more rational and healthy choices? Well, this fin-tech guy suggests an app that helps people choose an exercise program or diet based on the costs relative to the benefits. For numbers people at least, this may be just what the doctor ordered. What do you think?
P.S.
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