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Future costs in cost effectiveness analysis

  • Lee, Robert H.
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    This paper resolves several controversies in CEA. Generalizing [Garber, A.M., Phelps, C.E., 1997. Economic foundations of cost-effectiveness analysis. Journal of Health Economics 16 (1), 1-31], the paper shows accounting for unrelated future costs distorts decision making. After replicating [Meltzer, D., 1997. Accounting for future costs in medical cost-effectiveness analysis. Journal of Health Economics 16 (1), 33-64] quite different conclusion that unrelated future costs should be included in CEA, the paper shows that Meltzer's findings result from modeling the budget constraint as an annuity, which is problematic. The paper also shows that related costs should be included in CEA. This holds for a variety of models, including a health maximization model. CEA should treat costs in the manner recommended by Garber and Phelps.

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    File URL: http://www.sciencedirect.com/science/article/B6V8K-4R98K1X-1/1/bc9e8ada4dc59532a7ecfae132e5e3c1
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    Article provided by Elsevier in its journal Journal of Health Economics.

    Volume (Year): 27 (2008)
    Issue (Month): 4 (July)
    Pages: 809-818

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    Handle: RePEc:eee:jhecon:v:27:y:2008:i:4:p:809-818
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505560

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    1. Caballero, Ricardo J, 1991. "Earnings Uncertainty and Aggregate Wealth Accumulation," American Economic Review, American Economic Association, vol. 81(4), pages 859-71, September.
    2. Meltzer, David, 1997. "Accounting for future costs in medical cost-effectiveness analysis," Journal of Health Economics, Elsevier, vol. 16(1), pages 33-64, February.
    3. David Meltzer, 1997. "Accounting for Future Costs in Medical Cost-Effectiveness Analysis," NBER Working Papers 5946, National Bureau of Economic Research, Inc.
    4. Blomqvist, Ake, 2002. "Defining the value of a statistical life: a comment," Journal of Health Economics, Elsevier, vol. 21(1), pages 169-175, January.
    5. Andrew B. Abel, 1985. "Capital Accumulation and Uncertain Lifetimes with Adverse Selection," NBER Working Papers 1664, National Bureau of Economic Research, Inc.
    6. Johansson, Per-Olov, 2001. "Is there a meaningful definition of the value of a statistical life?," Journal of Health Economics, Elsevier, vol. 20(1), pages 131-139, January.
    7. Weinstein, Milton C. & Manning, Willard Jr., 1997. "Theoretical issues in cost-effectiveness analysis," Journal of Health Economics, Elsevier, vol. 16(1), pages 121-128, February.
    8. Barro, Robert J. & Friedman, James W., 1977. "On Uncertain Lifetimes," Scholarly Articles 3451301, Harvard University Department of Economics.
    9. Garber, Alan M. & Phelps, Charles E., 1997. "Economic foundations of cost-effectiveness analysis," Journal of Health Economics, Elsevier, vol. 16(1), pages 1-31, February.
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