Questions: Cost-Benefit Analysis in Health

Question 1

An air quality regulation reduces annual mortality by 100 deaths at a cost of $500 million. Using a VSL of $10 million, what is the net benefit?

• A. Net benefit = $500 million (the regulation pays for itself)
• B. Net benefit = $500 million (100 lives × $10M - $500M = $500M)
• C. Net benefit = -$500 million (the cost exceeds the number of deaths prevented)
• D. Cannot be calculated without knowing who dies

Answer: (B)

Monetized benefit = 100 statistical lives × $10 million = $1 billion. Cost = $500 million. Net benefit = $1 billion - $500 million = $500 million. The regulation passes the CBA test. The VSL does not mean each life is 'worth' $10 million — it reflects the aggregate willingness of the affected population to pay for small reductions in mortality risk. The $10 million figure comes from observing that people accept approximately $1,000 in additional annual income for a 1/10,000 increase in annual mortality risk (1,000 × 10,000 = $10M).

Question 2

CBA's reliance on the VSL means that health interventions benefiting wealthier populations will always show larger net benefits, because higher-income individuals have higher VSL (they are willing to pay more for risk reduction).

• T. True
• F. False

Answer: True

This is the most serious equity critique of CBA in health. VSL is derived from willingness-to-pay, which is constrained by ability-to-pay. A wealthy person's VSL may be $15 million while a low-income person's is $5 million — not because the rich person's life is more valuable, but because they have more resources to trade for safety. Using income-differentiated VSLs would systematically favor interventions for the wealthy. Most regulatory agencies use a single VSL for all populations to avoid this inequity, but this is an ethical choice, not an economic one.

Question 3

Explain why cost-effectiveness analysis is more commonly used than cost-benefit analysis for healthcare resource allocation decisions.

Model answer: CEA avoids the controversial step of placing a monetary value on health outcomes. It compares interventions using natural health units (QALYs, life-years) and a cost-effectiveness ratio, which is then judged against a threshold. CBA requires explicitly monetizing health, which raises ethical objections (commodifying life), methodological challenges (which valuation method? whose willingness to pay?), and equity concerns (VSL varies with income). CEA is also more intuitive for clinicians and health policymakers who think in terms of health outcomes rather than dollar values. However, CBA is standard in regulatory impact analysis (environmental, transportation) where health is one of many outcomes that must be compared on a common scale.

The threshold used in CEA (e.g., $50,000/QALY) implicitly places a monetary value on health — if society will pay up to $50,000 for one QALY, that is an implicit valuation. The difference is that CEA keeps this valuation implicit and allows different thresholds for different contexts, while CBA makes it explicit through the VSL. The implicit approach is considered more politically and ethically palatable in healthcare settings.