Future costs and the future of cost-effectiveness analysis

Abstract

In the past decade, the use of cost-effectiveness (CE) analysis to guide resource allocation in health care has grown in the United Kingdom and in continental Europe. Its use in the United States has been far more limited. The political resistance to explicit consideration of costs in the Medicare’s coverage decision making has all but buried efforts to make coverage decisions based on cost-effectiveness criteria, and explicit use of cost-effectiveness analysis is unusual among private U.S. health insurers. Nevertheless, this technique is attracting greater interest among policymakers and private health plans even in the United States, and its adoption elsewhere confirms that it is now seen as an essential tool to increase the efficiency of health expenditures. If it is really to be used, we should make sure that we get it right, and that its guidance will improve well-being. Our previous article (Garber and Phelps, 1997) was motivated by two simple questions: does a cost-effectiveness criterion lead to potential Pareto improvement, as is known to be the case when a cost-benefit criterion (positive net benefit) is applied, and if so, under what conditions? By this means, we hoped both to establish whether cost-effectiveness analysis provided a reasonable alternative to cost-benefit analysis as a guide to health expenditures, and to resolve methodological controversies—particularly whether unrelated future costs of care should be excluded from CE analysis or included. We proposed that the correct criterion for the use of CE analysis was to determine whether the allocations that resulted from application of the technique were optimal, in the sense that they represented a potential Pareto improvement, just as costbenefit criteria could do. We argued that if the future costs were truly unrelated, it did not matter whether such costs were included or excluded, as long as the cutoff CE ratio, above which the costs of the health expenditure would exceed the value of the resulting benefits, were properly adjusted. In an article published in the same issue of JHE, Meltzer (1997) argued that the future unrelated costs – not only of health care, but of consumption more generally – must be included in the cost-effectiveness calculation in order to rank alternatives for optimal resource allocation.