Allocating health expenditures to treatment and prevention.

Rational evaluation of important health sector issues requires more formal analysis of the optimal allocation of resources to treatment and prevention. The suggested approach imbeds a Markov model of the disease process in a simple budget-constrained nonlinear program. Expenditures are allocated to prevention and treatment of a given disease so as to maximize the expected fraction of time spent in the undiseased state by a group of individuals. Random-parameter simulations of a plausible form of the model produce qualitatively different expansion paths for the optimal spending mix, suggesting the need for a flexible policy stance until the parameters of such models can be estimated.