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Cost-benefit analysis (CBA) in health converts both costs and health outcomes into monetary terms, enabling a direct comparison: if the monetized benefits exceed the costs, the intervention increases social welfare. Unlike CEA (which produces a ratio requiring a threshold for interpretation), CBA produces a net benefit in dollars — a positive net benefit means the intervention is worth doing. The key challenge is assigning a monetary value to health outcomes, particularly life itself. The Value of a Statistical Life (VSL) — derived from observed tradeoffs people make between money and mortality risk (wage-risk studies, consumer behavior) — is the standard approach, with current US estimates around $10-12 million. CBA is the standard framework in environmental and transportation policy but is controversial in health because of discomfort with explicitly pricing life and because the VSL varies with income, raising equity concerns.
Cost-effectiveness analysis tells you which intervention produces the most health per dollar, but it cannot tell you whether the health gains are worth the cost in absolute terms — you need a threshold, and the threshold is ultimately a judgment call. Cost-benefit analysis resolves this by converting everything into dollars: if monetized benefits exceed costs, the intervention increases social welfare. This directness is both CBA's strength and the source of its controversy.
The central methodological challenge is monetizing health outcomes, especially life and death. The standard concept is the Value of a Statistical Life (VSL), which does not claim to price an identified individual's life. Instead, it measures the aggregate value of small reductions in mortality risk. If 10,000 people are each willing to pay $1,000 for a safety measure that reduces each person's annual mortality risk by 1/10,000, the implied VSL is $1,000 × 10,000 = $10 million. This is the value of one "statistical" life — the prevention of one expected death among a large group.
VSL estimates come from two sources. Revealed preference studies examine real-world tradeoffs: workers accepting higher wages for riskier jobs, consumers paying more for safer cars, or homebuyers paying premiums for homes away from pollution sources. Stated preference studies use surveys to elicit willingness-to-pay for hypothetical risk reductions. Current US regulatory estimates center around $10-12 million, though estimates vary by method, population, and type of risk.
The equity implications of CBA are its Achilles' heel in health applications. Because willingness-to-pay is constrained by ability-to-pay, VSL estimates are higher for wealthier populations. Using differentiated VSLs would mean that a policy saving 100 lives in a wealthy suburb generates more "benefit" than one saving 100 lives in a low-income neighborhood — a conclusion most societies find morally unacceptable. This is why healthcare resource allocation generally uses CEA with QALYs (which do not depend on income) rather than CBA with VSLs. CBA remains dominant in environmental and transportation regulation, where health impacts must be weighed against non-health costs and benefits on a common monetary scale.