Priority Setting in Health Care: Disentangling Risk Aversion From Inequality Aversion

Abstract

In this paper, we introduce a tractable social welfare function that is rich enough to disentangle attitudes towards risk in health outcomes from attitudes towards health inequalities across individuals. Given this preference specification, we evaluate how the introduction of uncertainty over the severity of illness and over the effectiveness of treatments affects the optimal allocation of healthcare resources. We show that the way in which uncertainty affects the optimal allocation within our proposed specification may differ sharply from that in the standard expected utility framework.

New results on precautionary saving and nonlinear risks

“…For instance, Gunning ( 2010 ) describes developing economies that present nonlinear risk shocks due to credit market constraints and unsolved asymmetric information problems. In the insurance literature, we also find nonlinear effects in health care applications (Echazu and Nocetti 2013 ), where the health production function incorporates nonlinear cross effects between the marginal productivity of investment in health and the random variable that captures the risk effects. We also find nonlinear effects in self-insurance with technology risk (Li and Peter 2021 ) when decision-makers lack precise information about the benefits of risk mitigation.…”

Distributionally sensitive measurement and valuation of population health

“…7 This is somewhat analogous to an approach to healthcare prioritisation proposed by Echazu and Nocetti (2013) that allows for aversion to both individual-level exposure to health risk and inequality over individuals in ex ante utility of health. We use a period life-table, and so there are no differences in ex ante health or lifespan to consider.…”

Should we do more when we know less? The effect of technology risk on optimal effort

“…Our paper also contributes to the large and growing literature on precautionary behavior. Examples include labor supply with wage risk (e.g., Block & Heineke, 1973; Chiu & Eeckhoudt, 2010), healthcare with risky treatment effectiveness (e.g., Courbage & Rey, 2012b; Dardanoni & Wagstaff, 1990; Echazu & Nocetti, 2013), precautionary saving due to income and interest rate risk (e.g., Eeckhoudt & Schlesinger, 2008; Jouini et al, 2013; Kimball, 1990; Rothschild & Stiglitz, 1971; Wong, 2019), precautionary insurance demand (Fei & Schlesinger, 2008) and precautionary effort (e.g., Courbage & Rey, 2012a; Eeckhoudt et al, 2012; Wong, 2016). Most of these papers do not consider nonlinearity and therefore cannot identify the various measures of technological efficacy that govern the comparative statics in our paper.…”