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Economic Foundations of Cost Effective Analysis

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  • Alan M. Garber
  • Charles E. Phelps

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

  • Alan M. Garber & Charles E. Phelps, 1992. "Economic Foundations of Cost Effective Analysis," NBER Working Papers 4164, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:4164
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    Cited by:

    1. Jonathan Gruber & James M. Poterba, 1996. "Tax Subsidies to Employer-Provided Health Insurance," NBER Chapters, in: Empirical Foundations of Household Taxation, pages 135-168, National Bureau of Economic Research, Inc.
    2. David Meltzer, 1997. "Accounting for Future Costs in Medical Cost-Effectiveness Analysis," NBER Working Papers 5946, National Bureau of Economic Research, Inc.
    3. Jack E. Triplett, 2001. "What's Different about Health? Human Repair and Car Repair in National Accounts and in National Health Accounts," NBER Chapters, in: Medical Care Output and Productivity, pages 15-96, National Bureau of Economic Research, Inc.
    4. Dominique Bureau & Geneviève Plu-Bureau & Jean-Christophe Thalabard, 1993. "L'évaluation économique des traitements médicaux : méthodes et enjeux," Économie et Statistique, Programme National Persée, vol. 266(1), pages 65-75.

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