The criterion of cost-effectiveness in health management may be given a welfaretheoretical justification if people are risk neutral with respect to life years. With risk aversion, the optimal allocation of health expenditures change: Compared to the costeffective allocation, more resources should be allocated to health cases for which the expected outcomes even after treatment are worse than average. The consequences of medical interventions are usually not known with certainty. Given this type of uncertainty, simple application of cost-effectiveness analysis would recommend maximization of expected health benefits given the health budget. We show that when people are risk averse with respect to the number of life years they live, the uncertainty associated with different types of interventions should play a role on allocating the health budget.
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Paper provided by Oslo University, Health Economics Research Programme in its series HERO On line Working Paper Series with number
2001:10.
Length: 13 pages Date of creation: 30 Jun 2009 Date of revision: Handle: RePEc:hhs:oslohe:2001_010
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Find related papers by JEL classification: D61 - Microeconomics - - Welfare Economics - - - Allocative Efficiency; Cost-Benefit Analysis D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty H43 - Public Economics - - Publicly Provided Goods - - - Project Evaluation; Social Discount Rate H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
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