This chapter is based on Ferrer-i-Carbonell and Van Praag (2002) and Van Praag and Ferrer-i-Carbonell (2002).
It is well known that in all western economies health costs are soaring. Medical technology is improving and provides us with new therapies. The costs of those new therapies are considerable. In view of this tendency there is a need for cost-benefit analysis, or some other evaluation method, such as cost-effectiveness. What are the costs of a therapy and what is the resulting benefit? If we knew that the therapy would cost $10,000 per year but that the benefit would have a value of $20,000, there would be a case for making the therapy available, and—most essential in that respect—for including the therapy in the health-insurance policy. It is fairly easy to assess the cost of a therapy but it is more difficult to assess the benefits. When the individual works in a paid job, one of the benefits of a therapy will consist in the productivity gain of the individual, and this can be measured in money terms. This is a good measure for choosing between becoming registered disabled, and hence becoming eligible for a disability benefit, or applying the therapy, where we assume that the therapy will reduce or even remove the work disability. However, for individuals who are not part of the workforce, for example the retired, this would have dismal consequences. Even if they are cured, they will not be 'productive' any more. It demonstrates that the benefit of a therapy consists of more components; there is also a component which we may describe as enhancing of the quality of life per year and/or increasing the life expectancy. The latter benefit is also called intangible benefits. In fact, those benefits are mainly perceptible as health improvements. The problem is how to assign to them monetary values. In this chapter we will make an attempt to do that. First, we will explain the novel method we propose and present some empirical results. Then we will have a look at the solutions presented in the health-economics literature and make the link with our ideas. Finally, we will make a comparative evaluation.
As shown in Chapter 2 , we can employ the utility function for estimating trade-offs between income and other variables that play a role in our evaluation of well-being. In Chapter 2 we considered the example of family size.