To test the hypothesis that the “severity effect”—the preference for more than utility-maximizing expenditure on severe health states—may be the result of, or exacerbated by, the uncertainty associated with the chance of contracting the illness that causes the severe health state.
Survey respondents were asked to imagine that they will contract one of two illnesses and asked to allocate a budget between two insurance policies, each of which provides services for the treatment of one of the illnesses. A person’s final health state varied with the amount of insurance purchased for the illness that occurred and therefore with the level of treatment. The relative cost of the two policies was altered and the selected levels of insurance compared with the levels that would be provided by a health authority that sought to maximize total utility or quality-adjusted life-years from its own budget.
Respondents selected more than utility-maximizing insurance for protection against severe health states. A number of psychological factors that affect measurement under uncertainty do not affect utility as currently measured. This difference may explain the present results and also explain the “severity paradox” that personal preferences as presently measured imply less expenditure on severe health states than do “social preferences” for the treatment of strangers.
Uncertainty alters preferences. Incorporating these preferences in decision making would result in greater spending on severe health states.