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be fully used). While the analysis of HCI and 45q15 speaks to the importance of building human capital in future generations, the 40q30 analysis speaks to the importance of protecting and using human capital now.
ANNEX 5A: APPROACHES TO ESTIMATING THE ECONOMIC BURDEN OF NCDs This annex briefly discusses existing methods for calculating the economic burden of NCDs and provides information about how these costs can relate to overall human capital costs. As mentioned in the introduction to this chapter, the economic burden of NCDs is both direct (by increasing medical expenses) and indirect (by, among other things, affecting human capital, morbidity, and premature mortality). The chapter provides a taste of how the human capital costs figure into calculations of the total economic costs of NCDs. Various approaches exist to estimating the economic burden of NCDs. Approaches to estimating the economic effects of health conditions include the cost-of-illness method, which calculates the direct and indirect costs associated with a disease; the value of a statistical life (VSL) approach, which infers costs from willingness-to-pay studies or observed avoidance behavior for risky occupations or scenarios; econometric estimates taken from cross-country growth regressions; and macroeconomic models (such as a production function–based approach or a general-equilibrium framework), which simulate output trajectories for different scenarios. The cost-of-illness approach is an easy-to-understand method that summarizes the burden of a certain disease over a particular time period in a single number. This number is defined as the sum of all costs of personal medical care (inpatient and outpatient hospital costs), personal nonmedical care (transportation and relocation expenses), and nonpersonal activities (research) as well as loss of income due to absenteeism, early retirement, or premature death. Altogether, the medical costs, the nonmedical costs, and the research costs are referred to as direct costs, while loss of income is referred to as an indirect cost. The advantage of this method is that the outcome is easily interpreted as the monetary value of the resources that could be saved by avoiding a particular disease. The main drawbacks are that no economic adjustment mechanisms are considered (for example, the substitution of labor lost due to an illness with capital or other workers) and that the effect of diseases on physical capital and human capital accumulation is disregarded in studies of illness (for a general debate on the usefulness of the cost-of-illness approach, see Currie et al. 2000; Rice 2000; WHO 2009). An alternative method is the VSL approach. Indeed, one way to estimate the costs of health conditions is to reconstruct people’s valuation of their own life by estimating their willingness to accept premiums for risky occupations via wage regressions or by estimating their willingness to pay for reduced risks via hedonic price regressions (Viscusi and Aldy 2003). The monetary value that a person assigns to his or her own life can be inferred from the parameter estimates in these regressions. The main advantage of this approach is that it delivers a single number that, if multiplied by the number of cases, can be interpreted as the total statistical value of the loss due to an illness. While the cost-of-illness approach focuses more on the objective costs of an illness, the VSL approach also implicitly covers the costs of pain and suffering via the revealed preferences of the
