Cost-Benefit Analysis

Cost-benefit analysis is a form of economic evaluation that can be used to assess the value in terms of money of healthcare interventions. In contrast with cost-effectiveness analysis and cost-utility analysis, which were developed specifically for the healthcare field, cost-benefit analysis has a long history of use in economics and is particularly linked to the theory of welfare economics. Its link with economic theory has led to some favoring this form of evaluation as the “correct” approach to problems of resource allocation in health systems, although it is worthy of note that other commentators have argued that the cost-utility analysis embodies its own theoretical properties and have coined the term extrawelfarism to counter the suggestion that only cost-benefit analysis has a grounding in economic theory.

The characterizing feature of cost-benefit analysis is the measurement of costs and benefits in the same units. In practice, this almost always means that the benefits are measured in monetary terms. For many noneconomists, the concept of placing a monetary value on health, and indeed on life itself, has seemed anathema. Indeed, this apparent aversion to monetary quantification of health outcomes explains the relative infrequency of the use of cost-benefit analysis in health economic evaluation, and the relative popularity of alternative evaluative forms such as cost-effectiveness and cost-utility analysis.

Nevertheless, advocates of the cost-benefit approach have continued to develop methods for the monetary valuation of health outcomes. Many early cost-benefit analyses were based on the human capital approach, which takes the (discounted) stream of lifetime earnings for an individual as a valuation of life. However, this approach implies a zero value for individuals outside formal paid employment and has become less used in recent years. More popular are stated preference methods that involve subjects responding to questions concerning their willingness to pay for health outcomes. When subjects are asked to reveal their willingness to pay for health outcomes directly, this is known as the contingent valuation approach. As with any method of preference elicitation, how such questions are framed can have important consequences for how a subject responds. However, the problems of framing effects and “protest” responses (where a respondent refuses to answer a question or gives a null value) seem particularly acute in contingent valuation of health outcomes. This may explain why much recent research has been based on using a class of methods known as discrete choice experiments that estimate preferences for different attributes at [Page 206]different levels using a series of dichotomous choices across a carefully chosen choice set. When one of the attributes is cost, it is possible to generate indirect estimates of willingness to pay for the other attributes in the experiment. By specifying a profile of levels of the attributes associated with a health state or treatment under consideration it is possible to estimate a monetary value of that health state or treatment.

One of the problems associated with stated preference methods is the danger that respondents overstate their willingness to pay due to the hypothetical nature of the question. That is, if they really had to pay, it is likely that we would observe a lower willingness to pay for the health state or treatment under consideration. In general, revealed preference, where willingness to pay is estimated from observed actions in the marketplace, is preferred to stated preference methods. However, the opportunity for revealed preference studies in the healthcare field, where patients rarely pay for their own healthcare, is limited. One example where revealed preference has been used is in studies of behavior regarding radon gas remediation measures taken by households. Radon gas is a naturally occurring phenomenon that is associated with an increased risk of lung cancer and occurs in geographical areas where the geology of the area has a high proportion of granite in the bedrock. Since radon is heavier than air, the simple installation of a sump pump in low-lying areas, such as basements, can reduce the risk of lung cancer. Therefore, the willingness to pay at the household level for such remedial measures can be used to infer the willingness to pay for a reduced risk of lung cancer.

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