economic evaluation of services for a national health scheme: the case for a fairness-based...

Journal of Health Economics 26 (2007) 785–799

Economic evaluation of services for a National HealthScheme: The case for a fairness-based framework

Jeff Richardson ∗, John McKieCentre for Health Economics, Monash University, Clayton, Victoria 3800, Australia

Received 2 December 2005; received in revised form 27 October 2006; accepted 24 November 2006Available online 27 February 2007

Abstract

In this paper we argue that the usual framework for evaluating health services may need modification in thecontext of a National Health Scheme (NHS). Some costs and benefits may need to be ignored or discounted,others included at face value, and some transfer payments included in the decision algorithm. In contrastwith the standard framework, we argue that economic evaluation in the context of an NHS should focus on‘social transfers’ between taxpayers and beneficiaries, and that the nature and scope of these transfers isdetermined by the level of social generosity. Some of the implications of a modified framework are illustratedwith a re-examination of (i) costs and transfer payments, (ii) unrelated future costs, (iii) moral hazard, and(iv) the rule that marginal costs should equal marginal benefits. We argue that an explicitly ‘fairness-based’framework is needed for the evaluation of services in an NHS. In contrast, the usual welfare economictheoretic framework facilitates the sidelining of issues of fairness.© 2007 Elsevier B.V. All rights reserved.

JEL classification: I1

Keywords: Cost; Equity; Fairness; Efficiency; Social welfare

1. Introduction

Health economists have generally recognised that the concept of fairness is important in thehealth sector, and there is a growing literature on the distribution of health costs and benefits andvarious theories of social justice (Wagstaff and van Doorslaer, 2000; Williams and Cookson, 2000).Empirical studies have commonly used trade-off techniques to quantify the importance of patient-

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786 J. Richardson, J. McKie / Journal of Health Economics 26 (2007) 785–799

related or systemic attributes of economic evaluations that bear on issues of fairness (Dolan andTsuchiya, 2006). These have included: (i) the patient’s age;1 (ii) the severity of the patient’s initialhealth state (as distinct from the improvement achieved by an intervention);2 (iii) the patient’spotential for health improvement (non-discrimination against the permanently disabled and thechronically ill);3 (iv) the maintenance of hope and universality of population coverage (to removeuncertainty concerning eligibility for a procedure);4 (v) smoker/non-smoker, parent/non-parent,carer/non-carer status;5 (vi) the number of patients sharing a benefit (i.e. the concentration ordispersion of health benefits);6 and (vii) and the ‘rule of rescue’.7

Despite this evidence relatively few evaluation studies explicitly incorporate fairness. We arguebelow that this is a reflection of the analytical orientation of the ‘welfare economic’ framework,which focuses initially upon efficiency and commonly leaves issues of fairness for the governmentto resolve.

Almost all of the empirical studies concerning fairness have focussed upon health benefits—health outcomes, their distribution, and the characteristics of the recipients. Generally, there hasbeen an acceptance of the traditional role of costs. There have been, however, a small numberof provocative studies that challenge this role and suggest a more fundamental problem with theexisting framework.

For example, in an Australian study, Nord et al. (1995b) reported that 81% and 87%, respec-tively, of a sample of 551 respondents would downgrade the importance of the direct costs oftreatment and indirect production benefits from a patient’s return to work when health serviceswere evaluated. The authors report that in subsequent interviews a statistically significant major-ity continued to reject cost minimisation despite structured interviewer argument that this wouldreduce the number that could be treated. Finally, 63 respondents were asked to allocate a budgetto diseases with the same outcome but different costs. The number cured was clearly shown toincrease as costs decreased. Only 6% selected the health-maximising, cost-minimising strategyrecommended by economic theory.

In a similar study, Abellan-Perpinan and Prades (1999) asked respondents in a Spanish studyto allocate a budget between two treatments with the same outcome but with a 100% cost differ-ential. Rather than allocating the budget entirely to the cheaper treatment, and maximising health,respondents divided the budget in the ratio 2:1 in a clear attempt to compensate for the additionalcost of the first disease.

Ubel created an analogous dilemma in the USA by asking respondents to allocate a fixednumber of organs (the ‘budget’) to groups with differing prognoses (Ubel, 2000). To max-imise lives saved (minimise cost per life gained) respondents should have allocated organs topatients with the highest probability of survival. In contrast, and consistent with the Australianand Spanish results, Ubel’s respondents allocated some organs to each of the groups, thereby

1 See Charny et al., 1989; Busschbach et al., 1993; Cropper et al., 1994; Nord et al., 1996; Choudhry et al., 1997;Johannesson and Johansson, 1997; Rodrıguez and Pinto, 2000.

2 See Nord, 1991, 1993a; Nord et al., 1993; Abelson et al., 1995; Ubel et al., 1996, 1998, 1999b; Prades, 1997; Dolanand Tsuchiya, 2005, in press; Nord, in press.

3 See Patrick et al., 1973; Nord, 1993b; Nord et al., 1995a; Abellan-Perpinan and Prades, 1999; Dolan and Cookson,2000; Ubel et al., 2002.

4 See Ubel and Loewenstein, 1995, 1996; Nord et al., 1995b; Ubel et al., 1996; Ratcliffe, 2000.5 See Charny et al., 1989; Nord et al., 1995b; Neuberger et al., 1998; Dolan et al., 1999.6 See Olsen, 1994, 2000; Johannesson and Gerdtham, 1996; Nord et al., 1996; Choudhry et al., 1997; Prades and

Lopez-Nicolas, 1998; Andersson and Lyttkens, 1999; Rodrıguez-Mıguez and Prades, 2002.7 See Jenni and Loewenstein, 1997; McKie and Richardson, 2003.

J. Richardson, J. McKie / Journal of Health Economics 26 (2007) 785–799 787

knowingly rejecting the principle of maximising benefits or minimising (opportunity) cost per lifesaved.

We argue below that in the context of an NHS, established to achieve fundamental fairnessobjectives, the theoretical basis of evaluation studies should reflect these objectives and makeconsideration of fairness explicit and unavoidable. In contrast, economic evaluation usually oper-ates within what might be called an ‘efficiency first’ paradigm, which facilitates the sidelining ofissues of fairness.

Consistent with this, a review of the evaluation literature from 1987–1997 found ‘a completeneglect of the equity dimension . . . the studies did not even provide enough information fordecision makers to make their own judgement’ (Sassi et al., 2001, p. 763). A more recent reviewfound that ‘equity was not effectively addressed in the studies reviewed,’ that ‘fairness (is) rarelyexplicitly examined’ and that ‘equity considerations, when they are made, are implicit rather thanexplicit’ (Harris-Roxas et al., 2004). Dolan et al. (2005) reach a similar conclusion.

In Section 2 we present four anomalies that arise within the existing framework. These concernthe treatment of transfer payments, unrelated future costs, moral hazard and the optimising rulethat marginal costs and benefits should be equal. The anomalies illustrate several facets of ourcentral theme that the existing framework and its welfare theoretic basis are misleading in thecontext of an NHS.

In Section 3 we argue that the plausibility of present welfare theory is primarily attributableto two assumptions, namely that social welfare is a function exclusively of individual util-ities (welfarism), and that the Kaldor–Hicks potential compensation principle provides asatisfactory basis for disregarding the distributional implications of health policies. Section3 argues that, in contrast with this approach, economic evaluation should focus on ‘socialtransfers’ between taxpayers and beneficiaries, as these determine the fairness or otherwiseof a policy. Section 4 discusses some of the likely objections to our thesis, and in Section5 we conclude that country-specific research is needed to align evaluation theory with socialvalues.

Despite the radical appearance of our conclusions the implications for the conduct of economicevaluation studies are modest and it is the underlying theory that is the primary focus of our critique.

2. Some implications of a ‘fairness-first’ analysis

We re-consider below four well-known issues from a ‘fairness-first’ perspective.

2.1. Pensions, transfer payments and costs

Because they do not use real resources, pensions and other transfer payments are normallyexcluded from evaluation studies, which are primarily concerned with the efficiency of resourceuse. In contrast, in a fairness-based analysis transfer payments may be as important as costs. Thereis no developed country that will allow its citizens’ standard of living to fall below a (country-specific) minimum level as a result of ill health. Patients who do not receive effective medicalcare and who cannot maintain a minimum level of consumption receive a pension or some formof income support. Consequently, it is incorrect to assume that only conventional benefits andcosts are relevant in assessing a service. In some instances withholding treatment will qualify adisabled person for a pension and the resulting increase in taxation needed to fund this transferpayment is a legitimate policy concern as it influences the fairness of the final distribution of costsand benefits.


As an example consider the choice between two prosthetic devices. Costs and benefits forthe first are $100,000 and $90,000, and for the second are $50,000 and $10,000. With theusual criterion, the benefit to cost ratio of 5:1 for the latter option implies its superiority overthe first with its benefit to cost ratio of 1:11. However, suppose that the second service leftthe patient disabled and eligible for a higher disability pension with an additional net presentvalue of $200,000. This option would ‘cost’ taxpayers $210,000 – an overall benefit to ‘tax-payer cost’ ratio of 0.24:1 – and leave the patient in a possibly inferior state despite the pension;that is, both the donor and the recipient of the funds may be worse off. However, this con-clusion is unlikely to be reached in the conventional framework which normally recognisesonly resource costs. Pensions and other transfer payments are consigned to ‘social’ not healthpolicy.

Viewed from a ‘fairness-first’ perspective, the taxpayer loses resources and the recipient gainsresources whichever option is adopted. The most important question for both is whether or not,under the circumstances, the transaction is fair. Net resource use is unlikely to interest eitherparty. If complaint arises it is likely to be over the fairness of the share of the cost borne bythe plaintive, not about the relative efficiency of the selected option judged from a ‘societalperspective’. Including all related transactions, the ‘cost-ineffective’ option is the ‘cheaper’, betteroption for both the taxpayer and the patient.

Olsen and Richardson (1999) provide another example where the size of the monetary flowbetween groups may be more important for policy than ‘net economic cost’ (direct costs lessindirect benefits). They argue that the inclusion of indirect benefits could have the anomalouseffect that for each additional dollar that a patient is expected to earn, and spend upon themselves,the taxpayer is required to pay one additional dollar to restore the patient’s health. This anomalyarises because the distribution of costs and benefits is ignored. If (indirect) benefits rise then,according to the usual argument, additional costs would be justified. But benefits are received bypatients and costs are borne by taxpayers, and it is unlikely that taxpayers would consider theabove anomaly to be fair.

2.2. Unrelated future costs

The controversial issue of whether or not an economic assessment should include the cost offuture unrelated illnesses raises similar issues. Analysis of the question is commonly based on animplicit assumption that there is a ‘theoretically correct’ answer—i.e. an efficiency-maximisingsolution that is independent of the vagaries of social values (Weinstein et al., 1980; Mushlinand Fintor, 1992; Meltzer, 1997). The argument is illustrated in Table 1. Individuals A and Bboth have the possibility of a 10 year life-extending procedure costing $100,000. Individual Ais otherwise healthy. The cost (to the taxpayer) is $10,000 per life year gained. Treatment forB costs the taxpayer $20,000 per life year gained, due to other unrelated medical expenses of$10,000 per annum. The policy question is whether the latter expenses should influence theprovision of the initial service.8

8 This is similar to the problem of ‘double jeopardy’. If a chronically ill or permanently disabled person acquiresan unrelated life-threatening illness, they may be considered a lower priority for treatment because, if successful, thetreatment will only return them to their previous state of illness or disability. Thus, they suffer a ‘double jeopardy’: theyare disadvantaged by acquiring the life-threatening illness, and are also disadvantaged because treatment will not returnthem to full health. Some argue that this is unfair (Harris, 1985; Ubel et al., 1999). In the example in the text, however,the focus is on the costs associated with the unrelated illness rather than the limited potential for health improvement.

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Table 1Unrelated consequences

Individual Service for Benefits Costs (PV $000) Cost per life year(PV $000)

Disease X Patient age(years)

Life expectancy(years)

Directmedical

Othermedical

Own consumption Direct Total

A Yes 60 10 100 0 N/A 10 10B Yes 70 10 100 100 N/A 10 20C Yes 60 10 100 0 40,000 10 40,010


While it is true that the ‘other medical expenses’ cannot be attributed to disease X, it is also true– by construction of the example – that the decision to treat individual B results in real resourceuse of $200,000 not $100,000, and it is possible that if this higher cost was attributable to a singledisease it would be excluded from the health scheme. A variety of arguments might be used insupport of withholding or proceeding with the treatment of disease X for patient B. (For example:‘It would be morally outrageous to let someone die because in the future they will use communalresources—aged pensioners would all be allowed to die.’) The salient point, however, is that theseare moral arguments and do not involve any principle of economic efficiency. The issue is one offairness: deciding in which contexts a person should have unrelated costs ‘held against them’ andwhether the taxpayer is prepared to forego $20,000 per life year for this person in this context.

It is often assumed that causal links have ethical significance and that if, and only if, the presentillness generates future health costs then these costs should (sic) be included in the evaluation.9

However, causation does not carry this ethical implication. A mother who inadvertently givesher child food that provokes a lethal allergic reaction would have caused the child’s death. Butthis does not demonstrate culpability and most would sympathise with, not condemn, the mother.Likewise, a person who refuses to help an injured motorist is morally culpable, even if they havenot caused the accident. Ethical judgements cannot be ‘read off’ from causal, factual information(Williams, 1985). Similarly, the question of how we should (sic) include unrelated future costsrequires an independent ethical judgement. The ‘complexity’ of this ‘conceptual’ problem arisesbecause of the inappropriate attempt to replace ethical with technical analysis.10

In the third case in Table 1, individual C is identical to A except that she is a multi millionairewith no living relatives. With treatment she is expected to spend $40 million during her retirement.Only one patient may be treated and a decision must be made concerning the relevant data. Thefacts of the case are clear. The treatment of the magnate will cost the taxpayer $100,000 directlyplus $40 million which, if treated, she will consume, but which would otherwise revert to society.It is reasonable to assume that society would obtain greater benefit from the money than a single,aged person with limited capacity to enjoy benefits from her money. Subject to minor caveats,taxpayers would be much better off if C died and the service was provided to the other patient. Butthis argument for letting the magnate die would be universally rejected as unfair. The efficiencyof the policy (the greater societal benefits) would be irrelevant.

9 In their detailed examination of such issues Gold, Siegal, Russell and Weinstein – The Washington Panel – separatefuture costs that are (1) medical and related to an intervention; (2) medical and unrelated; and (3) non-medical but incurredin the additional years of life attributable to an intervention. A variety of arguments are considered in each case. Regardingthe third category, for example, it is concluded: ‘theoretically, these costs should be included, if health care costs in addedyears of life are included’ (Gold et al., 1996, p. 48). Despite the breadth of the issues canvassed one fact stands out: at nostage is it suggested that the issues are ethical and that considerations of fairness are relevant. Rather, they are treated astechnical. The assumption is that there is a (positive) theory which, when clarified, demands our acceptance. The theoryis not, of course, arbitrary. The implied rule is that the analyst should strive to establish a causal sequence between anintervention and its consequences. These consequences, and only these consequences, should then be included in theinitial analysis.10 Nyman provides a rationale for excluding the costs of unrelated future illnesses that does not rely on causation.

He argues that costs should be excluded ‘if they represent resources that produce utility that is not being measured inthe denominator, even though the costs are causally associated with the intervention’ (Nyman, 2004, p. 419). However,Nyman’s explicit objective was to provide an account of unrelated health costs that is consistent with the welfare model(Nyman, 2006, p. 319). In this sense, by default, it presupposes that the adequacy of a theory of unrelated costs ismeasured by how well it accounts for the intuitions of welfare economists. As a result, it marginalises the importance ofsocial objectives no less than the accounts of Weinstein et al., 1980; Mushlin and Fintor, 1992; Meltzer, 1997, and others.


2.3. Demand, moral hazard and the dead-weight loss of insurance

In consumer theory, a consumer compares the marginal utility of a product with the product’sprice, which is the marginal cost to the consumer. When these are equal – output Q1 in Fig. 1(a) –it is argued that there is ‘efficiency’: the marginal cost of production is just equal to the marginalbenefits obtained. Before this point there are unrealised benefits for the consumer-benefits exceedcosts. After this point costs exceed benefits. In one of the most influential articles in healtheconomics, Pauly argued that health insurance induces a ‘dead-weight loss’ (Pauly, 1968). If, forexample, it reduced the patient co-payment to zero, demand would increase from Q1 to Q2 and thecost of producing medical care would exceed the benefits and generate a dead-weight loss equalto Q2ef. Several assumptions are necessary to conclude that this dead-weight loss represents areduction in social well-being. (There must be enough information for patients to evaluate theproduct, etc.) Importantly here, income does not play a role in this analysis and the dead weightloss appears to be an unambiguous inefficiency. It is the change in demand, not the reason for itsabsolute level, that is the focus of analysis.

A fairness-based analysis would focus upon different facts. Since demand is a function of bothincome and net price, a separate demand curve may be constructed for each income group, asshown in Fig. 1(b). At the equilibrium, low income patients, Y1, receive no services. Those withincome Y3 receive three times more services than those with income Y2. Generalising, as the pricerises, consumption becomes increasingly concentrated among high-income groups, a conclusionsupported by a review of the empirical evidence (Arhin-Tenkorang, 2001).

From this latter, fairness-based perspective, the demand curve in Fig. 1(a) indicates the mag-nitude of the re-distributive effect of co-payments, with higher prices being associated with anincreasingly skewed distribution of benefits. The ‘dead-weight loss’ of a collectively financedinsurance system represents the re-distributive loss to high income earners when collective fundingincreases service use by the poor and taxation of the wealthy.

Despite the initial appearance of a value free analysis of economic efficiency, co-payments andthe price elasticity of demand are probably the most ‘value-saturated’ issues in health economics.

Fig. 1. Two interpretations of moral hazard.


At least in Australia, they have been viewed by (some) governments as an opportunity for costshifting from the public to the private sector. This re-distributes net income from the unhealthypoor to the healthy wealthy. For doctors the relevant issue has been control over medical incomes.Patient advocacy groups have focused upon vertical equity, access to health services, and theresulting distribution of health outcomes between social groups. Economists alone have perceivedthe issue as primarily about efficiency.

2.4. Maximising net present value

By definition, efficiency is maximised when marginal cost is equal to marginal benefits. How-ever, the use of this rule in the health sector is problematical for at least three reasons associatedwith fairness. First, as discussed above, citizens are not abandoned when they are ‘unlucky’ in thecost of their treatment. Exclusion from treatment because of its high cost may qualify a personfor a compensatory pension, which requires re-distributing resources. Secondly, there may be adifferent social willingness to pay (WTP) for different illnesses. For example, an NHS may ormay not include pharmaceutical, cosmetic and dental services. More generally, the (social) WTPof citizens may not correspond with the private WTP, and it is the social WTP that incorporatesequity considerations.

Thirdly, it is taxpayers who bear the cost in an NHS, and they may not (and need not) beoverly concerned with an individual’s WTP. In a less generous society the social WTP may beinsufficient to reach a private optima. Ideally, benefits would be equated with the ‘shadow price’of the cost to budget of a service (the benefit of budgetary expenditures elsewhere). This, in turn,would be determined by the availability of public funds. In a more generous society there may bea willingness to finance services beyond the private optima. This is not irrational unless rationalityis defined by private, not public, willingness to pay. To the contrary, supporting service use bydisadvantaged groups beyond the point where their private WTP is less than the marginal cost ofservices is usually a reason for having a national scheme or tax financed health service.

In an NHS created crucially to replace market values, it is incongruous that the framework forevaluation should be based upon the values embodied in the market model (Schlander, 2005). Inprinciple, it is possible that the only facets of fairness of concern in a society are the accessibilityof health care and the distribution of health care costs. However, the literature cited in Section 1and the anomalies highlighted in Section 2 suggest that this hypothesis is untrue.

3. Fairness- versus efficiency-based frameworks

The case for a fairness-based framework in an NHS arises from two considerations. First, oneof the fundamental reasons for creating an NHS is to ensure the achievement of fairness-relatedobjectives in the health sector, and this should be reflected in the evaluation framework. Secondly,the usual welfare theoretic framework does not give sufficient focus to this objective. To the con-trary, welfare theory appears to provide powerful and policy-relevant predictions without the needfor ethical analysis. Its second fundamental theorem demonstrates that any Pareto efficient dis-tribution of utility may be achieved by a competitive market with the appropriate re-distributionof initial wealth (Folland et al., 2001). Prima facie this appears to be a compelling reason forignoring ethical analyses: if any achievable distribution of utility can be obtained without a con-sideration of other theories then these other theories must have little to add. Only the distributionof utilities needs to be determined. From this perspective the chief problem in the health sector isthat without the usual price market signals, and with imperfect information, achieving efficiency


is problematical, and the role of the economist may reasonably be seen as the correction of theseimpediments.

Broadly defined, however, ‘efficiency’ does not mean the minimising of cost per unit ofutility. Rather, it is the maximising of social objectives with available resources, and welfaretheory’s assumption that social welfare is only a function of individual utility (welfarism) ishighly contestable, a point driven home by Sen over several decades (Sen, 1982, 1985, 1991,2005).11

More recently Kaplow and Shavell (2001) have demonstrated that the assumption of any non-welfarist objective potentially violates the Pareto principle—a social optima need not correspondwith Paretian efficiency. The conclusion is, perhaps, unsurprising. Unless the additional objective,X, is coincidentally optimised at a Pareto optima, the achievement of X and Pareto efficiencymust be traded off against each other by a non-welfarist social welfare function—a task requiringadditional information about social values. If these include objectives based upon proceduraljustice then a non-Paretian optima is likely. As one example, Pareto efficiency would be violatedif a commitment to equal access for equal need reduced health outcomes and health-related utilities(as might occur if doctors were concentrated – inequitably – in centres of excellence).

Sen (1987) also appeals to the phenomenon of adaptation to illness and injury to dispute theexclusive focus on utility as a social objective. He notes that individuals with disabilities oftenadjust their expectations downwards, thereby increasing their utility despite objectively poor cir-cumstances. He contends that this should not negate patients’ claims for special consideration andthat social good should be based, at least in part, upon the achievement of capabilities—broadly,the freedom to pursue valuable goals.

Culyer and Mooney have also drawn on this work to dispute the universality of welfarism. In aseries of articles Culyer has argued that health per se, like Sen’s more general notion of capabilities,is necessary for social participation and is a plausible social goal in itself—something that, inthe health context, may override other utility considerations when there is a conflict (Culyer,1989, 1990). Similarly, Mooney has argued from a communitarian perspective that individualshave claims upon society that carry moral weight for reasons unrelated to utility (Mooney, 1998,2005).

This does not mean that we should switch from the conventional welfarist definition ofefficiency in terms of the Pareto principle to efficiency defined as the maximisation of health(minimisation of cost per QALY). The QALY model has one important equity assumption builtin: that QALYs are of equal value regardless of who gets them (Torrance, 1986; Williams, 1996).However, as noted in Section 1, there is a growing literature identifying where, and often to whatextent, respondents are willing to trade-off health gains to benefit certain groups: the young, themore severely ill, the permanently disabled, and so on. Hence, maximising QALYs (per unitcost) no more captures the full range of equity considerations than does the conventional Paretodefinition, and neither obviates the need for empirical investigations of social objectives.

11 In one famous example of this, Sen demonstrates that the non-welfarist objective of free choice is incompatible withPareto efficiency (Sen, 1970). Sen considers the views of two individuals, a Prude (P) and a non-Prude (NP), and theirpreferences with respect to the reading of Lady Chatterley’s Lover when only one may read it. P has a preference P > NP,i.e. P would prefer to read it first to frustrate NP. NP has a preference P > NP to irritate P by making him read the book.Clearly P is Pareto dominant. But in a democracy NP, not P, will read the book. The example shows the ‘impossibility ofa Paretian liberal’, though to generate the paradox it is necessary to assume (inter alia) that individuals have preferencesabout other individuals, and that government regulation, and agreements between individuals for their mutual benefit, areprohibited (Suzumura, 2005).


Despite these theoretical possibilities concerning social objectives, it may seem improbablethat the pivotal status of costs and efficiency in an economic evaluation could be challenged. Inthe cases above, reducing the cost of achieving objectives – even an expanded set of objectives –would normally create a surplus and the possibility of Pareto improvement. If this has an adverseimpact upon some individuals then the Kaldor–Hicks criterion can be invoked. According to this,one outcome should be considered superior to another if there is the potential for compensatingthose who are disadvantaged while leaving others better off. Actual compensation is a politicaldecision and economists cannot be held responsible for them (Ng, 2004).

However, the principle is misleading. At best it identifies outcomes that are potentially superior,and provides an arguable basis for blame shifting. At worst it side-steps the essence of usefulpolitical economy—namely, operating within the realm of the politically feasible (Evans, 1998;Hurley, 1998; Reinhardt, 1998; Rice, 2003). Compensation for those who are disadvantaged byhealth policy is at the extreme end of the politically and technically ‘infeasible’. With a fixedhealth budget, the opportunity cost of one service is the benefit of another service. If health isseriously impaired compensation may be infeasible. If losers die compensation is impossible.More generally, compensation of losers in an NHS would imply a re-distribution from the sickand low-income groups back to healthy, wealthy taxpayers who fund an NHS, which is the exactreversal of the purpose of an NHS. Without the possibility of compensation it is unsurprising thatthe achievement of ‘efficiency’ would be a relatively low priority in an NHS and that other socialgoals should assume greater importance for reasons of fairness.12

The resulting claims upon an NHS may be viewed as the outcome of an implied social contract(Gauthier, 1987). Taxpayer-citizens may consider that patients have entitlements for some classesof benefits but not for others (Anand and Wailoo, 2000). They may recognise some ‘communitarianclaims’ but not others (Mooney, 1998, 2005). These may include the provision of a ‘decent basicminimum’ of health care for all, the preferential treatment of disadvantaged groups such as thepoor and unemployed, or support for family members in the case of death or permanent disability.The social contract may impose no obligation upon taxpayers to sustain ‘expensive tastes’ (Cohen,1993; Keller, 2002) or compensate for self-inflicted harm (Bowling, 1996; Dolan et al., 1999).

4. Discussion

Despite the appearance of a radical change, a fairness-based framework would have a relativelymodest effect upon the practice of economic evaluation. Quantitatively, the dominating magni-tudes would remain direct treatment costs and the value of health improvement. The argumentshere suggests an evolution rather than a revolution: a revision to the underlying theory of economicevaluation that focuses attention on social transfers, in order to better align social goals, theoryand practice.

One reason for the limited impact is that important elements of fairness are already included inthe practice, as distinct from the theory, of economic evaluation. For example, as already noted,analyses using QALYs incorporate a strong egalitarian element—namely, the constraint that thevalues of life and quality of life are the same for everyone. Similarly, economic evaluation com-monly ignores the indirect benefits of increased production, despite current theoretical arguments

12 Supporting this, Ijzerman et al. (2003) found that the results of economic evaluations, being focused on economicefficiency, are of only limited interest to decision makers in the Netherlands. They were mainly interested in the resultsfrom clinical effectiveness studies and overall budget impact. This again calls into question the economist’s view of theimportance of costs in economic analyses in health care.


for their inclusion (Commonwealth of Australia, 1995; NICE, 2004). If social goals are consistentwith a focus on health (as opposed to utility) or inconsistent with the inclusion of indirect benefits,our suggestion would simply align current practice with theory.

In contrast, at the theoretical level the suggested changes represent a paradigm shift. We haveargued that in an NHS the appropriate analytical paradigm should focus upon ‘social transfers’when determining the allocation of resources and that the chief determinant of these is ‘socialgenerosity’. The paradigm does not prescribe or proscribe any particular element of the socialwelfare function. This is a matter for country-specific research and ethical debate. Guidelines forthe evaluation of pharmaceuticals, for example, can be specified in advance, but should remainopen to change in the light of ongoing empirical research.

Fairness-based frameworks might differ significantly between countries. In the more libertarianculture of the USA health outcomes may be included in the economic rewards system in a waythat might be rejected, at least in principle, in some European countries. Likewise, the importanceattached to the fairness aspects of moral hazard might differ. This is not to say that fairness or,more generally, morality is relative to a culture. This would make inter-cultural moral criticismimpossible (Williams, 1972, pp. 34–39). Rather, it is to acknowledge that moral practices andbeliefs differ between societies, and to the extent that evaluation frameworks are fairness-based,they can also be expected to differ.

The chief problem with the development of a fairness-based framework at present is the compar-ative dearth of empirical evidence relating to the dimensions of fairness discussed here. This high-lights a final anomaly. Government is ultimately responsible for the identification and implemen-tation of country-specific elements of fairness. But rather than informing policy analysts of theseparameters government commonly seeks the advice of economists with respect to policies, andimplicitly the values that should be embodied in policy. While the UK National Institute of ClinicalExcellence (NICE) has issued methodological guidelines for economic evaluation, which includea short section on equity considerations, these fall far short of the detail needed for constructing anoperational framework. It is likely that the broad parameters of a fairness-based framework wouldbe subject to continual modification in the light of the empirical investigation of societal values.

It may appear inconceivable that such a well-established concept as ‘economic cost’ could bedethroned from its pivotal role in economic evaluation. How could its relative importance havebeen exaggerated for so long? There are at least three reasons. First, and most fundamentally, thereis often no straightforward empirical test of the validity of a conceptual framework. If it is flawed, abridge or stock exchange does not collapse. Moreover, when interpreted from within a conceptualscheme, discordant evidence is often rejected because it conflicts with the scheme, rather thanthe other way around (Popper, 1968; Kuhn, 1996). Orthodox economics is largely sustained bythe authority of economics itself. The technical presentation of even simple economic conceptsto the public is sufficiently opaque to deflect serious criticism from outside the profession.

Secondly, as discussed above, the main change is with the theoretical basis of analyses for anNHS. The correlation between the present and the ideal ranking of projects would probably be veryhigh and differences would seldom be great. Third, the orthodox framework is appropriate in thegeneral economy where private rather than communitarian values predominate. It is unsurprisingthat a successful framework in one context should be transferred across to the health sector, albeitwith some important caveats concerning fairness. In the general economy there is a rational basisfor the focus on efficiency. The Kaldor–Hicks principle may often be legitimately invoked asgovernment can enact compensation for those adversely affected by policy. In the health sectorthere is no analogous argument. Maximised health cannot be re-distributed and the Kaldor–Hicksprinciple does not provide a sensible basis for blame shifting.


5. Conclusion

The central suggestion in this paper is that, if one of the essential reasons for a national healthscheme is to ensure fairness, then the analytical framework for selecting the optimal scheme, andthe services to include in it, should make the consideration of fairness unavoidable. Although theimplications of the advocated change are modest from a practical point of view, they imply morethan a re-weighting of the elements in an equity/efficiency trade-off. They may result in the part orfull inclusion of some transfer payments and the part or full exclusion of some costs and benefitspresently included.

The main recommendation is that economists should explore the implications of a fairness-based framework in the health area and undertake the implied empirical studies needed to identifyand quantify social values. It has been suggested that this will not simply quantify the importanceof particular dimensions of fairness but that it will result in a re-interpretation of economictheory in the context of an NHS. Four examples of this re-interpretation have been given, namely,the distinction between costs and transfer payments, the treatment of unrelated future costs,the interpretation of the demand curve and the purported ‘dead-weight loss’ associated withhealth insurance, and the net present value criterion for optimal output. The discussion of moralhazard is particularly revealing. Economists are commonly attracted to the use of co-paymentsto improve efficiency. In contrast, social welfare groups, politicians and the public are adamantthat co-payments represent a barrier to access and are unfair. The same facts are seen through adifferent lens. This is consistent with the hypothesis that economists are operating from within adifferent ‘paradigm’ in the Kuhnian sense of this term. Economists interpret evidence first in termsof efficiency and current theory provides a rationale for a cursory consideration of fairness. Incontrast, most of the population interpret the same evidence first in terms of fairness. As predictedby Kuhn (1996), communication between the paradigms appears to be difficult. The onus should beon economists to change. Economics purports to assist with the achievement of society’s objectivesand in an NHS these are largely related to fairness. Economics does not have the responsibilityor the authority to replace them with objectives that do not properly reflect social goals.

Acknowledgements

Earlier versions of this paper benefited greatly by insightful comments from Dr. Robin Pope,Professor Paul Dolan, Dr. Erik Nord and an anonymous reviewer.

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