Economic Evaluation andHealth Care
Cost-benefit analysis
Ray Robinson
Cost-benefit analysis is probably the most comprehensive
method of economic evaluation available
and it can be applied in two ways. The human capital
approach means that the value of people's contributions
is linked to what they are paid. The approach
based on individuals' observed or stated preference
means that theirpersonalvaluations are placed on an
activity by assessing how much money they are
prepared to accept for an increased risk or to pay for
a particular service. Each method has its disadvantages
and the most successful that has been devised
so far is the "willingness to pay" (stated preference)
approach, though the response to this is to a large
extent dependent on the income ofthe person being
questioned. There are still problems with its application,
however, so its usefilness is limited.
Cost-benefit analysis is the most comprehensive and
theoretically sound form ofeconomic evaluation and it
has been used as an aid to decision making in many
different areas of economic and social policy in the
public sector during the last 50 years. There are
numerous textbooks dealing with the theory and
practice ofthe general approach.'-3
The main difference between cost-benefit analysis
and other methods of economic evaluation that were
discussed earlier in this series is that it seeks to place
monetary values on both the inputs (costs) and outcomes
(benefits) of health care. Among other things
this enables the (monetary) returns on investments in
health to be compared with the returns obtainable from
investments in other areas of the economy. Within the
health sector itself, the attachment of monetary values
to outcomes makes it possible to say whether a
particular procedure or programme offers an overall
net gain to society in the sense that its total benefits
exceed its total costs. Cost-effectiveness and costutility
analysis do not do this because they measure
costs and benefits in different units.
Devising ways in which complex outcomes ofhealth
care can be reduced to a single monetary measure is not
easy and is the main reason why cost-effectiveness and
cost-utility analysis have been relied on more often in
the health care sector. None the less there have been a
number of approaches which over the years have
sought to place monetary values on the benefits
that arise from health care programmes. These may
be divided into two main categories: the human
capital approach and approaches based on individuals'
observed or stated preferences.
Human capital approach
Early approaches to benefit valuation were commonly
based on the concept of "human capital." This
concept is designed to convey the fact that human
beings are similar to capital equipment (at least as far as
their working lives are concerned) in the sense that
they can be expected to yield a flow of productive
activity in future years. If the value of this activity in
any period of time is assumed to be equal to the
individual person's rate of pay, then the benefits of
health care can be measured in terms ofthe future flow
of income that would otherwise have been forgone
because ofill health. Because these calculations involve
adding up a stream of income that accrues over a
number of different years, the sum in each year must
be time-discounted to take account of the precise time
profile of benefits (methods of time discounting and
debates surrounding this practice were discussed in the
second and third articles in this series).
The human capital approach has been applied in the
valuation of health benefits in cases of both avoidable
morbidity and mortality. There have, however, been
various criticisms. As one of the first attempts to place
monetary values on avoided mortality it led to monetary
values being placed on human life and many
people have strong ethical objections to this. In
contrast, most economists think that implicit valuations
are placed on human lives in a whole range of
decisions about allocation of resources in the public
sector and the cost-benefit approach is simply being
explicit about the process.4'5
Other criticisms have centred on the use of rates of
pay as a measure of value. Economic theory suggests
that productivity is accurately measured only by rates
ofpay when certain conditions in the labour market are
met. The widespread existence of restrictive practices
and other forms of imperfections in the labour market
means that these conditions often do not apply in
practice. At the same time, valuing benefits in terms of
rates of pay neglects the health benefits that accrue
to people who are not employed-for example,
non-working wives and retired people. It also ignores
the non-financial costs of pain, suffering, and grief
which are often associated with illness. But, from an
economist's perspective, the main criticism of the
approach is that it is not based on an individual
person's valuations of benefits. Indeed, a third party
view is taken about people's "worth" to society in
terms of their productive potential. This viewpoint
is inconsistent with the prevailing view among economists
that the individual person is the best judge ofhis
or her own welfare.
Individuals' observed or statedpreferences
The observed preferences approach involves observing
individuals' behaviour and using these observations
as a basis for valuing benefits. One method of
doing this is to observe their behaviour towards risk
and then to estimate the personal valuations implicit in
this behaviour. Some people accept "danger money"
for undertaking work with an increased risk of injury
or death-for example, deep-sea divers. Others spend
money on cars with enhanced safety features to reduce
the risk of injury or death. When the extra income
received or expenditure undertaken is compared with
the change in the degree of risk associated with a
particular activity, it becomes possible to establish the
personal valuations implicit in observed behaviour.
Converting valuations associated with small changes in
risk into full life valuation is not straightforward, but
various techniques associated with "scaling risks" have
been developed.6 On a practical level, however, one of
the main disadvantages of this approach is the limited
number of situations under which attitudes towards
risk can be observed and measured. This has led to the
BMJ VOLUME 307 9 OCTOBER 1993
This is thefifth in a series of
articles that describes the ways
in which methods ofeconomic
evaluation may be used to
assess the economic costs and
consequences associated with
differentforms ofhealth care
intervention.
Institute for Health Policy
Studies, Faculty ofSocial
Sciences, The University,
Southampton S09 5NH
Ray Robinson, professor and
director
BMJ 1993;307:924-6
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Value is in the eye ofthe beholder
development of other techniques, in which people
are asked to state their preferences among specified
choices in monetary terms. This is known as the
"willingness to pay" approach.
Outside the health sector, this method has been used
widely in the evaluation of environmental costs and
benefits.7 In this context, probably the most famous
and controversial application ofthe approach in Britain
took place over 20 years ago when the Roskill Commission
on the siting of the then proposed third London
airport used the willingness to pay approach to value
the costs of aircraft noise. The commission's approach
was to ask people how much compensation they would
require to leave them equally well off if they were
forced to move house to avoid noise costs.8
In the context of health, the willingness to pay
approach seeks to establish the value that people attach
to health care outcomes by asking them how muchthey
would be prepared to pay to obtain the benefits or avoid
the costs ofillness.
Because payment or compensation is not actually
made, however, either interviews or postal questionnaires
are normally used which are based on
open ended or discrete valuation questions. With
open ended questions a form of bidding game resembling
an auction is the most common approach. An
opening bid is made which the respondent either
accepts or rejects; thereafter, bids are either raised or
lowered until the respondent's maximum willingness
to pay is reached. With discrete questions, the respondent
is presented with a series of prices and asked to
offer a yes/no answer depending on their personal
willingness to pay. This approach is less susceptible to
starting point bias, which may cause the respondent's
answers to be influenced by the starting bid, but there
are a number ofother forms ofstrategic and compliance
bias which must be guarded against whichever
approach is used.9
Applications of the willingness to pay approach to
health care are still relatively rare, but some interesting
studies have been undertaken. For example, in an
early application of the approach, Acton investigated
willingness to pay for mobile coronary care units that
would reduce the risk of death after a heart attack.'0
Among other things, this study looked at a respondent's
personal willingness to pay for a programme,
given various probabilities of heart attack and death,
in comparison with their willingness to pay for a
community programme. Not surprisingly, perhaps,
willingness to pay was greater for perceived personal
benefits than it was for community benefits.
More recently, Thompson used willingness to pay
methods to value the effect of a hypothetical cure on
their state of health in 247 patients with rheumatoid
arthritis who were already enrolled in a randomised
controlled drug trial." During interviews, respondents
were asked to think about the ways in which arthritis
affected their lives and their families. They were then
told to assume that there was a complete cure for their
disease and asked how much they would be willing to
pay for it. The precise question that they were asked
was: "What percent of your families' (ie household)
total monthly income would you be willing to pay on a
regular basis for a complete cure for arthritis?" Consistency
of answers was checked by a follow up question
about how the family would manage to live on the
remaining amount.
Using these methods, Thompson obtained a 96%
response and 84% ofthe responders gave answers that
met predetermined criteria for plausibility. The results
indicated that the average responder was willing to pay
22% of their household income to secure a cure for
arthritis. This proportion did not vary with income.
In another study, Johannesson, Jonsson, and Borgquist
11th Nordic Health Economists' Study Group
Meeting, Stockholm, 27-28 August 1990) examined
willingness to pay for antihypertensive therapy. They
achieved a response rate of 67% from an elderly
population (mean age 64-4 years) comprising 481
patients at a primary health care centre. A particular
focus of this study was an investigation of the relative
merits of an open ended questionnaire compared with
one using discrete yes/no questions. The authors
concluded that open ended questions do not work
well in willingness to pay postal surveys. Discrete
questions, on the other hand, led to a lower nonresponse
rate and provided respondents with an easier
valuation task. This approach indicated that people
would be willing to pay between SKr 2500 and
SKr 5000/year (about £225-1450) for antihypertensive
therapy. The authors also concluded that although the
results should be interpreted with caution, they indicated
a large potential application for willingness to pay
methods in the field ofpreventive health care.
Two recent studies carried out in the United Kingdom
were by Rushby (JA Rushby. Paper presented to
the Health Economists' Study Group, July 1991) and
Donaldson.'2 Rushby investigated willingness to pay
for improvements in the quality of life offered by heart
pacemakers. Respondents were asked to state their
maximum willingness to pay to be free of specified
symptoms associated with heart disease (shortness
of breath, chest pain, dizziness, fainting, and palpitations).
Groups of respondents included those with
personal experience of the symptoms, those with
experience of caring for patients, and those with no
more experience of the symptoms than the general
population. All groups were, however, asked to base
their answers on hypothetical cases rather than current
experience. The answers indicated that the mean
willingness to pay varied from £45.50/month for heart
palpitations to £70.67/month for chest pain.
BMJ VOLUME 307 9 OCTOBER1993
Willingness to pay methods have been
used to value benefits arisingfrom:
* Ultrasound scans in pregnancy
* Mobile coronary care units
* Drug treatments for hypertension
* Anaesthetics following hip surgery
* Heart pacemakers
* Cures for rheumatoid arthritis
* Continuing care for elderlypeople
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Donaldson applied willingness to pay in an attempt
to value the benefits ofcontinuing care accommodation
for elderly people.'2 The aim was to compare NHS
nursing homes with NHS hospital accommodation. A
distinctive feature of the study was that relatives of
respondents not the residents themselves were asked
how much they thought the government should be
willing to pay for the respective accommodation; 71%
of respondents provided valuations that could be used
in the analysis and their answers indicated a clear
preference for nursing home accommodation over
hospital accommodation when the total willingness to
pay of the two options was compared with their
respective costs.
In a recent review ofthe application ofwillingness to
pay studies, Morrison and Gyldmark argued that three
criteria must be met if use of the approach is to be
valid.'3 Firstly, given the uncertainty surrounding
individual subjects' needs for health care, willingness
to pay questions should ask how much a person is
willing to pay as an insurance premium so that a given
service would be available if it is needed. Secondly,
expectations should be expressed in terms of probabilities;
that is, what is the probability of needing
treatment and of its success? Thirdly, representative
samples ofthe population are necessary to establish the
total willingness to pay of the relevant population.
They concluded that few of the studies carried out to
date meet these criteria and that there are other
methodological issues that require attention, among
which is the link between willingness to pay and
income.
Income and monetary valuation ofbenefits
Valuing the benefits of health care interventions in
terms of willingness to pay raises the problem that the
amount people are willing to pay is often positively
related to their level of income. The fact that a rich
person is willing to pay £40/week for a drug whereas a
poor person is willing to pay only £1O/week is likely to
reflect the value each ofthem attaches to money itselfas
well as the benefits ofthe drug to health.
This is a problem that bedevils all attempts to value
benefits in monetary terms, both inside and outside the
health sector and it occurs when payment is actually
made as well as when it is based on willingness to pay
surveys. In some cases attempts have been made to
overcome the problem by "weighting" benefits according
to the income group of recipients with lower
income groups receiving larger weights, but this raises
many practical problems in addition to the obvious one
ofcalculating the appropriate scale ofweights. Another
approach is to take willingness to pay figures at their
face value if the programme under consideration
requires only small amounts of expenditure in relation
to a person's total income. If this is done distortions
that result from different valuations of money itself are
likely to be minimised.
Conclusion
Cost-benefit analysis is the most comprehensive
form of economic evaluation. By assigning monetary
values to both costs and benefits, it offers the potential
for comparisons between a wide range of programmes
both within the health sector and between the health
and non-health sectors. As far as its application within
Summary
* Cost-benefit analysis places monetary values on
both the inputs (costs) and the outcomes (benefits) of
health care
* Early methods of valuation of benefits were based
on the human capital approach in which benefits are
valued in terms of productivity gains. Rates of pay are
used as a measure ofproductivity
* Recent approaches have adopted the more theoretically
sound practice of basing valuations on peoples'
observed or stated preferences
* Stated preferences are usually based on willingness
to pay; the value people attach to health care
outcomes is established by asking them how much
they would be prepared to pay to obtain the benefits or
avoid the costs ofillness
* The dependence of willingness to pay on a person's
income does, however, create a difficulty because
answers may reflect the value people attach to money
itself as well as their valuation of the benefits of health
care
* Despite their theoretical superiority, willingness to
pay studies are still relatively rare. Their application in
the immediate future is likely to be most appropriate in
the case of, for example, pharmaceutical products
where qualitative health gains are achievable, where
payments are small in relation to income, and where
people are familiar with cash transactions
the health sector is concemed, it is a more powerful
technique than either cost-effectiveness or cost-utility
analysis. Among other things, it enables people to
express the benefits of health care in terms of their
valuations of the quantity of life, its quality, and any
other dimension that they feel is important. And all of
these diverse benefits are expressed in terms of a single
common unit ofmeasurement.
Early methods of obtaining valuations based on the
human capital approach have been largely superseded
by more theoretically sound methods based on individuals'
stated preferences, but a number oftheoretical
and practical problems remain and applications of
the approach have been relatively uncommon. In
the immediate future its application is likely to be
restricted to those areas in which small improvements
in the state ofhealth are attainable, in which payments
are relatively small in relation to income, and in which
patients have some familiarity with cash paymentsfor
example, pharmaceutical products that offer
improvements in the quality oflife.
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