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Cost‐effectiveness analysis with risk aversion

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  • Joshua Graff Zivin

Abstract

This paper discusses why, in a medical context, the standard assumption of a risk‐neutral social planner is inappropriate and develops a framework for conducting cost‐effectiveness (CE) analysis when social planners are risk‐averse. This framework demonstrates that if new medical interventions are variance increasing (decreasing), the risk‐neutral approach will approve (reject) projects that should be rejected (accepted). This methodology is applied to two medical interventions that have been previously evaluated and considered cost‐effective in the published literature. Since both conclusions assumed risk neutrality we determine the level of societal risk‐aversion that would be necessary to reject these new interventions and compare these levels to previous estimates of risk‐aversion in the economics literature. We find that for reasonable values of the risk‐aversion parameter, only one of the two interventions should be approved. It is our recommendation that the cut‐off risk aversion parameter (the level of risk‐aversion above which a project would be rejected) should become a standard reported figure in future CE studies. Copyright © 2001 John Wiley & Sons, Ltd.

Suggested Citation

  • Joshua Graff Zivin, 2001. "Cost‐effectiveness analysis with risk aversion," Health Economics, John Wiley & Sons, Ltd., vol. 10(6), pages 499-508, September.
  • Handle: RePEc:wly:hlthec:v:10:y:2001:i:6:p:499-508
    DOI: 10.1002/hec.601
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    Cited by:

    1. Michael Hoel, 2003. "Allocating health care resources when people are risk averse with respect to life time," Health Economics, John Wiley & Sons, Ltd., vol. 12(7), pages 601-608, July.
    2. Phuong Bui & David Crainich & Louis Eeckhoudt, 2005. "Allocating health care resources under risk: risk aversion and prudence matter," Health Economics, John Wiley & Sons, Ltd., vol. 14(10), pages 1073-1077, October.
    3. Klemen Naveršnik, 2015. "Output correlations in probabilistic models with multiple alternatives," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 16(2), pages 133-139, March.
    4. Joshua Graff Zivin & Matthew Neidell, 2010. "Medical technology adoption, uncertainty, and irreversibilities: is a bird in the hand really worth more than in the bush?," Health Economics, John Wiley & Sons, Ltd., vol. 19(2), pages 142-153, February.
    5. Maiwenn J. Al & Talitha L. Feenstra & Ben A. van Hout, 2005. "Optimal allocation of resources over health care programmes: dealing with decreasing marginal utility and uncertainty," Health Economics, John Wiley & Sons, Ltd., vol. 14(7), pages 655-667, July.
    6. Fuhai Hong & Larry Karp, 2014. "International Environmental Agreements with Endogenous or Exogenous Risk," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 1(3), pages 365-394.
    7. Gandjour, Afschin & Chernyak, Nadja, 2011. "A new prize system for drug innovation," Health Policy, Elsevier, vol. 102(2), pages 170-177.
    8. Mohan V. Bala & Gary A. Zarkin & Josephine Mauskopf, 2008. "Presenting results of probabilistic sensitivity analysis: the incremental benefit curve," Health Economics, John Wiley & Sons, Ltd., vol. 17(3), pages 435-440, March.
    9. Elamin H. Elbasha, 2005. "Risk aversion and uncertainty in cost‐effectiveness analysis: the expected‐utility, moment‐generating function approach," Health Economics, John Wiley & Sons, Ltd., vol. 14(5), pages 457-470, May.
    10. Afschin Gandjour, 2015. "Comment on: “Healthy Decisions: Towards Uncertainty Tolerance in Healthcare Policy”," PharmacoEconomics, Springer, vol. 33(9), pages 981-982, September.

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