COMPATIBILITY OF HEALTH BENEFITS ANALYSES WITH COST-BENEFIT ANALYSES

The goal of a cost-benefit analysis is to compare the monetized benefits of a regulation with its costs. Regulations are often ranked according to the size of their net benefits (benefits minus costs). As a result, health benefits must be calculated and then converted to dollars using a value per avoided casetoallowcomparisontothecosts.

Monetization of Health Benefits

Economists estimate the value of avoided morbidity by determining the amount a person is willing to pay to avoid an illness. The estimate should include the value of avoided pain and suffering, the value of time lost due to illness (both leisure and work time), and the costs of medical treatment. If some of the costs are not borne by the individual and therefore not reflected in the person’s “willingness to pay” (WTP), these costs must be added to the estimate to measure the total benefits to society of reduced morbidity. For certain chronic illnesses, such as chronic bronchitis, economists try to measure what a person would be willing to pay to reduce his risk of contracting the illness. The amount is usually expressed in terms of the “value of a statistical case” of a given illness, such as chronic bronchitis, and represents the sum, across different individuals, of WTPs for risk reductions that together equal one statistical case.

Similarly, for premature mortality, economists try to measure what a person would be willing to pay to reduce his risk of dying. The amount is usually expressed in terms of the “value of a statistical life” (VSL) and represents the sum, across different individuals, of WTPs for risk reductions that together equal one statistical life. For example, if 10,000 people are willing to pay $100 each to reduce their risk of dying by 1 in 10,000, together they are willing to pay $1 million for risk reductions that equal one statistical life. The $1 million is the VSL. The VSL includes the lost income associated with dying prematurely but does not reflect the medical costs that might precede death. These costs are assumed to be included in the value of morbidity.

Empirical estimates of the value of avoided morbidity that include all three components (WTP to avoid pain or discomfort, lost earnings, and



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