Economic foundations of cost-effectiveness analysis

J Health Econ. 1997 Feb;16(1):1-31. doi: 10.1016/s0167-6296(96)00506-1.


To address controversies in the applications of cost-effectiveness analysis, we investigate the principles underlying the technique and discuss the implications for the evaluation of medical interventions. Using a standard von Neumann-Morgenstern utility framework, we show how a cost-effectiveness criterion can be derived to guide resource allocation decisions, and how it varies with age, gender, income level, and risk aversion. Although cost-effectiveness analysis can be a useful and powerful tool for resource allocation decisions, a uniform cost-effectiveness criterion that is applied to a heterogeneous population level is unlikely to yield Pareto-optimal resource allocations.

Publication types

  • Research Support, Non-U.S. Gov't
  • Research Support, U.S. Gov't, P.H.S.

MeSH terms

  • Cost-Benefit Analysis / economics*
  • Health Care Costs / trends*
  • Health Policy / economics
  • Health Services Research / economics
  • Health Services Research / methods*
  • Models, Econometric
  • Quality-Adjusted Life Years
  • United States