HERO Online Working Paper Series,
University of Oslo, Health Economics Research Programme

Abstract: The criterion of cost-effectiveness in health management may be given a welfaretheoretical justification if people are risk neutral with respect to life years. With risk aversion, the optimal allocation of health expenditures change: Compared to the costeffective allocation, more resources should be allocated to health cases for which the expected outcomes even after treatment are worse than average. The consequences of medical interventions are usually not known with certainty. Given this type of uncertainty, simple application of cost-effectiveness analysis would recommend maximization of expected health benefits given the health budget. We show that when people are risk averse with respect to the number of life years they live, the uncertainty associated with different types of interventions should play a role on allocating the health budget.

Keywords: Health management; risk aversion; QALY; HYE

JEL-codes: D61; D81; H43; H51; I18

13 pages, June 30, 2009

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