Allocating health care resources when people are risk averse with respect to life time
2001/10: Hoel, M., Department of Economics, Frisch Centre & HERO.
To prioritize among different types of health expenditures, economists often argue that cost-effectiveness analysis should play an important role. To be able to use cost-effectiveness analysis, one needs some measure of "health benefits". While some analyses simply use the sum of life years saved due to a medical intervention, it is more common to also take improvements in health status into account. A frequently used measure combining the number of lives lived and the health quality of these years is "quality adjusted life years", or QALYs. The use of QALYs as a welfare measure, and as an appropriate variable in cost-effectiveness analyses, has been extensively discussed in the literature. The purpose of this paper is to examine if the criterion of cost-effectiveness in health management may be given a welfare-theoretical justification. Such a justification may be given if people are risk neutral with respect to life years. With risk aversion, the optimal allocation of health expenditures change: Compared to the cost-effective 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 in allocating the health budget.