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Economic Foundations of Cost Effective Analysis

42 Pages Posted: 27 Apr 2000  

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)

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

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)

Charles E. Phelps

University of Rochester - Provost's Office ( email )

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

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