Estimating optimal willingness to pay thresholds for cost‐effectiveness analysis: A generalized method

Charles E Phelps and Chris Cinatl

Health Economics, 2021, vol. 30, issue 7, 1697-1702

Abstract: Operationalizing cost‐effectiveness analysis (CEA) requires that decisionmakers select maximum willingness to pay thresholds (K). We generalize previous methods used to estimate K using highly flexible hyperbolic absolute risk aversion (HARA) utility functions that encompass a wide range of risk behavior. For HARA utility, we calculate formulas for relative risk aversion (r*) and relative prudence (π∗), using literature‐based estimates to calibrate our HARA model. We then assess optimal WTP thresholds (K) in absolute value and relative to income (K/M). Across the most‐plausible range of risk preference parameters (r* and π∗), optimal K/M ratios sit (approximately) in the range of 1 to 3, although we cannot readily rule out larger K/M values. The optimal K always increases with income, while K/M falls with income if utility has increasing relative risk aversion. Results of this more‐general model of economic utility are broadly consistent with previous work using more‐restrictive Weibull functions. More precision in measuring the key parameters—particularly relative prudence (π∗) will narrow down the range of K/M estimates. The highly general HARA structure illuminates why and how optimal CEA thresholds change with income. An appendix illuminates how relative risk aversion and relative prudence relate to each other.

Date: 2021
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https://doi.org/10.1002/hec.4268

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Persistent link: https://EconPapers.repec.org/RePEc:wly:hlthec:v:30:y:2021:i:7:p:1697-1702

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