A. General Cost-Effectiveness Analysis Issues

5. Should I discount healthcare benefits?

If you are comparing two interventions, each involving a series of expenditures over time, you need to consider the time value of money (the fact that a dollar spent today is a bigger expense than a dollar spent a year from now). Benefits and cost should be discounted at the same rate. The Public Health Service Panel on Cost-Effectiveness in Medicine recommends a discount rate of 3%. View FAQ A4

Benefits must be discounted for the same reason as costs are discounted. A benefit realized today has greater value than a benefit realized a year from today. Failure to discount benefits, or to discount costs and benefits at a lower rate, results in the Keeler-Cretin paradox.

Here is a simplified version of the Keeler-Cretin argument. Consider an intervention that costs $100,000 and saves 10 lives. If you chose to wait, and fund the intervention 10 years from now, the cost would be discounted, that is, the net present value would be less than $100,000, but it would still save 10 lives. The "waiting" strategy would be more cost-effective. If you waited 20 years, the intervention would even be less costly, and would still save 10 lives. You would always prefer to defer to the future, and you'd never do the intervention. The paradox is described more fully in the Gold, 1996.

There are controversial questions in discounting health consequences (e.g., QALYs). Research analysts interested in this topic should consult the following articles:

Gold MR, Siegel JE, Russell LB, Weinstein MC. Cost-effectiveness in health and medicine. Oxford: Oxford University Press, 1996. (pages 219-221)

Smith DH, Gravelle H. The practice of discounting in economic evaluations of healthcare interventions. Int J Technol Assess healthcare 2001; 17:236-43.

Gyrd-Hansen D, Sogaard J. Discounting life-years: whither time preference? Health Econ 1998; 7:121-7.

Cairns J. Discounting and health benefits: another perspective. Health Econ 1992; 1:76-9.

Parsonage M, Neuburger H. Discounting and health benefits. Health Econ 1992; 1:71-6.

van Hout BA. Discounting costs and effects: a reconsideration. Health Econ. Nov 1998; 7(7): 581-594.