BOOKS OF RtfiDIfGS - PAHO/WHO

- 354 -
Application of Cost-Benefit Analysis to Health Services /
pd~cies (2, 3, 34). There is controversy regarding which imperfectiona to allow for and
how to allow for themn Another reason for differences of opinion, as Musgrave (35)
o~ua cles, is the saitce of financing-private consumption or investment. Still another
reason for differences of opinion is a value judgment: whether the proper measure of tho
dLcount rate for public projects is the opportunity cost of capital in the private sector,
or, to the contrary, whether it is the social rate of time preference. The private rate may
be high, well above 10 per cent, particulady when allowance is made for the corporation
income tax of 50 per cent (36). The social rate of time preference is usually much lower,
based on a longer time horizon or greater readiness by the community acting together
than by individuals to postpone gratification in favor of future generations. The social
rate, which has been justified in terms of future risk and uncertainty, probability of
personal survival, and the diminishing marginal utility of additional income or
consumption as per capita income grows over time, is not a number that we know how to
ascertain empirically (34). Accordingly, still another procedure, which combines private
opportunity cost and social time preference, is also not measurable.
In practice, the agencies of the federal government have employed a wide range of
discount rates, usually without giving a reason (37). Nevertheless, the consequences of
choosing a high or a low discount rate are clear. A low discount rate favors projects or
programs with benefits accruing in the distant future. In effect, as Boulding (38) has
suggested, a high interest rate favors the aged and a low one favors the middle aged. When
a project or program is short-lived, with both benefits and costs concentrated in the near
future, the choice of discount rate is of minor or no consequence; indeed, for a
short-lived program discounting may be dispensed with. Some economists are averse to
selecting a particular discount rate, on the ground that they are in no position to choose
between generations (13, p. 57). The tendency is to display calculations of the present
values of benefits and costs under two or more discount rates. It seems to me that such
alternative calculations do not afford helpful guidance to the policy maker, unless he is
advised when to employ one or the other.
Even in the present state of the controversy there may be some merit to employing a
single number for all public projects or for all public human investment projects. The
combined method, recommended by a panel of consultants to the Bureau of the Budget
in 1961 (39), and subsequently developed by Feldstein (40), can furnish an adequate
rationale even though it does not yet yield a specific number. Such a number admittedly
would be arbitrary, a reflection of value judgment (2). Henderson (34) reports that the
French have adopted a centrally determined rate of discount of 7 per cent, to be applied
to all public enterprises. This rate is higher than that encountered in many Ame~ican
cost-benefit studies.
APPLICATIONS OF COST-BENEFIT ANALYSIS TO THE HEALTH FIELD
The health services literature contains many affirmations of the importance of
cost-benefit analysis for improving the allocation of resources to and within the health
field. It may prove to be a source of astonishment that relatively few complete
cost-benefit studies of health programs have been carried out. Perhaps it is appropriate
that fewer cost-benefit studies have been performed than advocated. Where the am is to
minimize the cost of producing a given good or service, or even of constructing a hospital
of specified size and with suitable appurtenances, the apparatus of cost-benefit analysis is
superfluous (33). It then suffices to compare unit costs.