Cost-benefit analysis: Difference between revisions

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===Health and safety===
===Health and safety===
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A substantial literature over the past thirty years has evaluated tradeoffs between money and fatality risks. These values in turn serve as estimates of the value of a statistical life. This article reviews more than 60 studies of mortality risk premiums from ten countries and approximately 40 studies that present estimates of injury risk premiums. This critical review examines a variety of econometric issues, the role of unionization in risk premiums, and the effects of age on the value of a statistical life. Our meta-analysis indicates an income elasticity of the value of a statistical life from about 0.5 to 0.6. The paper also presents a detailed discussion of policy applications of these value of a statistical life estimates and related issues, including risk-risk analysis.
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<ref>[http://papers.ssrn.com/sol3/papers.cfm?abstract_id=362840 W Kip Viscusi and Joseph Aldi: ''The Value of a Statistical Life: A Critical Review of Market Estimates Throughout the World'', Harvard Law and Economics Discussion Paper No. 392, November 2002]</ref>


===The environment===
===The environment===

Revision as of 15:46, 13 July 2010

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Cost-benefit analysis is used to evaluate projects that generate non-financial costs and benefits, taking account of the preferences of those affected. It has applications to the provision of public goods for which preferences are not reflected in market prices. Although its quantitative results are necessarily approximate, it can sometimes provide a persuasive guide to a choice among alternatives. It is claimed that, by taking account of the strengths of preferences, cost-benefit analysis can provide a better guide to choice than can be obtained from voting.

Introduction

The function of cost-benefit analysis is to inform a decision that is to be taken on behalf of others. Its purpose is to indicate whether the proposed decision would be consistent with the preferences of those affected. The actions required are:

  • the specification of the scope of the analysis and of the decision criterion to be used;
  • the forecasting of the material consequences of the proposed decision;
  • the monetary valuation of each consequence in light of the preferences of those that would be affected;
  • the aggregation of those valuations as required in order to apply the decision criterion; and,
  • the interpretation of the aggregated valuations.

Specification

Scope

The scope of an analysis is normally determined by the requirements of its prospective users. The evaluation of a medical procedure might, for example, be concerned solely with its effects on patients and their families, or it might also encompass effects on the hospital or on the public at large. An evaluation of migration commissioned by a European government might or might not be required to include effects upon migrants and their families, but an evaluation commissioned by the European Union might be expected to require the inclusion of effects upon all of its inhabitants. Some users require the coverage of a longer timescale than others, and environmental studies may even be required to encompass effects on future generations.

Criterion

The customary ("consequentialist") decision criterion of cost-benefit analysis uses the summation of the effects of the expected consequences of a decision on the well-being of people within its scope. The alternative ("deontologist") decision criterion takes account of predetermined rules that reflect the beliefs or customs of the community concerned. To make a summation possible, a monetary cost or benefit is assigned to each of those effects. The summation normally used is then that of the costs and benefits of each effect, weighted by their estimated probability of occurrence, and discounted using the estimated time preference rates of those affected. The normal acceptance criterion for a single project is a positive net present expected value of the excess of benefits over costs, and the normal criterion for the acceptance of one among several alternatives is that it should be the one with the highest net present expected value. Some authorities specify a required rate of return criterion, but that has the disadvantage that the associated internal rate of return calculation can sometimes produce inconsistent results [1].

Methodology

Forecasts

The practice of cost-benefit analysis depends upon the assumption that - although the acceptability of the consequences a decision is determined by the reactions of those affected - the forecasting of those consequences is the responsibility of the decision-maker. That responsibility is assumed to be delegated to a representative government by its voters (and also, for example, to a medical practitioner by his patients). It is here assumed that forecasts of all of the expected outcomes and their probabilities are already available.

Valuation

The outcomes whose valuations typically figure in cost-benefit analysis, include non-financial benefits such as the saving of time and the relief of suffering, and non-financial costs in the form of unwelcome experiences such as injury and exposure to noise. The monetary value to a person of such an outcome is taken to be the amount that he would be willing to pay in order to enjoy its benefits or avoid its costs. The preferred way of estimating the relevant willingness to pay is the revealed willingness to pay method, which depends upon observations of the subjects' conduct in making free and well-informed choices. Valuation can be reliably estimated from the price that is determined by choices made in an efficient market, a reasonable approximation to which is often provided by organised markets for products and services. An alternative is the contingent valuation method[2] which employs survey questionnaires to establish the subjects' stated willingness to pay. Another possibility is the valuation of particular outcomes according to the observed community willingness to pay in expression of its collective attitude to similar outcomes. (Under that approach, the value of life might be derived from the costs of communally-determined practices concerning its preservation, such as prolonged hospitalisation).

Aggregation

The preferred method of aggregation is to calculate the sum of the net present expected values of all the outcomes, using their estimated probabilities and the appropriate discount rate. An exception is the practice (adopted in some assessments of global warming) of assessing the value of a "worst case scenario" when probability estimates are not available.

Applications

Health and safety

[3]

The environment

Climate change

Objections and limitations

Metrics used in cost-benefit analyses

  • Cost per year of life saved[4] The definition of an acceptable cost per year of life saves ranges from $50,000 to $200,000.[5]
  • Cost of Preventing an Event (COPE)[6]. For example, to prevent a major vascular event n a high-risk adult , the number needed to treat is 19, the number of years of treatment are 5, and the daily cost of the generic drug is 68 cents. The COPE is 19 * 5 * ( 365 * .68) which equals $23,579 in the United States.
  • Years (or months or days) of life saved. "A gain in life expectancy of a month from a preventive intervention targeted at populations at average risk and a gain of a year from a preventive intervention targeted at populations at elevated risk can both be considered large."[7]
  • Quality-Adjusted Years of Life saved and Disability-Adjusted Years of Life saved. These are compound metrics that considers both the gain in duration life, adjusted by factors reflecting overall health and ability to function in those years. [8]

Standards in conducting a cost-benefit analysis

Standards have been developed for the conduct of cost-benefit analyses[9][9] and for systematic reviews of cost-benefit analyses[10].

The two most common problems in publications of cost-benefit analyses are not stating the study perspective (e.g. is the cost born by the patient, health case system, or society) and not disclosing the funding source.[11]

Difficulties in cost-benefit analyses

The costs saved by successful treatment of one disease may be offset by greater longevity leading to increased costs from other disease.[12]

Recommendations have bee published on how to read and interpret a cost-benefit analysis.[13][14][15][16]


[17]

References

  1. Gaylon E. Greer and Phillip T. Kolbe: Investment analysis for real estate decisions[1] (Google books extract), Dearborn Real Estate, 2003
  2. Robert Mitchell and Richard Carson: The Contingent Valuation Method, (From: "Using Surveys to Value Public Goods"), The World Bank Group, 1989
  3. W Kip Viscusi and Joseph Aldi: The Value of a Statistical Life: A Critical Review of Market Estimates Throughout the World, Harvard Law and Economics Discussion Paper No. 392, November 2002
  4. Tengs TO et al (1995). "Five-hundred life-saving interventions and their cost-effectiveness". Risk Anal 15: 369–90. PMID 7604170[e]
  5. Cutler DM, Rosen AB, Vijan S (2006). "The value of medical spending in the United States, 1960-2000". N. Engl. J. Med. 355 (9): 920-7. DOI:10.1056/NEJMsa054744. PMID 16943404. Research Blogging.
  6. Maharaj R (2008). "Adding cost to NNT: the COPE statistic". ACP J. Club 148 (1): A8. PMID 18170986[e]
  7. Wright JC, Weinstein MC (1998). "Gains in life expectancy from medical interventions--standardizing data on outcomes". N Engl J Med 339: 380–6. PMID 9691106[e]
  8. Franco Sassi (2006), "Calculating QALYs, comparing QALY and DALY calculations", Health Policy and Planning 21 (5): 402-408, DOI:10.1093/heapol/czl018
  9. 9.0 9.1 Siegel JE, Weinstein MC, Russell LB, Gold MR (1996). "Recommendations for reporting cost-effectiveness analyses. Panel on Cost-Effectiveness in Health and Medicine". JAMA 276 (16): 1339–41. PMID 8861994[e] Cite error: Invalid <ref> tag; name "pmid8861994" defined multiple times with different content
  10. Jefferson T, Demicheli V, Vale L (2002). "Quality of systematic reviews of economic evaluations in health care". JAMA 287 (21): 2809-12. PMID 12038919[e]
  11. Neumann PJ, Stone PW, Chapman RH, Sandberg EA, Bell CM (2000). "The quality of reporting in published cost-utility analyses, 1976-1997". Ann. Intern. Med. 132 (12): 964-72. PMID 10858180[e]
  12. van Baal PH, Polder JJ, de Wit GA, et al (2008). "Lifetime Medical Costs of Obesity: Prevention No Cure for Increasing Health Expenditure". PLoS Med. 5 (2): e29. DOI:10.1371/journal.pmed.0050029. PMID 18254654. Research Blogging.
  13. Drummond MF, Richardson WS, O'Brien BJ, Levine M, Heyland D (1997). "Users' guides to the medical literature. XIII. How to use an article on economic analysis of clinical practice. A. Are the results of the study valid? Evidence-Based Medicine Working Group". JAMA 277 (19): 1552-7. PMID 9153371[e]
  14. O'Brien BJ, Heyland D, Richardson WS, Levine M, Drummond MF (1997). "Users' guides to the medical literature. XIII. How to use an article on economic analysis of clinical practice. B. What are the results and will they help me in caring for my patients? Evidence-Based Medicine Working Group". JAMA 277 (22): 1802-6. PMID 9178794[e]
  15. Greenhalgh T (1997). "How to read a paper. Papers that tell you what things cost (economic analyses)". BMJ 315 (7108): 596-9. PMID 9302961[e]
  16. Detsky AS, Naglie IG (1990). "A clinician's guide to cost-effectiveness analysis". Ann. Intern. Med. 113 (2): 147-54. PMID 2113784[e]
  17. Managing risks to the public: appraisal guidance, HM Treasury, 2005