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Allocating health care resources when people are risk averse with respect to life time

  • Michael Hoel

    (Department of Economics, University of Oslo, Norway)

The criterion of cost-effectiveness in health management may be given a welfare-theoretical justification if people are risk neutral with respect to life years. With risk aversion, the optimal allocation of health expenditures changes: Compared to the cost-effective allocation, more resources should be allocated to health conditions 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 in allocating the health budget. Copyright © 2002 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/hec.733
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Article provided by John Wiley & Sons, Ltd. in its journal Health Economics.

Volume (Year): 12 (2003)
Issue (Month): 7 ()
Pages: 601-608

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Handle: RePEc:wly:hlthec:v:12:y:2003:i:7:p:601-608
Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/5749

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  1. Joshua Graff Zivin, 2001. "Cost-effectiveness analysis with risk aversion," Health Economics, John Wiley & Sons, Ltd., vol. 10(6), pages 499-508.
  2. Johannesson, Magnus & Weinstein, Milton C., 1993. "On the decision rules of cost-effectiveness analysis," Journal of Health Economics, Elsevier, vol. 12(4), pages 459-467, December.
  3. Bleichrodt, Han & Quiggin, John, 1999. "Life-cycle preferences over consumption and health: when is cost-effectiveness analysis equivalent to cost-benefit analysis?," Journal of Health Economics, Elsevier, vol. 18(6), pages 681-708, December.
  4. Gafni, Amiram & Birch, Stephen & Mehrez, Abraham, 1993. "Economics, health and health economics: HYEs versus QALYs," Journal of Health Economics, Elsevier, vol. 12(3), pages 325-339, October.
  5. Culyer, A. J. & Wagstaff, Adam, 1993. "QALYs versus HYEs," Journal of Health Economics, Elsevier, vol. 12(3), pages 311-323, October.
  6. 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.
  7. Wagstaff, Adam, 1991. "QALYs and the equity-efficiency trade-off," Journal of Health Economics, Elsevier, vol. 10(1), pages 21-41, May.
  8. Dolan, Paul, 1998. "The measurement of individual utility and social welfare," Journal of Health Economics, Elsevier, vol. 17(1), pages 39-52, January.
  9. Johannesson, Magnus & Johansson, Per-Olov, 1996. "To Be, or Not to Be, That Is the Question: An Empirical Study of the WTP for an Increased Life Expectancy at an Advanced Age," Journal of Risk and Uncertainty, Springer, vol. 13(2), pages 163-74, September.
  10. Bleichrodt, Han & Wakker, Peter & Johannesson, Magnus, 1997. "Characterizing QALYs by Risk Neutrality," Journal of Risk and Uncertainty, Springer, vol. 15(2), pages 107-14, November.
  11. Olsen, Jan Abel, 1997. "Theories of justice and their implications for priority setting in health care," Journal of Health Economics, Elsevier, vol. 16(6), pages 625-639, December.
  12. Pratt, John W & Zeckhauser, Richard J, 1996. "Willingness to Pay and the Distribution of Risk and Wealth," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 747-63, August.
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