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This chapter discusses the measurement of benefits from health interventions in monetary terms and specifically why and how monetary values are attached to health benefits. This discussion explores in detail the relationship between two commonly used methods of measuring the desirability of new programs or new products, especially new drugs. One method, cost–benefit analysis, is the economic approach that measures both resource costs and health benefits in monetary terms. The other method is cost–effectiveness analysis, which measures health outcomes in nonmonetary terms either as physical or as utility measures, while maintaining monetary measures for explicit (budgetary) resource costs and, frequently, for implicit costs. The difference between the two methods consists entirely in the way good outcomes are measured. The processes, advantages, and disadvantages of measurement in monetary terms are thus illustrated in comparison with the alternative. Two primary questions about cost–benefit and cost–effectiveness analysis are addressed in this chapter. The first question is what differences are there between these two methods? A method will be called different from some other method if it will, in at least some possible state of the world, lead to a different conclusion about which program is preferable. The second question is, if there are differences, which method should a decision maker use? Such a normative conclusion obviously depends on the decision maker's objectives, so this question will be addressed in an indirect way by showing which objectives are consistent with the choices made under each method. [ABSTRACT FROM AUTHOR]

The whole purpose of cost–effectiveness/cost–benefit analysis is to determine the best way to allocate scarce resources among alternative uses. Because markets for medical care and health insurance have a natural tendency to fail (Enthoven 1993), no country in the world has left these decisions about resource allocation entirely to private markets. Conversely, only a handful of countries have eliminated private markets entirely. Instead, health system policies form a continuum based on the degree to which government intervenes to make health care a social right (Roemer 1991). Alternative methods of allocating health resources under constraints There are numerous approaches to allocating health resources. In the current environment, these are often characterized as policies designed to control costs (see CBO 1991). However, it should be kept in mind that health cost containment per se is not an appropriate objective of public policy. Instead, we should be seeking the “right” level of health spending that would bring into balance the benefits and costs of medical care (Pauly 1991). The various approaches to health resource allocation can be categorized into four broad groups based on the locus of resource allocation decisions. That is, decisions about how much to do or how much to spend can be made by patients, payers, providers, or the public (Table 10.1). The remainder of the chapter describes in more detail various strategies for resource allocation and the potential role of cost–effectiveness/cost–benefit analysis in each. [ABSTRACT FROM AUTHOR]

In recent years, cost–effectiveness analysis has been the most prevalent type of economic evaluation of health care interventions, including pharmaceuticals (Torrance 1986; Eisenberg 1989; Detsky and Naglie 1990; Freund and Dittus 1992). Unlike cost–benefit analysis, which requires that health outcomes be valued in monetary units in order to calculate the net economic benefit of a program, cost–effectiveness analysis requires only that a quantitative measure of health effectiveness, or utility, be defined. Typically, effectiveness is measured by life years (LYs) or quality-adjusted life years (QALYs). The cost–effectiveness ratio (dollars per LY or dollars per QALY) serves as a yardstick for measuring the relative priority of health interventions that compete for limited resources. Perhaps because it avoids translating health consequences into dollars, cost–effectiveness analysis has been more favorably received by the medical community than cost–benefit analysis and has been favored by government agencies that have proposed or adopted economic criteria for funding of health programs or paying for new drugs (Klevit et al. 1991; Henry 1992). Although economic valuation of health consequences is avoided in the analysis per se, the problem of deciding in absolute terms whether a program is worth funding or not rests on whether a particular value of the cost–effectiveness ratio (e.g., $100,000 per QALY) is acceptable. Following a review of the theoretical framework that leads to the use of the cost–effectiveness ratio as a decision criterion, this chapter addresses three issues in interpreting cost–effectiveness ratios and in translating them into criteria for resource allocation. [ABSTRACT FROM AUTHOR]

In a world with unlimited resources, it would be unnecessary to have methods to determine the best way to allocate those resources among alternative uses. But resources are limited: in 1994, U.S. health spending will exceed $1 trillion for the first time and spending is projected to grow 50 percent faster than gross domestic product for the remainder of the decade (Burner, McKusick, and Waldo 1992). Similar trends are evident in other countries (Schieber, Poullier, and Greenwald 1993). Throughout the world, there are pressures on public budgets. Policymakers and the public have begun to recognize that every dollar spent on health care is no longer available for spending on education, crime control, or infrastructure improvement. Further, much of what we now spend is wasted on care that does not improve our health or yields small improvements in health at exorbitant cost (Siu et al. 1986; Winslow et al. 1988; Enthoven and Kronick 1989; CBO 1992a). In the public sector, even in the face of mounting cost pressures, the balancing of benefits and costs has typically not been a criterion in deciding whether medical services should be made available or should be covered under public insurance. At one extreme, policymakers have focused exclusively on costs, rejecting higher cost alternatives without any consideration of their potential benefits (e.g., some state Medicaid programs in the United States). Others have focused exclusively on benefits while ignoring the costs of achieving these benefits. [ABSTRACT FROM AUTHOR]