Incorporating option values into the economic evaluation of health care technologies

Abstract

Despite uncertainty being intrinsic to economic evaluation of health care, existing techniques for handling uncertainty remain underdeveloped compared to the formal techniques commonly applied in the business sector. This paper develops an alternative approach to handling uncertainty in economic evaluation based on 'option-pricing' techniques. The presence of uncertainty and the degree of irreversibility of a decision make it clear that some flexibility in the timing of a decision is often a desirable characteristic with an economic value. We demonstrate how option-pricing techniques can be applied to the decision rules for economic evaluation in health care. The key determinants of an option value are the presence and type of uncertainty; the ability to defer a decision; and the irreversibility of the decision. The relative significance of each of these for a particular economic evaluation will depend on the particular characteristics of the technology under consideration.