The Cost-Effectiveness Criterion and the Treatment of Health Gains and Losses versus Additional Years of Life

Abstract

In publicly-funded health care system with limited health care resources, the government needs to determine wihich of all available treatments it is willing to fund. Cost-effectiveness analysis (CEA) has been developed as a solution to this problem, and it helps policy makers choose between alternative treatment. A feature of the standard CEA model is that each person is weighted equality, irrespective of their initial state of health or the nature of the health improvement or life extension due to treatment. This paper extends the standard CEA to examine whether assigning, different weights to health treatment which enable patients to avoid illness or death versus treatments which prolong life matters to funding decisions, particularly at the end of life. I study a two-period individual expected utility function and derive the increamental cost-effectiveness ratio for each treatment and determine the implications for funding decisions. The analysis reveals that the incremental cost-effectiveness ratio of each treatment in a model with different weights may generate different funding rules from those derived from the standard model.