Cost-effectiveness analysis with risk aversion.
This paper discusses why, in a medical context, the standard assumption of a risk-neutral social planner is inappropriate and develops a framework for conducting cost-effectiveness (CE) analysis when social planners are risk-averse. This framework demonstrates that if new medical interventions are variance increasing (decreasing), the risk-neutral approach will approve (reject) projects that should be rejected (accepted). This methodology is applied to two medical interventions that have been previously evaluated and considered cost-effective in the published literature. Since both conclusions assumed risk neutrality we determine the level of societal risk-aversion that would be necessary to reject these new interventions and compare these levels to previous estimates of risk-aversion in the economics literature. We find that for reasonable values of the risk-aversion parameter, only one of the two interventions should be approved. It is our recommendation that the cut-off risk aversion parameter (the level of risk-aversion above which a project would be rejected) should become a standard reported figure in future CE studies.
Zivin
J G
JG
International Center for Health Outcomes and Innovation Research and Joseph L. Mailman School of Public Health, Columbia University, New York 10032, USA.
D000704:Analysis of Variance; D000893:Anti-Inflammatory Agents / Q000191:economics / Q000627:therapeutic use; D000970:Antineoplastic Agents / Q000191:economics / Q000627:therapeutic use; D015982:Bias; D003362:Cost-Benefit Analysis; D003659:Decision Making, Organizational; D019317:Evidence-Based Medicine; D005343:Fibrinolytic Agents / Q000191:economics / Q000627:therapeutic use; D006285:Health Planning / Q000191:economics*; D006302:Health Services Research; D006801:Humans; D008297:Male; D008942:Mitoxantrone / Q000191:economics / Q000627:therapeutic use; D017059:Models, Econometric; D009203:Myocardial Infarction / Q000188:drug therapy; D011241:Prednisone / Q000191:economics / Q000627:therapeutic use; D011471:Prostatic Neoplasms / Q000188:drug therapy; D019057:Quality-Adjusted Life Years; D018570:Risk Assessment; D013673:Technology Assessment, Biomedical / Q000191:economics*
D000893:Anti-Inflammatory Agents; D000970:Antineoplastic Agents; D005343:Fibrinolytic Agents; D008942:Mitoxantrone; D011241:Prednisone