Allocating health care resources when people are risk averse with respect to life time.

The criterion of cost-effectiveness in health management may be given a welfare-theoretical justification if people are risk neutral with respect to life years. With risk aversion, the optimal allocation of health expenditures changes: Compared to the cost-effective allocation, more resources should be allocated to health conditions for which the expected outcomes even after treatment are worse than average. The consequences of medical interventions are usually not known with certainty. Given this type of uncertainty, simple application of cost-effectiveness analysis would recommend maximization of expected health benefits given the health budget. We show that when people are risk averse with respect to the number of life years they live, the uncertainty associated with different types of interventions should play a role in allocating the health budget. Copyright 2002 John Wiley & Sons, Ltd.