Economic Foundations of Cost Effective Analysis
Alan M. Garber
Stanford University - Center for Primary Care and Outcomes Research; Government of the United States of America - Palo Alto Veterans Affairs Medical Center; National Bureau of Economic Research (NBER)
Charles E. Phelps
University of Rochester - Provost's Office
NBER Working Paper No. w4164
In order to address several controversies in the application of cost-effectiveness analysis, we investigate the principles underlying the technique and discuss the implications for the evaluation of medical interventions. Using a standard von Neumann-Morgenstern utility framework, we show how a cost-effectiveness criterion can be derived to guide resource allocation decisions. We investigate its relation to age, gender, income level, and risk aversion. Cost-effectiveness analysis can be a useful and powerful tool for resource allocation decisions, but in the presence of heterogeneous preferences and personal characteristics, a cost-effectiveness criterion that is applied at the population level is unlikely to yield pareto-optimal resource allocations.
Number of Pages in PDF File: 42
Date posted: April 27, 2000
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