Chapter 11: Cost–Benefit Analysis and the Human Capital Approach
11. Cost–beneﬁt analysis and the human capital approach 11.1 INTRODUCTION CBA requires that outputs and inputs be measured 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 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 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 main way that intangible beneﬁts are estimated. We start by reviewing the three main components of beneﬁts and then deﬁne intangible beneﬁts and list the main methods by which they can be estimated. In section 11.2 we explain the logic of the human capital approach. Section 11.3 examines the alternative approach that is based on WTP and an expression is presented that relates the two methodologies. Section 11.4 covers ways of converting CUAs into CBAs that put a price on a QALY. In the conversions both human capital and revealed preference WTP estimates...
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