Want to cut drug spending? Air pollution rules could help.

Posted: 8/1/2012

From the Washington Post:

As environmentalists and industry groups bicker over the costs and benefits of pollution rules, a new study finds that we may actually be underestimating the value of clean air in at least one respect: Cutting pollution can allow people to spend less on prescription drugs.

The new working paper, by economists at MIT and UC Santa Barbara, concluded that a U.S. government program set up in 2003 to reduce smog-forming compounds in certain regions managed to both save lives and lead to lower spending on pharmaceuticals - particularly heart and respiratory medication. In the areas where NOx pollution dropped, drug spending declined by 1.9 percent, a value of $900 million per year. That suggests that clean air can have a significant impact on public health.

"Up until now, there hasn't been empirical proof that air pollution rules have this benefit," says MIT's Michael Greenstone, one of the authors of the study. "But in this case, we found that the benefits of reduced drug expenditures were at least as large as the benefit from reduced mortality rates."

Trying to calculate the value of air-pollution rules is often tricky. How do you put a price tag on clean air? So economists have often tried to estimate how much people are willing to pay for less pollution. One standard way to do this is by looking at the wage premiums for dangerous jobs like firefighting. This helps provide a statistical estimate of how much the free market "values" life. Then economists look at studies of how many fewer people would die from lung and heart disease if an air pollutant is restricted. Put that together, and you get a rough estimate of the market value of curbing pollution, which can then be compared against the costs of clean-up measures.

But this is only a partial estimate of the benefits. It measures the value of reduced mortality that comes with clean air (which, in practice, tends to swamp all over benefits anyway). But it doesn't measure how quality of life might improve, which is harder to assess in dollar terms.

So Greenstone and his colleagues took advantage of a quasi-natural experiment to measure a different facet of this. In 2003, the Environmental Protection Agency began its NOx Budget Trading Program, which cleaned up smog-forming compounds in certain parts of the country. The researchers compared these areas before and after the program went into effect. They were also able to compare regions where smog pollutants were reduced with regions where they weren't. And, crucially, they procured data on prescription drug spending from MarketScan. (Greenstone says they had to "knock on a lot of doors" to get that drug data, which is hard to come by.)

What they found was that in the clean-up areas, the mortality rate in the summer - when smog is heaviest - declined by 0.5 percent. That meant about 2,200 fewer premature deaths, mainly among those aged 75 and up. Under existing measures, that's worth about $900 million in cold dollar terms. But Greenstone and his colleagues also found that prescription drug expenditures declined by about $900 million in those areas. People were spending less on heart and respiratory medication, suggesting that this drop was plausibly linked to the cut in smog. Spending on gastrointestinal drugs, by contrast, stayed about the same.

Moreover, Greenstone and his colleagues concluded, the decline in drug spending appeared to be driven by a reduction in ground-level ozone and not a reduction in fine particle pollution. That's a key distinction. Most researchers agree that reducing particulates has health benefits. But smog-forming compounds like ozone are more controversial.

Last year, President Obama and the White House nixed a proposal by the Environmental Protection Agency to tighten up its ground-level ozone standards. This move attracted a lot of criticism from environmentalists. According to the New York Times, the White House concluded that the costs of clean-up outweighed the health benefits from less smog. Yet Greenstone's paper suggests that the health benefits of curbing smog could well be bigger than anyone realizes. (For the NOx budget program, the value of lower drug spending alone was greater than the clean-up costs.)

"This probably merits a change in thinking about ozone," says Greenstone. "Our cautious conclusion was that there appears to be substantial benefits from ozone reduction."

The paper is important in another respect. When the EPA formulates its air-pollution rules, it tends to use modeling to estimate the costs and benefits beforehand. Yet the agency rarely goes back afterward, years later, to see whether those estimates were accurate. "We're actually trying to assess the benefits by using real-world data," says Greenstone, "rather than just ex ante modeling." And, at least in this case, the rules seemed to be worth the cost.

Original here.