Valuation of Health Risks

Abstract

Many public policies and individual actions have consequences for population health. To understand whether a (costly) policy undertaken to improve population health is a wise use of resources, analysts can use economic evaluation methods to assess the costs and benefits. To do this, it is necessary to evaluate the costs and benefits using the same metric, and for convenience, a monetary measure is commonly used. It is well established that money measures of a reduction in health risks can be theoretically derived using the willingness-to-pay concept. However, because a market price for health risks is not available, analysts have to rely on analytical techniques to estimate the willingness to pay using revealed- or stated-preference methods. Revealed-preference methods infer willingness to pay based on individuals’ actual behavior in markets related to health risks, and they include such approaches as hedonic pricing techniques. Stated-preference methods use a hypothetical market scenario in which respondents make trade-offs between wealth and health risks. Using, for example, a random utility framework, it is possible to directly estimate individuals’ willingness to pay by analyzing the trade-offs they make in the hypothetical scenario. Stated-preference methods are commonly applied using contingent valuation or discrete choice experiment techniques. Despite criticism and the shortcomings of both the revealed- and stated-preference methods, substantial progress has been made since the 1990s in using both approaches to estimate the willingness to pay for health-risk reductions.

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Reference

Henrik Andersson, Arne Risa Hole, and Mikael Svensson, “Valuation of Health Risks”, Encyclopedia of Economics and Finance, March 2019.