Chapter 11: Cost–benefit analysis and the human capital approach
Cost–benefit analysis requires that outputs and inputs be valued in comparable units. With inputs measured in monetary units forming costs, the main way that CBA is made operational is for the outputs also to be measured in monetary terms and become benefits. In this chapter we look at the traditional, human capital (HC) approach to benefit estimation that places monetary valuations by way of individual earnings affected by health care interventions. This approach can be used for estimating indirect benefits, but it can also be used to measure lives lost or saved. The main alternative approach to valuing a life, which we will be contrasting with the HC approach in this chapter, is to find out what people are willing to pay for reductions in the probability of losing one’s life. This modern approach, called valuing a ‘statistical life’, typically relies on revealed preferences in the labor market and is the chief way that intangible benefits are estimated. Since the value of a statistical life (VSL) is the main WTP method that we will be discussing in this chapter, we will use the terms VSL and WTP interchangeably (except in section 11.5.2). Once the human capital approach has been clarified, we explain how it can be used to price a QALY.
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