Benefit-Cost Analysis in Global Health

Lisa A. Robinson
James K. Hammitt

Harvard T.H. Chan School of Public Health

Center for Health Decision Science
and
Center for Risk Analysis

January 2017

Forthcoming as Chapter 7 in: Global Health Priority-Setting: Beyond Cost-Effectiveness (O.

Norheim et al., eds.), Oxford, UK and New York, NY: Oxford University Press.

Electronic copy available at: https://ssrn.com/abstract=2952014

 January 2017 Draft

Benefit-Cost Analysis in Global Health

Lisa A. Robinson and James K. Hammitt*

Abstract:

Decisions on investing in health as well as other policies require deciding how to best allocate
available resources -- recognizing that using labor, materials, and other resources for one purpose
means that they cannot be used for other purposes. Approaches for economic evaluation,
including cost-effectiveness analysis and benefit-cost analysis, have in common the overarching
goal of providing information on policy impacts, so as to provide an evidence-base for decisions.
What distinguishes benefit-cost analysis is its emphasis on explicitly accounting for all
significant outcomes (both health and non-health) and on valuing them in monetary units to
facilitate comparison. Benefit-cost analysis makes the relative values of different outcomes
explicit. As conventionally implemented, benefit-cost analysis does not address the distribution
of impacts within a population, but it can be supplemented to do so.

Key Words: benefit-cost analysis, benefit valuation, morbidity risk reduction, mortality
risk reduction, value per statistical life.

* Harvard T.H. Chan School of Public Health, Center for Health Decision Science and Center for
Risk Analysis; robinson@hpsh.harvard.edu, jkh@harvard.edu.

Electronic copy available at: https://ssrn.com/abstract=2952014

 January 2017 Draft

Introduction

Prioritizing investments in health and other policies requires deciding how to best allocate
available resources. Is it better to devote labor, materials, and other resources to implementing a
designated policy rather than using those resources for other purposes – including other policies
that might achieve similar outcomes? Benefit-cost analysis explicitly addresses this question,
comparing the outcomes of one policy with those that could be obtained by other uses of the
resources. Disparate outcomes are measured in monetary terms to facilitate comparison of their
relative importance.
Benefit-cost analysis is the dominant approach to policy evaluation in many spheres. For
example, it is widely used to evaluate the impacts of environmental, public health, and safety
regulations. It is less frequently applied to investments in health care, perhaps in part because of
the belief that health is a merit good that should be provided regardless of ability to pay or
preferences for health relative to other goods. However, choosing to implement a policy
presumably means the decision-maker believes it will do more good than harm; benefit-cost
analysis makes this tradeoff explicit. Money is used to measure the intensity and direction of
preferences, recognizing that choosing to spend more on one policy means that there will be
fewer resources available for other purposes. While a different metric could be employed, money
is the most convenient because of its use in the marketplace to measure the relative value of
different goods and services.
Cost-effectiveness analysis, extended cost-effectiveness analysis, and benefit-cost
analysis have in common the overarching goal of providing information on policy impacts so as
to encourage evidence-based decision-making. They also use similar methods to estimate the
costs of policy implementation. What distinguishes benefit-cost analysis is its emphasis on
explicitly accounting for all policy outcomes and valuing them in monetary terms to the extent
possible. Relying on monetary values enables analysts to consider a wide range of impacts,
including non-health benefits such as environmental improvements as well as the effects of
reduced impoverishment on health and welfare.
In benefit-cost analysis, the values of outcomes are usually derived from the perspective
of the people affected. Although benefit-cost analysis has normative foundations, one can
disagree with its underlying principles and still find the information it provides useful. Benefit-
cost analysis is rarely, if ever, the sole basis for decisions, given that some important
consequences may be difficult to quantify and that choices are often constrained by a variety of
legal, technical, budgetary, and other factors. However, policymakers and other stakeholders are
likely to be interested in understanding the preferences of the affected population even if the
decision is ultimately made on other grounds.
In this chapter, we discuss the conceptual framework and practical application of benefit-
cost analysis, focusing on how it is conducted in the real world. We introduce the general
framework and standard analytic components, discuss the valuation of improvements in health

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and longevity in more detail, then illustrate the approach based on the case study introduced
earlier in this volume.

General Framework

Benefit-cost analysis (sometimes referred to as cost-benefit analysis) is rooted in standard

welfare economic principles.1 Key assumptions include that opportunity costs are the appropriate
measure of value and that each individual is the best judge of his or her own welfare. We discuss
these and related concepts below.

Characterizing trade-offs
Benefit-cost analysis focuses on the opportunity costs associated with different policy choices. It
explicitly recognizes that using resources (such as labor or raw materials) for one purpose means
they are not available for other uses. Thus the value of a resource is determined by its most
productive or beneficial alternative use. This opportunity cost often can be estimated from
market prices. However, for outcomes such as reductions in mortality and morbidity risks as well
as improvements in environmental quality, no market price exists. Values are instead derived
from stated preferences or from preferences revealed by market behavior.
Conventionally, values are estimated from an individual’s perspective, then aggregated to
determine the value of the good or service to society. Presumably, if an individual chooses to buy
a good or service, he or she values that item more than the other things the money could buy.
This means that the value of a policy’s benefits can be measured by the affected individuals’
willingness to spend on different goods or services. For an individual as well as a society,
income (or wealth) represents the total amount of resources that can be allocated across various
goods and services, taking into account the ability to borrow or save so as to spread consumption
over time.

Relying on net benefits as the summary measure

The conventional normative basis for using benefit-cost analysis in decision-making begins with
the Pareto Principle, which states that a policy is desirable if it makes at least one person better
off and no one worse off. While attractive in theory, few policies meet this criterion: virtually all
policies make some people worse off, at least in comparison to alternative policies that could be
chosen. The Kaldor-Hicks criterion addresses this limitation by suggesting that a policy is
desirable if it makes the winners better off by an amount large enough that they could provide
monetary compensation to the losers; alternatively, it should be rejected if the losers could
compensate the winners for forgoing the policy. This criterion assumes that compensating
payments do not impose administrative costs or otherwise affect the resources available to
society. It also does not require that compensation be provided: the criterion is satisfied if
adequate compensation could be paid hypothetically. Following this criterion, if only one policy

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is being considered, it should be selected if its benefits exceed its costs. If multiple policies are
being considered, the preferred choice is the one that yields the largest positive net benefits.
While the goal of benefit-cost analysis is often described as seeking to determine which
policy option is most economically efficient, using the Kaldor-Hicks criterion as a guide, in
reality its goals are perhaps more pedestrian. Typically, gaps and limitations in the available
research mean that not all outcomes of interest can be quantified and monetized and that net
benefits are uncertain. In addition, decision-makers and stakeholders care about factors other
than economic efficiency, including distributional, ethical, legal, political, budgetary,
technological, and other concerns. Thus it is more consistent with current practice to describe
benefit-cost analysis as a well-established and useful framework that provides information for
decision-making, rather than as a normative guide to which policy should be implemented. It
helps those engaged in the policymaking process anticipate outcomes that might otherwise be
unexpected, understand the preferences of the affected populations, and develop evidence to
support the decision.

Distinguishing between economic efficiency and distribution

Although benefit-cost analysis traditionally focuses on efficiency, those involved in policy
development are also interested in the distribution of the impacts -- who pays the costs and who
receives the benefits. As a result, it is useful to supplement a standard benefit-cost analysis with
an analysis of how the impacts on income, health, longevity, and other outcomes are distributed.
Such analysis is required to varying degrees by government guidance on regulatory benefit-cost
analysis (see, for example, U.K. Treasury 2011, Robinson et al. 2016, U.S. Department of Health
and Human Services 2016), and several scholars have proposed approaches for enhancing such
analysis (e.g., Adler, this volume, Fleurbaey et al. 2013, Cookson et al. 2016).
There are several reasons for the conventional separation between economic efficiency
and distribution, both conceptual and practical. One is that incorporating individual preferences
for costs and benefits that accrue to others raises difficult conceptual issues related to the
treatment of altruistic preferences as well as the empirical measurement of other-regarding
values. For example, appropriately incorporating altruism in benefit-cost analysis requires
determining whether it is pure or paternalistic: a pure altruist respects others’ preferences for
both the benefits they receive and the costs they incur, whereas a paternalistic altruist cares only
about some aspects of others’ well-being, such as their health (Jones-Lee 1991, Bergstrom 2006).
In addition, valuation studies that explore altruistic preferences often find counterintuitive
results: individuals report lower values for programs that benefit the community than for
programs that benefit only themselves (e.g., Svensson and Johansson 2010, Lindhjem
et al. 2011), suggesting that they may not understand or accept the valuation scenarios.
Another closely related concern is the lack of agreement on how to rank different
distributions. There is substantial debate over the extent to which priority should be given to
helping the worst off, to reducing inequality, or to other distributional concerns. As a result,
analysts often find it easier to describe the distribution without attempting to agree on the

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evaluation. For example, analysts may report the costs, benefits, and net benefits that accrue to
different income groups and calculate measures of inequality such as the Gini coefficient (as in
Verguet et al., this volume). However, as illustrated in Norheim et al. (this volume) and Adler
(this volume) weights that reflect distributional preferences can be explicitly included in the
analysis, and the results can be reported with and without such weights or with alternative
weighting schemes.
A more practical consideration is that it can be more difficult to determine the
distribution of costs than benefits, particularly in cases where the costs are initially imposed on
industry or other organizations rather than directly on individuals. Focusing solely on the
distribution of benefits can lead to inaccurate conclusions, since such analysis ignores the extent
to which the distribution of costs aggravates or ameliorates inequities associated with the
distribution of benefits.
A final concern is the need to appropriately distinguish between resource costs and
transfers. Transfers are monetary payments between individuals or groups that have little impact
on the total resources available to society, such as taxes, fees, and surcharges. Because they are a
benefit to recipients and a cost to payers, transfers are often ignored in calculating net benefits,
and only considered when assessing the distribution of the impacts. However, transfers may have
welfare effects that should be included in the benefit-cost analysis. For example, policies that
avert financial distress, such as universal health-insurance coverage, may have consequences for
health as well as for other aspects of welfare (such as the maintenance of work-related skills) that
should be included when estimating the benefits of the policy.

Standard Components

As conventionally conducted, benefit-cost analysis consists of seven basic steps; distributional

analysis may be completed as an eighth step, as illustrated in Figure 7.1 and discussed below.
These steps are not unique to benefit-cost analysis; the other analytic approaches described in
this volume include similar components. While shown as a sequential process, in reality these
steps are iterative. As analysts acquire additional information and review their preliminary
findings, they often revisit and revise earlier decisions to reflect improved understanding of the
issues.

(1) Define the problem: This may, for example, involve reducing the prevalence of smoking,
increasing infant survival rates, or more effectively preventing the transmission of malaria.

(2) Identify policy options: These should include a reasonable number of feasible alternatives;
considering only one policy or investment option can lead decision-makers to ignore others that
may be more cost-beneficial.

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Figure 7.1. Benefit-Cost Analysis Components

1) Define the 
problem

2) Identify 
policy options

3) Determine 
standing

4) Predict  5) Predict 
baseline  responses

6a) Estimate  6b) Estimate 
costs benefits

7) Calculate net 
benefits

8) Estimate the 
distribution

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(3) Determine who has standing; i.e., whose benefits and costs count. The analysis may, for
example, consider impacts on only those who reside or work in a specific country or region.

(4) Predict baseline conditions: Each option is typically compared to a “no action” baseline that
reflects predicted future conditions in the absence of the policy, although other comparators may
at times be used. The baseline should reflect expected changes in the status quo. For example,
the health of the population and its size and composition may be changing, and the economy may
be evolving, in ways that will affect the policy’s impacts.

(5) Predict policy responses: This is often the most difficult step, given that individuals do not
always respond as expected and that the available research may address a dissimilar population
or context. One challenge is ensuring that changes likely to occur under the baseline are not
inappropriately attributed to the policy; another is understanding the causal pathway that links
the policy to the outcomes of concern. The goal is to represent the policy impacts as realistically
as possible.

(6) Estimate costs and benefits: Whether an impact is categorized as a “cost” or “benefit” is
arbitrary and varies across analyses. To avoid confusion, we suggest categorizing as costs the
investments or inputs needed to achieve the policy goals and as benefits the intended policy
outcomes, including any countervailing effects in the corresponding category. For example,
“costs” might include expenditures on improved technology as well as any cost-savings that
result from its use; “benefits” might include the reduction in disease incidence as well as any
offsetting risks, such as adverse reactions to vaccines.
When estimating costs, analysts concentrate on the reallocation of resources required to
implement the policy; i.e., the opportunity costs of using labor, materials, and other resources to
carry out the policy rather than for other purposes. These costs may be incurred by private
enterprises, government agencies, nongovernmental organizations, other nonprofits, or
individuals. Analysts often estimate direct costs based on market prices.2 At times, policy
impacts may be large enough to noticeably affect these prices, in which case the effects on
market supply and demand also should be considered.
When estimating benefits, prices generally can be used to value marketed goods or
services. However, improved health and longevity as well as environmental quality require the
application of nonmarket valuation methods, as discussed later in this chapter.

(7) Calculate net benefits: In determining which policy provides the largest positive net benefits,
future year impacts are discounted to reflect time preferences as well as the opportunity costs of
investments made in different periods. This discounting reflects the general desire to receive
benefits as soon as possible and to defer costs. In benefit-cost analysis, benefits and costs are
generally discounted at the same rate.3

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Analysts must also address the effects of uncertainty, including non-quantified effects.
The goal is to ensure that decision-makers and other stakeholders understand the extent to which
these uncertainties – in the data, models, and assumptions – affect the net benefit estimates, and
that they explicitly consider the potential impacts of those impacts that could not be quantified.

(8) Estimate the distribution: While often considered to be outside the benefit-cost analysis
framework, the distribution of the impacts is frequently important to decision-makers and other
stakeholders. At minimum, the analysis should include descriptive information on how the costs
and benefits are likely to be allocated across the groups of concern.

Valuing Health and Longevity

 
When assessing health-related policies, analysts conventionally aggregate risk reductions across
the number of people affected to estimate the statistical cases averted by the policy.
Alternatively, or in addition, risk reductions may be expressed as disability-adjusted life years
(DALYs) averted or quality-adjusted life years (QALYs) gained; DALYs are more often used in
global health. We introduce related valuation methods and discuss their application below.

Nonmarket Valuation Methods

For beneficial outcomes that are not traded in markets, estimates of individual willingness to pay
(WTP) are generally derived using stated or revealed preference methods. WTP is the maximum
amount an individual could pay for the improvement and be at least as well off with the
improvement and payment as without them, given his or her budget constraints. Stated
preference methods typically employ survey techniques to ask respondents about their WTP for
an outcome under a hypothetical scenario. Such methods are attractive because researchers can
tailor them to directly value the outcome(s) of concern; e.g., the survey can describe the
particular health risks that result from specific causes and also describe the characteristics of the
affected individuals. However, conducting a study that yields accurate and reliable results
requires careful design and implementation. A key concern is that respondents may have little
incentive to respond accurately, since the payment is hypothetical.
Revealed preference methods infer the values of nonmarket goods from observed
behaviors and prices for related market goods. For example, wage-risk (or hedonic-wage) studies
examine the additional compensation associated with jobs that involve higher risks of fatal or
nonfatal injury, using statistical methods to separate the effects of these risks from the effects of
other job and personal characteristics on wages. While this indirect use of market data has the
advantage of relying on behavior with real consequences, it is often difficult to find a market
good that can be used to value the outcome of concern. Because stated and revealed preference
methods each have advantages and limitations, the choice between them often depends on the
characteristics of the outcome being valued; e.g., whether it can be modeled as an attribute of a

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market good in a revealed preference study. Comparing the results from both methods, or using a
combined approach, can be informative.
Because conducting new primary research requires substantial time and expense,
typically analysts rely on existing valuation studies. This approach is generally called “benefit
transfer” to indicate that the populations and policies studied are not necessarily identical to the
population and policy considered in the benefit-cost analysis. Such transfers involve carefully
reviewing the literature to identify high-quality studies that are suitable for use in a particular
context, and determining whether and how to adjust the results prior to application. “Quality”
can be evaluated by considering the likely accuracy and reliability of the data and methods used,
referring to guidance on best practices. “Suitability” or “applicability” involves considering the
similarity of the risks and the populations affected. There are no firm guidelines; benefit transfer
relies heavily on the informed judgment of the analyst and requires clear disclosure and
discussion of related uncertainties and their implications.
Below, we focus on methods for valuing health and longevity. More information on
valuing other types of benefits is provided in Boardman et al. (2011), Livermore and Revesz
(2013), Freeman et al. (2014), and Johnston et al. (2015).

Valuing Statistical Cases

The conventional starting point for valuation is an estimate of the change in the likelihood of
illness, injury, or death for the affected individuals in a defined time period. This risk change can
be aggregated over the affected population to calculate the number of statistical cases averted by
the policy over the designated period. The term “statistical” is used to emphasize the role of
probability; most policies reduce the risk of adverse effects to individuals rather than eliminating
identifiable cases with certainty. A statistical case, or a statistical life, involves aggregating small
risk changes across individuals.
Consistent with the benefit-cost analysis framework, the value of mortality and morbidity
risk reductions is based on affected individuals’ willingness to trade-off their spending on other
goods and services for reductions in their own risks. For mortality risk reductions, WTP is
typically expressed as the value per statistical life (VSL). Conceptually, VSL is an individual’s
marginal rate of substitution between money and risk of dying in a defined time period (Hammitt
2000). For small changes in risk, VSL can be approximated by dividing WTP for a risk reduction
by the risk change. For example, if an individual is willing to pay $90 for a 1 in 100,000
reduction in his risk of dying in the current year, his or her VSL is $9 million ($90 WTP ÷
1/100,000 risk change). Similarly, individual WTP for reduction in the risk of nonfatal effects
can be approximated by the value per statistical case, again dividing WTP for the particular type
of risk reduction by the risk change. Presumably, individual WTP accounts for both the
pecuniary effects of the risk change (including out-of-pocket medical expenses and future
earnings) and the non-pecuniary effects (including the joys of life itself and the pain and
suffering associated with morbidity or disability).

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Most VSL studies consider the risks of accidental deaths, largely among adult
populations in high income countries (e.g., Viscusi and Aldy 2003, Lindhjem et al. 2011). VSL
is expected to vary with individual characteristics (such as age, income, and health status), the
characteristics of the risk (such as whether it is associated with illness or injury, or results from a
cause viewed as voluntary or controllable), and the physical and social characteristics of the
society (such as the quality of health care). However, the effects of many of these characteristics
on VSL are not well-understood. Thus these factors are often addressed through qualitative
discussion rather than through quantitative adjustment.
In global health, VSL is usually adjusted for income, recognizing that WTP depends on
ability to pay given available resources and other needs. For example, Robinson and Hammitt
(2015) suggest that the U.S. population-average VSL is about $9 million (2013 dollars). This
implies that the average U.S. citizen is willing to pay $900 for a 1 in 10,000 mortality risk
change, which was 1.7 percent of U.S. gross national income (GNI) per capita ($54,000) in
2013.4 In Mozambique, where GNI per capita was $1,060 in the same year, it seems impossible
that the average individual would be willing to spend $900 on the same risk reduction, given the
difficulties of funding basic needs. Overall, individual WTP per unit of risk reduction must
decrease as income decreases, resulting in a smaller VSL.
However, the quantitative relationship between VSL and income is uncertain. Hammitt
and Robinson (2011) note that the available research suggests that income elasticity may be in
the range of 1.0 to 2.0. Changing the elasticity used to adjust VSL from one income level to
another can lead to values that vary by an order of magnitude or more.5 For example, starting
with a population-average U.S. VSL of $9 million and using the GNI per capita estimates above,
the population-average Mozambique VSL would be about $177,000 with an elasticity of 1.0,
$25,000 with an elasticity of 1.5, and $4,000 with an elasticity of 2.0. In developing these values,
analysts should use estimated lifetime earnings and consumption as a lower-bound estimate,
because VSL reflects factors related to the joy of living, not solely the impacts on productivity
and consumption. Given uncertainty about how to extrapolate VSL from one population or
context to another, analysts should test the sensitivity of their results to variation in VSL.
The VSL concept is widely misunderstood. It is not the amount that the government, the
analyst, or an individual places on saving a life with certainty, nor is it a measure of the moral
worth of an individual. Rather, it is the value we each place on small changes in our own risks.
Individual values of risk reduction are demonstrated every day, in deciding whether to buy
protective equipment, to drive more safely, to use less polluting cook stove fuel, or to walk
further to reach a less contaminated water source.
Another issue, which has received less attention, is that the size of the risk change
matters. When the risk change is small, theory suggests that WTP will increase at roughly the
same rate as the size of the risk reduction, resulting in an estimate of VSL that does not depend
on the magnitude of the risk change (Corso et al. 2001, Alolyan et al. 2015). However, as the risk
change increases, WTP will become increasingly constrained by income, and the ratio between
WTP and the risk change will decrease. For example, U.S. studies often consider risk reductions

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in the range of 1 in 10,000 or 1 in 100,000 per year. A $9 million VSL suggests that on average
individuals are willing to pay $900 for a 1 in 10,000 risk change or $90 for a 1 in 100,000 risk
change. However, it seems unlikely that an average individual would pay $9,000 for a 1 in 1,000
risk change, and impossible that he or she would be willing to pay $90,000 for a 1 in 100 risk
change, given that U.S. GNI per capita is $54,000. When WTP is a significant fraction of
income, dividing it by the risk reduction yields an underestimate of VSL.6
Although the same principles apply, the approaches typically used to value nonfatal risk
reductions are more diverse than the approaches used for mortality risk reductions due to
significant gaps in the research literature. Relatively few studies estimate the value of reducing
nonfatal risks, even among high income populations. Analysts generally need to start by
conducting a criteria-driven review of the valuation literature for the health effects of concern,
then adjust the results for the income level of the affected individuals as well as perhaps other
salient characteristics of the individuals and the risks. When suitable WTP studies of reasonable
quality are not available, analysts typically apply cost of illness estimates or estimates of
monetized QALYs or DALYs as rough proxies. Robinson and Hammitt (2013) provide more
information on the application and advantages and limitations of these methods.

Valuing DALYs
The DALY measure was developed to assess the global burden of disease (Murray 1994, Murray
and Lopez 1996, Salomon et al. 2012), and is also often used in cost-effectiveness analysis. For
nonfatal effects, the loss from disability is measured as a value between zero (full health) and
one (equivalent to death). For example, a health condition assigned a disability weight of 0.2 is
equivalent to 80 percent of a year in full health. The disability weight is then multiplied by the
duration of the condition. For fatal effects, each year of life gained or lost is assigned a value of
1.0.
If an analysis reports estimates of statistical cases averted, then valuation is
straightforward: the WTP estimates or proxies discussed in the prior section can be used to
calculate the benefits of the policy. If the number of statistical cases averted cannot be estimated,
but DALYs are reported, then the analyst may value them using a constant value per life year as
a rough proxy, generally described as the value per statistical life year (VSLY).
VSLY is an individual’s marginal rate of substitution between money and life expectancy
(Hammitt 2007, Hammitt 2013, Jones-Lee et al. 2015). Because few empirical studies directly
estimate VSLY, it is typically derived from a VSL estimate, often by dividing VSL by the
(discounted) expected life years remaining for an individual at the mean age of the population
studied. The resulting constant VSLY implicitly averages over future health, which typically
declines with age.
This approach assumes that the monetary value of a DALY does not vary depending on
the duration, severity, or other characteristics of the health effect addressed by the intervention.
Both theory and an increasing body of scholarship suggest that these assumptions do not hold.
Although we are not aware of research that directly addresses the monetary value of a DALY,

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several studies suggest that the value of a QALY depends on the severity and duration of the
health condition as well as other factors (e.g., Haninger and Hammitt 2011, Robinson et al. 2013,
Pennington et al. 2015, Hammitt and Haninger 2017). Given these concerns, analysts should
clearly state the advantages and limitations of the approach they follow, and discuss the extent to
which related uncertainties are likely to affect their analytic conclusions.

Case Study Example

In this section, we apply the framework in Figure 7.1 to the simple case study introduced earlier
in this volume. In a real-world analysis, we would ideally consider more policy options, examine
the assumptions in more detail, value more of the impacts, consider a longer time frame, and
more formally assess the uncertainty of the estimates.

(1) Define the problem: Tuberculosis treatment rates are low, in part due to the inability to afford
treatment; the out-of-pocket expenses of such treatment can lead to impoverishment.

(2) Identify policy options: Provide universal public financing for tuberculosis treatment.

(3) Determine who has standing: Address the impacts on a hypothetical population of 1,000,000,
each of whose benefits and costs are included in the analysis.

(4)-(7) Predict baseline conditions, predict policy responses, estimate costs and benefits, and
calculate net benefits: The results of these four steps are provided below, based on the
assumptions introduced earlier in this volume.

Tables 7.1 and 7.2 report baseline tuberculosis incidence and costs respectively, in the absence of
the policy. As indicated by Table 7.1, 400 of 1,000 cases of tuberculosis will be treated in the
baseline annually. Treatment is 90 percent effective, reducing the death rate from 25 percent to
2.5 percent. Total deaths across the treated and untreated cases are 160 per year. We assume that
the deaths occur in the current year; there is no significant time lag between incidence and death.
For simplicity, in the tables we refer to “cases” and “deaths” rather than to reductions in
morbidity and mortality risks or statistical cases averted.

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Table 7.1: Baseline Incidence

Income Untreated Treated
quintile Total cases Total deaths
(median (a) Deaths (c)+(e)=(f)
Cases Deaths Cases
income) (0.10*0.25)*(d)=
(0.60)*(a)=(b) (0.25)*(b)=(c) (0.40)*(a)=(d)
(e)
I ($405) 400 240 60 160 4 64
II ($667) 300 180 45 120 3 48
III ($907) 200 120 30 80 2 32
IV ($1,198) 100 60 15 40 1 16
V ($1,717) --0-- --0-- --0-- --0-- --0-- --0--
Total 1,000 600 150 400 10 160

The only costs considered are those associated with treatment, which are $100 per case and are
paid by the patients (out-of-pocket) in the baseline, as illustrated in Table 7.2. Thus the total
baseline costs are $40,000.

Table 7.2: Baseline Costs

Treatment costs paid by Treatment costs paid out-of-
Income quintile Total costs
insurance pocket
(median income) (a)+(b)=(c)
(a) (b)
I ($405) --0-- $16,000 $16,000
II ($667) --0-- $12,000 $12,000
III ($907) --0-- $8,000 $8,000
IV ($1,198) --0-- $4,000 $4,000
V ($1,717) --0-- --0-- --0--
Total --0-- $40,000 $40,000

Tables 7.3 and 7.4 report tuberculosis incidence and costs with the policy. In this case,
treatment costs are covered by the universal public finance program, which increases the number
of cases treated by 10 percent within each income quintile. The number of deaths drops from 160
in the baseline to 137.5 with the policy.

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Table 7.3: Incidence with Policy

Income Untreated Treated
quintile Total cases Total deaths
(median (a) Deaths (c)+(e)=(f)
Cases Deaths Cases
income) (0.10*0.25)*(d)=
(0.50)*(a)=(b) (0.25)*(b)=(c) (0.50)*(a)=(d)
(e)
I ($405) 400 200 50 200 5 55
II ($667) 300 150 37.5 150 3.75 41.25
III ($907) 200 100 25 100 2.5 27.5
IV ($1,198) 100 50 12.5 50 1.25 13.75
V ($1,717) 0 0 0 0 0 0
Total 1,000 500 125 500 12.5 137.5

With the policy, the number of treated cases increases, and the total costs increase from $40,000
to $50,000.

Table 7.4: Costs with Policy

Treatment costs paid by Treatment costs paid out of
Income quintile Total costs
insurance pocket
(median income) (a)+(b)=(c)
(a) (b)
I ($405) 20,000 --0-- 20,000
II ($667) 15,000 --0-- 15,000
III ($907) 10,000 --0-- 10,000
IV ($1,198) 5,000 --0-- 5,000
V ($1,717) --0-- --0-- --0--
Total 50,000 --0-- 50,000

To compare costs and benefits, we first need to determine the value of the mortality risk
reductions. For this simple example, we calculate VSL using the population mean income of
$1,000, assuming it represents 2013 GNI per capita, and apply an income elasticity of 1.0, using
the $9.0 million U.S. VSL introduced above as our starting point. This yields a VSL of $167,000.
Note that we follow the convention of applying a population-average VSL to all cases; it would
be more accurate to calculate VSL separately for each income group, given that WTP for these
small risk reductions will change with income.
The net benefits of the policy are summarized in Table 7.5, assuming that all costs and
benefits accrue in a single year, so no discounting is needed.

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Table 7.5: Net Benefits

Decrease in tuberculosis
Value of deaths averted Increase in costs
Income quintile deaths (Table 7.3(f))- Net benefits
($167,000 per statistical (Table 7.2(c))-(Table
(median income) (Table 7.1(f))= (b)-(c)=(d)
case)*(a)=(b) 7.4(c))=(c)
(a)
I ($405) 64-55 = 9 $1,503,000 $20,000-16,000=$4,000 $1,499,000
$15,000-
II ($667) 48-41.25 = 6.75 $1,127,250 $1,124,250
$12,000=$3,000
III ($907) 32-27.5 = 4.5 $751,500 $10,000-$8,000=$2,000 $749,500
IV ($1,198 16-13.75 = 2.25 $375,750 $5,000-$4,000=$1,000 $374,750
V ($1,717) --0-- --0-- --0-- --0--
$50,000-
Total 160-137.5 = 22.5 $3,757,500 $3,747,500
$40,000=$10,000

In this simplified example, the benefits of the policy clearly exceed the costs, because the value
of the mortality risk reductions far outweigh the costs of treating additional cases.
Note, however, that this example excludes many impacts that we may want to consider,
and does not examine uncertainty in the estimates. For instance, other benefits would include
reduced morbidity risks and the health and welfare effects of preventing impoverishment. Other
costs would include the administrative expenses associated with universal public financing.
Uncertainty in the VSL estimate, as well as in tuberculosis incidence, death rates, and treatment
costs, may also affect the results. However, it seems unlikely that including these additional
factors would change the conclusions, given the amount by which the benefits exceed the costs.
We treat the $100 in treatment costs per case as a transfer from those who fund the
program to those who are treated, with no effect on net benefits. In theory, this transfer could
have welfare impacts depending on how it is financed. For example, funding universal coverage
through a tax on all members of the lowest income group could more significantly affect their
welfare then funding it through a tax on higher income groups. However, the $50,000 in program
costs are a small proportion of total income, so any such affects may be relatively small.7 Finally,
we only consider the impacts in one year. In future years, tuberculosis transmission is likely to
decrease as the result of increased treatment, which will affect both the costs and the benefits of
the program.

(8) Estimate the distribution: As indicated by the tables, most of the benefits of this program
accrue to individuals in the lower income quintiles. The net distributional effect will depend,
however, on how the program is funded, as noted above.

Summary and Conclusions

Weighing the pros and cons of different choices is a natural part of any decision-making process.
By making the trade-offs between spending on health and on other goods and services more
explicit, benefit-cost analysis provides useful information for decision-makers and other

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stakeholders regardless of whether it is ultimately the basis for the decision. Like any form of
analysis, the results are uncertain due to gaps and inconsistencies in the research literature. Clear
communication of the effects of these uncertainties and their implications for decision-making is
essential. In some cases, pursuing a policy option may be well-justified regardless of these
uncertainties; in others, whether the policy is likely to yield net benefits may be unclear.
Benefit-cost analysis has several advantages, allowing analysts to incorporate a wide-
range of potential impacts and to provide information on the preferences of the populations
affected by the policy for spending on the outcome of concern rather than on other goods or
services. Hence it can play an important role in priority-setting in global health.

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1
See Boardman et al. (2011) for more discussion. Alternative conceptions of welfare are discussed elsewhere in this
volume.
2
In markets that are reasonably competitive and efficient, prices are generally an appropriate measure of the
opportunity costs, as discussed in Boardman et al. (2011). However, in resource-limited settings, market distortions
(such as labor immobility and trade barriers), may mean that prices are not an appropriate cost measure. Hutton and
Baltussen (2005) discuss how to appropriately estimate costs under these conditions; Boardman et al. (2011) discuss
this and a number of other issues related to cost estimation. For example, it may also be appropriate to adjust market
prices that do not correspond to resource costs because of externalities (e.g., pollution) or market power (e.g.,
monopoly producers).
3
Greaves (this volume) discusses several issues related to the conventional approach to discounting as well as
alternatives.
4
Per capita GNI estimates in current 2013 dollars from the World Bank:
http://data.worldbank.org/indicator/NY.GNP.PCAP.PP.CD.
5
The formula is VSLB = VSLA * (IncomeB/IncomeA)elasticity. “VSLB” is the result of extrapolating from “VSLA” given
the ratio of the income levels for groups A and B and the elasticity estimate.
6
Alolayan et al. (2015) describe how to adjust VSL for larger risk changes.
7
With a mean income per capita of $1,000, the total economy of the population is about $1 billion; the $50,000 in
treatment costs is a very small fraction of this total regardless of how it is distributed.

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