Cost-Effectiveness Analysis in the Health Sector when There is a Private Alternative to Public Treatment

In health economics, cost-effectiveness is defined as maximizedhealth benefits for a given health budget. When there is a privatealternative to public treatments, care must be taken when usingcost-effectiveness analysis to decide what types of treatmentsshould be included in the public program. The correct benefitmeasure is in this case the sum of health benefits to thosewho would not be treated without the public alternative andthe cost savings to those who would otherwise choose privatetreatment. In the socially optimal ranking of treatments tobe included in the public health program, treatments shouldbe given higher priority the higher are costs per treatmentfor a given ratio of gross heath benefits to costs. (JEL: H42,H51, I18)