Economic theory and the monetary valuation of health care : an overview of the issues as applied to the economic evaluation of health care programs

Abstract

Cost-effectiveness, and cost-utility, analyses have historically been the most widely used techniques of economic evaluation applied to the evaluation of health care programs. However, in recent years there has been renewed interest in the use of cost-benefit analysis, which requires the assessment of programme benefits in monetary terms. This paper provides a brief review of the economic basis for willingness to pay, and monetary valuation more widely, used in the conduct of cost-benefit analysis. This theoretical background is placed within the framework of the evaluation of health care programs, and in particular the context of priority-setting and the concurrent use of cost-effectiveness and cost-utility analyses. It is concluded that cost-benefit anlaysis does have a strong conceptual basis in welfare economics, whereas other techniques of economic evaluation do not. The advantage of this being that it provides cost-benefit analysis with a logical structure for guidance on issues such as what costs and benefits should be included, and how they should be measured. However, it is clear that when deciding whether to adopt CBA as a desirable technique on which to base resource allocation decisions, a number of considerations at the theoretical level are to be made, prior to consideration of methodological issues. Fundamentally, this means considering whether the maximisation of `social welfare' (as defined in welfare economics), rather than `health outcomes', is the basis on which decisions should be made. That is, should health (care) services be responsive to individual stated preference for programs, or concerned with maximing the health status of the population? Furthermore, there are also considerations to be made to allow for the difference in ranking which will result from CBA, CEA and CUA, and decision-criteria developed to account for this in the decision-making process.