Budget allocation and the revealed social rate of time preference for health

Abstract

Appropriate decisions based on cost-effectiveness evaluations of health-care technologies depend upon the cost-effectiveness threshold and its rate of growth as well as some social rate of time preference for health. A more traditional approach to this problem is outlined before a social decision-making approach is developed, which demonstrates that social time preference for health is revealed through the budget allocations made by a socially legitimate higher authority. The relationship between the social time preference rate for health, the growth rate of the cost-effectiveness threshold and the rate at which the higher authority can borrow or invest is then examined. We establish that the social time preference rate for health is implied by the budget allocation and the health production functions in each period. As such, the social time preference rate for health depends not on the social time preference rate for consumption or growth in the consumption value of health but on growth in the cost-effectiveness threshold and the rate at which the higher authority can save or borrow between periods. The implications for discounting and the policies of bodies such as NICE are then discussed.