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Money or mental health: The cost of alleviating psychological distress with monetary compensation versus psychological therapy

Authors:

Abstract

Money is the default way in which intangible losses, such as pain and suffering, are currently valued and compensated in law courts. Economists have suggested that subjective well-being regressions can be used to guide compensation payouts for psychological distress following traumatic life events. We bring together studies from law, economic, psychology and medical journals to show that alleviating psychological distress through psychological therapy could be at least 32 times more cost effective than financial compensation. This result is not only important for law courts but has important implications for public health. Mental health is deteriorating across the world - improvements to mental health care might be a more efficient way to increase the health and happiness of our nations than pure income growth.
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Authors:
Christopher J. Boyce and Alex M. Wood
Title:
Money or Mental Health: The Cost of
Alleviating Psychological Distress with
Monetary Compensation versus Psychological
Therapy
Year of
publication:
2009
Link to
published
version:
http://dx.doi.org/10.1017/S1744133109990326
Publisher
statement:
None
1
Money or Mental Health: The Cost of Alleviating Psychological Distress with
Monetary Compensation versus Psychological Therapy
Christopher J. Boyce
Department of Psychology, University of Warwick
Email: c.j.boyce@warwick.ac.uk
Alex M. Wood
School of Psychology, University of Manchester
Email: alex.wood@manchester.ac.uk
Reference: Boyce, C. J. & Wood, A. M., (forthcoming) Money or Mental Health: The
Cost of Alleviating Psychological Distress with Monetary Compensation versus
Psychological Therapy, Health Economics, Policy and Law
This article is the copyright of Cambridge University Press and can be viewed online
at Cambridge Journals Online -http://journals.cambridge.org/action/login
Abstract
Money is the default way in which intangible losses, such as pain and suffering, are
currently valued and compensated in law courts. Economists have suggested that
subjective well-being regressions can be used to guide compensation payouts for
psychological distress following traumatic life events. We bring together studies from
law, economic, psychology and medical journals to show that alleviating
psychological distress through psychological therapy could be at least 32 times more
cost effective than financial compensation. This result is not only important for law
courts but has important implications for public health. Mental health is deteriorating
across the world – improvements to mental health care might be a more efficient way
to increase the health and happiness of our nations than pure income growth.
Corresponding author:c.j.boyce@warwick.ac.uk
Address: Department of Psychology, University of Warwick, Coventry CV4 7AL.
Telephone: (+44) 024765 23158
Fax: (+44) 024765 24225
Acknowledgements: For helpful discussions and comments the authors are grateful to Gordon Brown, Anna
Cunningham, Stephen Joseph, Andrew Oswald, Paul Raffield and two anonymous referees. The Economic and
Social Research Council (ESRC) provided research support. The usual disclaimer applies.
2
Putting a price tag on “pain and suffering” seems an impossible task but
judges in law courts are regularly expected to make such decisions. Equating money
with an intangible loss may seem peculiar but in tort law an individual who has
suffered should, as nearly as possible, be restored to the same position had they not
sustained some wrong (Lunney & Oliphant, 2008). In law courts monetary
compensation is the expected remedy and there are established monetary guidelines to
compensate for the “pain and suffering” of various injuries (Mackay et al., 2006). In
the UK, the Fatal Accidents Act 1976 provides a one off payment for the
“bereavement” of family members. Economists have developed a method to place
monetary values on various life events (Blanchflower & Oswald, 2004, Ferrer-i-
Carbonell & van Praag, 2002, Powdthavee, 2008). It has further been suggested that
such monetary values could be offered as compensation to help overcome
psychological distress after particularly traumatic life events (Oswald & Powdthavee,
2008a, Oswald & Powdthavee, 2008b). The economists’ calculations would suggest
that court settlements would need to be much higher than present to fully compensate
an individual. The high monetary values reflect money’s ineffectiveness at
compensating someone for pain and suffering.
We assess the evidence across law, economic, psychology and medical
journals and suggest psychological therapy as an alternative. Psychological therapy
would be substantially more cost effective than financial compensation at alleviating
psychological distress. We extend our argument beyond the law courts and suggest
that moneys low importance in achieving mental health has important implications for
public health. National happiness levels have remained flat in developed countries in
spite of large economic gains. Mental health, on the other hand, appears to have been
deteriorating across the world for some time and is estimated to deteriorate still
3
further (Michaud et al., 2001). The comprehensiveness and accessibility of mental
health services, in particular the provision of psychological therapies in publicly
funded services, have regularly been questioned. Increasing the investment in mental
health and generally broadening access therefore might be a more efficient way to
increase the health and happiness of our nations than pure income growth.
Money - a common metric for valuing life events and the movement towards
compensation
Monetary values have been calculated across numerous areas of life
including; marriage (Blanchflower & Oswald, 2004), social relationships
(Powdthavee, 2008), the fear of crime (Moore & Shepherd, 2006), noise (Van Praag
& Baarsma, 2005), health (Ferrer-i-Carbonell & van Praag, 2002) and disabilities
(Oswald & Powdthavee, 2008b). The income equivalences attached to such events are
typically large. For example, the value of a marriage is estimated to be equivalent to
having an extra $100,000 (around £70,000 at today’s exchange rate) each year
(Blanchflower & Oswald, 2004). Such values have been calculated using subjective
well-being data and computation is relatively simple. The average impact of some life
event on an individual’s wellbeing can be determined statistically across a large
sample. This impact is then compared to the effect that income has on an individual’s
well-being. Typically, a one standard deviation rise in income would be expected to
induce a rise in well-being of between 0.17 and 0.21 standard deviations (Lucas &
Dyrenforth, 2006). By comparing the two effects researchers can estimate how much
extra income an individual would need on average to achieve an equivalent level of
well-being as the life event.
4
Compensation for injustices is an important aspect of society. In tort cases,
particularly those involving psychological distress, judges are commonly faced with
the dilemma of awarding compensation to restore an individual to the position they
were before any injustice took place. Such a decision is mostly subjective, arbitrary
and normally takes the form of a one off monetary payment (Mackay et al., 2006).
Some researchers have suggested that the psychological impact of particularly
traumatic life events can be evaluated in purely financial terms (Clark & Oswald,
2002). With the aim of alleviating psychological distress recent studies have
suggested that such figures could be useful in a court of law to guide compensation
payouts for individuals who have lost family members (Oswald & Powdthavee,
2008a) or become disabled (Oswald & Powdthavee, 2008b).
Such events can devastate the lives of individuals and the sums suggested to
help alleviate the psychological distress are large; much larger than those presently
awarded by courts. For example, were an individual to lose a partner, then it is
suggested that a compensation amount ranging from £114,000 to £206,000 per annum
would be needed to overcome psychological distress. For the loss of a child,
individuals would require anything from £89,000 to £140,000 to compensate (Oswald
& Powdthavee, 2008a). In the UK the Fatal Accidents Act 1976 recommends a
substantially lower payout of just £10,000. If such a financial compensatory argument
were extended to unemployment, which is well known to have deep psychological
effects beyond the simple loss of income (Darity & Goldsmith, 1996), the income
equivalence of psychological distress alone would be in the region of £34,000 to
£59,000 per annum (Oswald & Powdthavee, 2008a).
The clinical and cost effectiveness of psychological therapy
5
Researchers have assessed the clinical and cost effectiveness of various
treatments for depressed patients (Bower et al., 2000, Ward et al., 2000). The
effectiveness of general practitioner care with both cognitive-behaviour therapy
(CBT) and non-directive counselling were all compared. Over twelve months all
treatments reduced average depression levels by at least one and a half standard
deviations. The average total cost, which even included indirect costs such as work
time lost, was less than £1,500. In fact, the improvement was achieved by both CBT
and non-directive counselling within the first four months at a total cost of less than
£800.
A cost effectiveness comparison between psychological therapy and direct
financial compensation
Comparing the cost effectiveness of psychotherapy and direct financial
compensation in alleviating individuals from severe psychological distress has not
been carried out before. There are several ways in which the costs between
psychological therapy and direct financial compensation can be compared using the
studies already outlined. Oswald and Powdthavee (2008a) estimate that the average
psychological impact of losing a partner is about one standard deviation. They suggest
that the individual would need to be compensated with at least £114,000. Pro-rata it
would cost less than £600 to help the individual adjust to such a difficult life event
using psychological therapy. Similarly for unemployment, which has deep
psychological consequences, it would be more cost effective to provide individuals
with psychological therapy (around £100-£200 pro rata) to overcome their loss of
purpose in life and help them back to work rather than solely offering financial
compensation.
6
To compare the costs in another way; psychological therapy alleviates
psychological distress by one and a half standard deviations at a cost of £800 over 4
months. To achieve a one and a half standard deviation reduction in psychological
distress using money alone would require (based on estimates in Oswald and
Powdthavee (2008a) and dependent on the statistical technique) somewhere in the
region of £179,000 to £292,000 of extra income every year. This illustrates that the
alleviation of severe psychological distress could be worth at least £179,000 of extra
income each year and suggests that financial compensation is an inefficient way of
helping individuals overcome distress.
The wide disparity between the effects of psychological therapy and income
arises out of the poor ability of income to improve mental health. However, income’s
effect on psychological distress in studies such as Oswald and Powdthavee (2008a) is
likely to be under estimated. More realistic income effects can be obtained by
allocating income randomly to individuals and observing the effects on individuals’
lives. Such an experiment is not possible but researchers have analyzed longitudinally
the effect of medium sized lottery wins on psychological distress. An average lottery
or pool win of £4,300 is found to bring approximately a quarter of a standard
deviation improvement to mental health two years after the win (Gardner & Oswald,
2007). This suggests that even when the best income-psychological distress estimates
are considered (Gardner & Oswald, 2007), psychological therapy is still calculated to
be at least 32 times more cost effective than financial compensation. This figure is
large and places huge questions on the use of income as an effective compensation
method.
Our argument is not without its limitations. There are of course inherent
difficulties in making inferences across studies and just like the proponents of the use
7
of monetary compensation it is necessary to draw some conclusions from one group
of individuals to another1. The evidence on the cost-effectiveness of psychological
therapy is not based exclusively on individuals experiencing loss as a result of a
devastating life event. Some psychological distress will undoubtedly follow from the
loss of a loved one but one may question whether, what could be considered a fairly
normal response, would benefit from psychological therapy. This perhaps calls into
question the purpose of psychological treatment more generally. One view of
psychological therapy is that mental health is a continuum and that everyone, no
matter their level of psychological distress, can benefit from psychological therapy.
Under this view any psychological distress would be viewed as mental disorder and
therefore treatable. Another viewpoint is that mental disorder is dichotomous, in that
individuals either have mental disorder or do not. This view suggests that mental
disorder is the presence of distorted thought processes that can result in protracted
psychological distress. In this latter view the psychological distress that arises as a
normal reaction to loss might not be seen as directly treatable. However, it is likely
that, without adequate support, some unnecessary mental disorder will arise from the
loss. Therapy should aim to avert such mental disorder. Additionally, even if there
were a substantial cost difference in helping individuals with loss and those with
mental disorders, the cost-effectiveness comparison figure calculated earlier should be
high enough to absorb any extra expense.
A further issue that requires some discussion is the process of adaptation.
People adapt to many of life’s events (Brickman et al., 1978, Clark et al., 2008) and
some individuals will naturally return to their baseline level of psychological
1The argument for using subjective well-being measures to calculate monetary compensation levels
must necessarily assume that the effect of income on psychological distress, based on estimates from
the entire sample, will be the same for the small sub-sample who have recently lost a family member
8
functioning given time. If individuals adapt anyway then an argument could be made
against the use of psychological therapy. The same argument, however, could be
made against the use of monetary compensation, the current default method of
addressing loss. In any case individuals do not always fully adapt and even if they did
resources should be used in the most efficient manner to relieve psychological distress
in the interim. Oswald and Powdthavee (2008b) address the issue of adaptation and as
such suggest that annual compensatory amounts should be reduced each year.
Similarly, psychological therapy could be proportionally reduced to help with the
lower levels of distress in later years after an event. However, it may turn out that
psychological therapy, focusing directly on psychological distress, speeds up the
process of adaptation and may even mean therapy is unnecessary in later years.
Practical implications of our argument – for judges
In tort law an individual who has suffered should, as nearly as possible, be
restored to the same position had they not sustained some wrong. The loss of future
earnings must undoubtedly be compensated financially. The evidence suggests that
following a devastating life event an individual is likely to experience an adverse
psychological reaction and our concern is with the efficiency of compensating such an
intangible and fairly normal psychological reaction financially. Currently monetary
compensation seems to be unquestionably taken in law courts as the only way of
helping an individual overcome psychological distress after a traumatic event. The
values currently offered as compensation are arbitrary (Mackay et al., 2006) and,
according to economists’ subjective well-being equations, should actually be much
higher (Oswald & Powdthavee, 2008a, Oswald & Powdthavee, 2008b). Rather than
9
giving individuals more income to cope with distress it seems sensible to consider
other alternatives such as psychological therapy.
Can bestowing an individual with money really be expected to help an
individual with psychological distress after a traumatic life event? As a compensatory
device, money, like most things, can never truly fulfil such a role. The purpose of
financial compensation, however, is to alleviate an individual’s psychological distress
by helping them to find enjoyment elsewhere. Thus, if a tool is judged by its ability to
alleviate an individual’s psychological distress then the answer may be found in
medical research. We have shown that psychological therapy could be much more
cost effective than financial compensation. We are not claiming that psychological
therapy will entirely prevent what could be considered as a normal adverse
psychological reaction but therapy may provide some short term relief. Moreover
such devastating life events if not adequately dealt with may lead to maladaptive
thoughts and result in undue distress. It is unlikely that financial compensation will
protect against such maladaptive thinking.
On punitive grounds we are not necessarily suggesting that large court payouts
are not justified2. However, we are suggesting that the sums currently offered may not
be the best way to help the injured party overcome any psychological distress unless it
is decreed, in the best interests of the injured party, that the money gets spent on some
form of psychological therapy. There is currently no legal obligation for individuals to
undertake steps to alleviate their psychological distress. However, there is some legal
support in New Zealand for an increased use of psychological therapy to help
individuals overcome psychological distress that occurs due to the actions of a third
2There are several theories concerning the purpose of tort, these include; deterrence, corrective justice,
risk allocation and distribution of loss. Some, depending on the legal system, would argue that
retribution also plays an important part
10
party. The Injury Prevention, Rehabilitation and Compensation Act of 2001 requires
that the cost of psychological therapy be borne by the state.
Financial compensation may not even have the causal effect on a traumatized
individual in the way that economists suggest. Additionally, individuals are likely to
be unequally affected by financial compensation, for example due to the diminishing
marginal utility of income wealthier individuals may require even more income to
replenish lost well-being. Financial compensation seems like a poor device for
alleviating psychological distress. In contrast psychological therapy does not attempt
to act as compensation but instead focuses directly on helping individuals to
overcome their loss. Psychological therapy acknowledges that trauma is person
dependent and is therefore effective, inexpensive and compassionate.
Practical implications of our argument – for policy makers and society
We believe our argument has important implications for public health. The
high levels of financial compensation that economists suggest help to highlight how
inefficient money is at alleviating psychological distress and generally improving
individual well-being. Economists are puzzled as to why developed societies are
becoming no happier in spite of large income gains (Easterlin, 1995). However, in
1999 unipolar major depression was the fifth leading cause of the disease burden and
by 2020 major depression is expected to rise to the second biggest burden (Michaud et
al., 2001). These conflicting findings, along with the evidence presented here, indicate
that although income growth may provide some benefit to well-being, the greatest
benefit to the health and happiness of our nations could come from improving access
to mental health care.
11
Our argument, although clearly comparing across studies and extending from
the law courts to wider society, adds a new perspective to public health debate on
mental health. Regarding the UK’s National Health Service, Richard Layard (2006)
has suggested that the cost of helping individuals overcome mental health issues using
psychological therapy more than outweighs the money saved from reducing the
individuals on benefits who are incapacitated by their mental health. Our argument
adds further support for increasing the availability of mental health resources by
instead suggesting that mental health in its own right is something to be valued
alongside economic progress. The importance of improving mental health for national
well-being needs to be further recognized and policy makers must consider improving
mental health care further. Individuals are also probably not fully aware of the
powerful effects that good psychological therapy can have on their mental health and
general well-being. It needs to be understood that aspiring to good mental health can
often be more important than aspiring to high income for well-being. Since
individuals are unlikely to unilaterally invest in their own mental health there is a
strong case for public provision.
12
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