Research Report, Department of Economics, University of Western Ontario 2000-7
Economic evaluation in health care often involves cost-utility analysis (CUA), a method based on the cost-effectiveness criterion of dollars per Quality-Adjusted Life Year (QALY), where the quality adjustement factors for years lived in ill health are established through answers to standard-gamble questions. This paper shows that, contrary to a widely held notion, allocation of a fixed health care budget through CUA does not generally result in a second-best efficient allocation. However, CUA can be used to attain second-best efficiency in the sense of meeting a given QALY target at minimum social cost. It also qualifies Meltzer's (1997) result that the cost per QALY for life-saving medical interventions should include the future consumption of those who would otherwise not have survived, by showing that its validity depends on how the QALY index has been defined. Another finding is that failure to specify carefully what respondents to standard gamble question are supposed to assume about the financial consequences of ill health may result in a bias against providing care to older individuals.