Quality Adjusted Life Years as a Way Out of the Impasse between Prevention Theory and Insurance Theory
Rotterdam Institute of Law and Economics (RILE) Working Paper No. 2010/06
21 Pages Posted: 28 Aug 2010 Last revised: 2 May 2013
Date Written: November 15, 2010
IIn a previous paper we have argued that tort law can benefit from the use of Quality Adjusted Life Years (QALYs) in assessing pain and suffering damages for personal injuries. In the current paper we pose that QALYs may be able to solve a problem which exists in the economic analysis of this area of law. The question whether a tortfeasor should compensate non-pecuniary losses is not answered unambiguously in Law and Economics, as shows from the debate between the prevention theory (which argues that the injurer should be liable for immaterial losses) and the insurance theory (which argues that the victim should not receive compensation for such losses).
In our view, QALYs are able to bridge the gap between these two theories. They provide a framework for the assessment of pain and suffering damages for personal injuries, which is based on the impact of the health impairment on the victim. This is important for the (primarily legal) objective to provide adequate compensation to the tort victim, and for the (primarily Law and Economics) goal to provide adequate deterrent incentives.
A QALY expresses the value of living one year in a certain health condition. Health Economics literature enables assessing the impact of different health conditions on the quality of life. By subsequently monetizing QALYs, this impact is expressed in monetary terms, which provides a non-arbitrary basis for pain and suffering damages. This is not only relevant within the domain of Law and Economics, but it also allows a more systematic assessment of pain and suffering damages than the current legal approach, which lacks a framework to assess the correctness of the damages. In addition, in our view QALYs are able to deal with adaptation.
By way of illustration, we compare pain and suffering damages in several European countries with the amounts that would result from a conservative estimation of the monetary value of a QALY for specific types of personal injuries. We show that the amounts that are currently awarded are too low, both from a legal compensation as from an economic incentives point of view.
Keywords: Adaptation, Health Economics, Insurance Theory, Pain and Suffering, Prevention Theory, Quality Adjusted Life Years, Tort Law
JEL Classification: I12, K13
Suggested Citation: Suggested Citation