In this paper we critically appraise the appropriateness and validity from an economic perspective of alternative preference-based approaches to measuring outcomes in economic evaluations of health care interventions. We describe the properties of an outcome measure for economic evaluation to make it compatible with the principles of economics when applied to the problem of resource allocation. We also describe the difference and similarities between the psychometric and the economic approaches for the measurement of outcome. Using these properties we critically appraise the use of QALY and HYE methods of measuring individual and social preferences for health outcome. We argue that the most advanced measure currently available that meets these required properties is the HYE. Because the HYE, unlike the QALY, has its foundations in utility theory under uncertainty, it neither assumes particular formulations of the individual utility function, nor is it incompatible with the principles of economics. As such it represents a further stage in the continuing development of methods for economic evaluation of health care programmes.