ECONOMIC FOUNDATIONS OF COST-EFFECTIVENESS ANALYSIS

To address controversies in the application of cost-effectiveness anal ysis, we investigate the principles underlying the technique and discu ss the implications for the evaluation of medical interventions. Using a standard von Neumann-Morgenstern utility framework, we show how a c ost-effectiveness criterion can be derived to guide resource allocatio n decisions, and how it varies with age, gender, income level, and ris k aversion. Although cost-effectiveness analysis can be a useful and p owerful tool for resource allocation decisions, a uniform cost-effecti veness criterion that is applied to a heterogeneous population level i s unlikely to yield Pareto-optimal resource allocations.