Economic Evaluation

The change in health profiles of the population and the evolution of medical technology have made more explicit the gap between what medicine can do and what is economically feasible (Fuchs, 2000). Resources to satisfy needs are scarce and every society must decide how better to allocate the scarce resource among the different alternative uses. Economics tries to address the normative question of which allocation of resources is best for the society. The answer to such question depends crucially on the objective being pursued. When comparing different alternatives, under the classical assumptions of competitive markets (the Arrow-Debreu economy) and Pareto efficiency, a reallocation is said to be efficient if no one in the economy is made worse off and at least one individual is better off. However, such definition is very restrictive in at least two senses: first, it is not concerned with distributional issues and ignores any equity implications (a reallocation of resources that gives more money to the richest person, without taking anything from others, is efficient, despite the greater inequity such decision generates) and it doesn’t allows to judge reallocation of resources where there are some gainers and losers, because utility is neither interpersonally comparable nor cardinally measurable.

One way to compensate such flaw is to calculate the compensating variation, which is the amount of money that must be taken to the individual after the change, if the individual’s utility increased, and leave him in the same level of utility as before the change. If the person were made worse off after the change, the compensating variation would be a positive amount of money (enough to compensate him for the deterioration in utility...

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... if the definition is not explicitly detailed, the cost effectiveness of any intervention is very likely to be flawed.

The economic evaluation will establish whether the new service represents an efficient use of NHS (and societal) resources. The service can be considered cost-effective under the following conditions: (i) it saves money and generates improvements in health outcomes; (ii) it adds to costs and generates health improvements, with the incremental cost per unit of health gain considered good value relative to other uses of resources; (iii) it reduces costs and leads to a deterioration in health outcomes but the incremental cost per unit of health gain of standard management is not considered good value relative to other uses of resources. The purpose of the economic evaluation is to estimate the probability of each of these three possible outturns.