Session (CTI)

ISSUE: Traditional cost-effectiveness focuses on efficiency, relegating equity to the background. In recent years, growing interest in equity has encouraged researchers to measure the cost of inequality, but important issues remain unsettled. Nearly a century ago, John Harsanyi showed that societal decisions respect the “Pareto principle” – that what is good for society must also be good for all its citizens -- only if social policy maximizes a weighted sum of individual utilities. However, decades later, Peter Diamond, another Nobel Laureate economist, pointed out that this utilitarian approach can produce unfair outcomes, even though it respects individual preferences. This tradeoff binds on health economics, because summing up utilities means summing up QALYs. When QALYs are simply summed, unequal QALY distributions fail to affect social welfare. This counter-intuitive property has caused health economists to propose and debate multiple paths forward: 1) distributional cost-effectiveness analysis (DCEA) departs from utilitarianism, and the Pareto principle, by layering “inequality aversion” onto individual preferences; 2) “rank-dependent” welfare functions enable utilitarian approaches by threading a needle that considers only those policies that preserve the relative rank of each individual in society; and 3) Generalized Risk-Adjusted Cost-Effectiveness (GRACE) allows for utilitarian approaches that nonetheless imply costs to inequality. OVERVIEW: Lakdawalla will provide an overview of the challenges faced by health economists quantifying inequality (5 mins). Jansen will present the case for DCEA that incorporates inequality-aversion (15 mins). Davis will compare and contrast rank-dependent welfare approaches with GRACE for measuring the costs of inequality (15 mins). Phelps will make the case for GRACE as a strategy for utilitarian approaches to measuring inequality (15 mins). There will be ten minutes allotted for fielding of questions and discussion.