Available online at www.sciencedirect.com Journal of Health Economics 27 (2008) 826–842 Does health care spending improve health outcomes? Evidence from English programme budgeting data Stephen Martin a , Nigel Rice b , Peter C. Smith b,∗ a Department of Economics, University of York, UK b Centre for Health Economics, University of York, Heslington, York YO10 5DD, UK Received 13 February 2007; received in revised form 23 November 2007; accepted 6 December 2007 Available online 25 December 2007 Abstract Empirical evidence has hitherto been inconclusive about the strength of the link between health care spending and health outcomes. This paper uses programme budgeting data prepared by 295 English Primary Care Trusts to model the link for two specific programmes of care: cancer and circulatory diseases. A theoretical model is developed in which decision-makers must allocate a fixed budget across programmes of care so as to maximize social welfare, in the light of a health production function for each programme. This yields an expenditure equation and a health outcomes equation for each programme. These are estimated for the two programmes of care using instrumental variables methods. All the equations prove to be well specified. They suggest that the cost of a life year saved in cancer is about £13,100, and in circulation about £8000. These results challenge the widely held view that health care has little marginal impact on health. From a policy perspective, they can help set priorities by informing resource allocation across programmes of care. They can also help health technology agencies decide whether their cost-effectiveness thresholds for accepting new technologies are set at the right level. © 2008 Elsevier B.V. All rights reserved. JEL classification: I12 Keywords: Value of life; Programme budgeting; Econometric modelling 1. Introduction One of the most fundamental yet unresolved issues in health policy is the extent to which additional health care expenditure yields patient benefits, in the form of improved health outcomes. The work of health technology agencies such as the English National Institute for Health and Clinical Excellence (NICE) has greatly improved our understanding at the micro-level of the costs and benefits of individual technologies. However, there remains a dearth of evidence at the macro-level on the benefits of increased health system expenditure. The empirical problems of estimating the link between spending and health outcomes are manifest. If one relies on a time series of health outcome data for an individual health system it is difficult to disentangle the impact of expenditure from a wide range of other temporal influences on health, such as technological advances, epidemio- logical changes, and variations in broader economic circumstances. Similar methodological difficulties arise if one ∗ Corresponding author. Tel.: +44 1904 321443. E-mail address: pcs1@york.ac.uk (P.C. Smith). 0167-6296/$ – see front matter © 2008 Elsevier B.V. All rights reserved. doi:10.1016/j.jhealeco.2007.12.002