Production gains from health care: what should be included in cost-effectiveness analyses?

Recent literature has been concerned with the correct measurement of the 'indirect costs and benefits' of health care as well as the issue of including these items in economic evaluations. This article considers the question of which 'indirect benefits' to include in cost effectiveness analysis and cost utility analysis. Within the context of a collectively financed health scheme the relevant issues include not only the size of the net resource costs of providing health care but also which costs and benefits the society is prepared to consider in its assessment of health services. The strong preference for 'equal access for equal need' implies that some production gains may have to be disregarded in the social welfare function. We introduce the notion of socially relevant and socially irrelevant production gains. The analysis suggests that the magnitude of the socially relevant part of the production gains may vary between countries as it depends, first, upon differences in patients' potential contributions to the rest of society (tax rates), and second, the strength of preferences for equity.