Economic Evaluation
November 20th 2003
Topic 8: Discounting
In Topic 3 the notion of time preference was introduced and the calculation of present values using discounting was demonstrated. This topic extends our coverage of discounting. By the end of this topic, you should be able to explain the social opportunity cost and time preference rationales for discounting; and explain (and critique) the debate surrounding the discount rate to be used to discount health benefits as opposed to costs.
The rationale for discounting:
- Time preference
- Social opportunity cost
Should the discount rate used for benefits be the same as for costs?
- Weinstein and Stason’s consistency argument
- Keeler and Cretin’s paralysing paradox.
- A critique of the paralysing paradox
- Is time preference for health different?
Functional form
- Constant rate vs. ‘slow’ discounting
Pragmatics: how to proceed.
- Washington Panel recommendations
- HM Treasury requirements
- NICE guidelines
Key reading:
Drummond et al (1997) Section 4.2. Allowance for the differential timing of costs in Methods for the economic evaluation of health care programmes. Oxford medical Publications.
*Lipscomb, J et al (1996) Time preference. Chapter 8 in: Gold, M et al. Cost effectiveness in health and medicine. Oxford University Press.
For UK recommended practice on discounting in economic evaluation, see:
HM Treasury (1997) Economic Appraisal in Central Government (“The Green Book”) Treasury recommends a 6% discount rate. See:
A new draft of the Green Book is currently available for consultation. This recommends ‘unbundling’ time preference from the treatment of uncertainty, and recommends a new rate, 3.5%, for discounting costs and benefits in monetary terms. For the main document, see:
and accompanying annexes to the draft document:
For guidelines on discounting (and economic evaluation generally) in the preparation of evidence for NICE, see section 2.11 in: NICE (2001) Guidance for manufacturers and sponsors. Technology Appraisals Process Series No. 5. This documents is available as a pdf document from:
Further papers referred to in the lecture:
Torgerson, D J, Raftery, J. (1999) Discounting. BMJ 319: 914-915. This paper, and two responses to it, are available from
*Parsonage, M, Neuburger, H. (1992) Discounting and health benefits. Health Economics 1:71-76.
Keeler, E, Cretin, S. (1983) Discounting of life saving and other non-monetary effects. Management Science.29:300-306.
Weinstein, M.C, Stason, W.B. (1977) Foundations of cost effectiveness analysis for health and medical practices. New England Journal of Medicine. 296:716-21.
Weinstein, MC, Siegel, J, Gold, M., Kamlet, M., Russell, L. (1996) Recommendations of the Panel on cost effectiveness in health and medicine. Journal of the American Medical Association 276(15) 1253-8. [*see readings folder corresponding to the first item of coursework]
Study questions
1. What is meant by discounting to present value and why is it used extensively in economic evaluations of health care? Should health care benefits be discounted? (from the 2000 exam).
2. What is the justification for discounting costs and health care benefits in economic evaluations of health care? Ought costs and health benefits be discounted at the same rate? (from the 2001 exam).
3. Why should we discount health benefits? What is the appropriate discount rate? (from the 2002 exam)
4. (a) What is the justification for discounting in economic evaluation? (b) On what basis, theoretical and pragmatic, should the discount rate used in economic evaluation be selected? (c) Critically assess the arguments for discounting health outcomes at the same rate as costs [from the 2003 exam]