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In this section we elaborate on the following:
Health and disability riskLife cycle risk that physical and mental well-being will be diminished throughout one’s lifetime. is the third category of life cycle risks. They can be defined as the risks that our physical and mental well-being will be diminished throughout our lifetime. In the case of disease or disability, one will have to pay for increased costs (hospitalization, surgery, doctors, medicines, and prolonged courses of treatment), while still having to finance the regular living expenses, like food, housing, and debt payments for oneself and for the other members of the household.
With costs escalating, health care is becoming the number one retirement-related problem in the developed economies. As with all other risks, the most effective treatment seems to be prevention, which can be accomplished through dieting, exercising, preemptive medicine, and a variety of other ways. Indeed, some of the sicknesses of old age stem from behavior during our youth and could probably be treated at that time.
On average, some of the lifetime health-related costs are concentrated around the very young ages, but most are concentrated around the final years. Thus, due to the increased life expectancy and the fact that older people often suffer from all manner of medical problems, health costs are becoming associated more and more with retirement problems.
World Health Organization (WHO) statistics show a positive correlation between the development level of the economy and the percentage of gross domestic product (GDP) spent on health-related costs. Typically, health-related expenditures reach 6 to 13 percent of GDP in developed nations such as United States, compared to 2 to 9 percent in the less-developed countries. In terms of per capita figures, the gap is very noticeable: an average annual per capita expenditure of $20 to $200 in the less-developed countries, compared to $1,800 to $4,000 in developed economies (the dollar values used conversions of the local currencies at international dollar rates).
The World Bank and the Global Health Organization suggested a new index to measure the global burden of disease: disability adjusted life years (DALY). It combines weighted information about morbidity and mortality, and it is expressed in terms of the numbers of healthy years lost. Each state of health is assigned a disability weighting on a scale from zero (perfect health) to one (death). To calculate the burden of a certain disease, the disability weighting is multiplied by the number of years lived in that health state and is added to the number of years lost due to that disease. Years of life in childhood and old age are assigned lower values in the weighting process. DALY is discounted to better reflect future burdens (an annual interest rate of 3 percent interest is assumed). It is not a perfect indicator and has a substantial degree of subjective judgment and uncertainty,Trude Arnesen and Erik Nord, “The Value of DALY Life: Problems with Ethics and Validity of Disability Adjusted Life Years,” British Medical Journal 319 (1999): 1423–25. but it is a fairly useful instrument for describing a complex problem by a single measure. A complementary measure is the quality adjusted life years (QALY), which measures the years lived in good health and is used to calculate healthy adjusted life expectancy (HALE). Published by the WHO for the entire population at birth, the HALE figures run in the range of thirty-five to forty-five years for the least-developed countries, around fifty to sixty years for more developed countries, and around sixty-five to seventy-five years for most progressive nations. The difference between the life expectancy and HALE is a measure of the average equivalent number of years lost due to bad health and disability.
The expectation of lost healthy years at birth does not show a clear-cut distinction between the least-developed and most-developed countries. In some of the least-developed countries with the poorest health conditions, the number of years lost due to poor health can be fairly low—even three to four years—simply because life expectancy itself is very low (thirty-five to forty years). In others, it can be as high as eight to eleven years, compared to a life expectancy of around sixty to sixty-five years. In the developed countries, the variation of this figure is somewhat lower, and the expectation of lost healthy years at birth runs around six to nine years. A better measure might be the ratio between the expected lost years and the life expectancy at birth. For the developed countries, this figure typically runs around 10 percent, compared to 15 to 18 percent for the least-developed countries.
The main problem is that a substantial part of the years lost due to poor health occurs during the retirement period. A better analysis would be found in the ratio of lost years to life expectancy at retirement (although some lost years relate to the preretirement period). Calculating these ratios with WHO data for the life expectancy of sixty-year-old males shows that these ratios are very high (67 to 100 percent) in the least-developed countries and in the 35 to 45 percent range for developed economies. These ratios show that health concerns are becoming a major part of the retirement issue.
About half of all deaths of adult males and about a quarter of all deaths of adult females are due to cardiovascular diseases, hypertension, and renal diseases. Another quarter of all deaths of adult males and about half of all deaths of adult females are related to cancer. In other words, about three-quarters of the deaths of the adult population are related to these two major groups of sickness. Major breakthroughs in these areas may lead to a remarkable decline of death rates, and this may lead to a further substantial increase in life expectancy (a reduction of mortality probabilities in all age groups by half can increase life expectancy at birth by about five years).
Important advances in medicine are expected in the future due to the improved knowledge and understanding of genetics and complex biochemical processes, better screening devices, smarter surgical technologies, and improved care (and maybe even due to improved understanding of the balance between body and spirit). All these will affect a variety of medical problems such as cancer, heart diseases, diabetes, strokes, neurology and gerontology, metabolic diseases, and more. Certain factors may interfere, delay, and even stop the development of such conditions. Among these factors could be economic and financial forces, global epidemics of new diseases, contamination and pollution, and political factors.
The sophistication of medical procedures cannot arrive without increased costs. Part of these increases is concentrated at the young ages. There are many conflicting factors; some tend to increase health costs for the young population, while others decrease them. For example, in developed countries, highly paid women may prefer not to have repeated pregnancies, and the use of surrogates for having children may increase. Technological developments may even enable families to conceive and nurture a fetus outside the human womb. On the other hand, genetic testing is becoming much more precise, so fewer families will have children suffering from physical and mental disabilities. (On the other hand, the ability to save the very young fetus may increase the prevalence of other birth defects.)
For the older part of the population, most factors operate in one direction: toward a continuous increase in medical and health costs. Among these are a variety of surgical procedures meant to replace or fix problems of aging or failing organs (transplants, angioplasty), special aids (hearing aids, dentures, vision support, mobility instruments), and new expensive drugs. In developed countries, conditions such as diabetes, obesity, and depression are becoming more prevalent as contributing factors in the causes of death for older age groups. Diseases that once killed people (like Tuberculosis and Polio) long before the above conditions could have a significant health impact have all but been eradicated.
Particular health-related risk management solutions will be handled in greater detail in Chapter 22 "Employment and Individual Health Risk Management", but at this point we would like to say a few words about the probabilities. Unlike the mortality and longevity cases, we have no health and disability tables from which the relevant probabilities could be derived. There is an objective difficulty in getting the detailed data needed for the analysis of such a complex issue. Unlike death, disability is often a reversible event; it could be partial or full, and it could be temporary or permanent. Moreover, the event may be defined in a variety of ways: medical (e.g., the loss of a particular limb), psychological, or functional (there are people with severe disabilities—such as blindness—who can function better than many other healthy people). We can only hope that technological developments will enable us in the near future to use better databases and resolve these issues. Due to these reasons it is difficult to create the equivalent of mortality tables or life tables for the health area and, thus, estimates of the probabilities. However, the first steps have already been made in that direction with the WHO resources described previously.
The probabilities of dying and surviving depend greatly on the particular population studied in a given mortality table. Recall that the 2001 CSO mortality table is based on the insured population in the United States. However, the study was divided also into two subpopulations: smokers and nonsmokers. Some selected figures were taken from the statistics to demonstrate the potential wide differences between the mortality and survival rates of two distinct populations. Simultaneously, we can get some important and useful information about the potential impact of smoking.
Table 17.6 The Number of Survivors at Age x out of an Initial Population of 1,000,000 (Ultimate Figures) as Derived from the USA 2001 CSO Table
Sources: Processed by the authors from the American Academy of Actuaries CSO Task Force Report, June 2002, http://www.actuary.org/life/CSO_0702.asp (accessed April 4, 2009); 2001 CSO Ultimate Table.
As derived from Table 17.6 "The Number of Survivors at Age ", the probability of a nonsmoking male surviving to age sixty-five is 84.8 percent, whereas that of a smoker is only 74.4 percent. In other words, the probability of dying before the age of sixty-five is 15.2 percent for nonsmokers and 25.6 percent for smokers. Smoking takes an even greater toll at higher ages. The probability of survival to age eighty is 51.4 percent for a nonsmoking man, while that of a smoker is only 35.4 percent. The probabilities for females can easily be derived from the above table. The differences between smoking and nonsmoking females are also high, although slightly lower than those for males.
In this section you studied the following risks to health throughout one’s lifetime: