Economic Foundations of Cost Effective Analysis

42 Pages Posted: 27 Apr 2000 Last revised: 19 Apr 2008

See all articles by Alan M. Garber

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

Date Written: September 1992

Abstract

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.

Suggested Citation

Garber, Alan M. and Phelps, Charles E., Economic Foundations of Cost Effective Analysis (September 1992). NBER Working Paper No. w4164. Available at SSRN: https://ssrn.com/abstract=226803

Alan M. Garber (Contact Author)

Stanford University - Center for Primary Care and Outcomes Research ( email )

179 Encina Commons
Stanford, CA 94305-6019
United States
650-723-0920 (Phone)
650-724-5182 (Fax)

Government of the United States of America - Palo Alto Veterans Affairs Medical Center

Palo Alto, CA 94304
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Charles E. Phelps

University of Rochester - Provost's Office ( email )

Rochester, NY 14627
United States
585-275-5931 (Phone)

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