This chapter discusses the measurement of benefits from health interventions in monetary terms and specifically why and how monetary values are attached to health benefits. This discussion explores in detail the relationship between two commonly used methods of measuring the desirability of new programs or new products, especially new drugs. One method, cost–benefit analysis, is the economic approach that measures both resource costs and health benefits in monetary terms. The other method is cost–effectiveness analysis, which measures health outcomes in nonmonetary terms either as physical or as utility measures, while maintaining monetary measures for explicit (budgetary) resource costs and, frequently, for implicit costs. The difference between the two methods consists entirely in the way good outcomes are measured. The processes, advantages, and disadvantages of measurement in monetary terms are thus illustrated in comparison with the alternative.

Two primary questions about cost–benefit and cost–effectiveness analysis are addressed in this chapter. The first question is what differences are there between these two methods? A method will be called different from some other method if it will, in at least some possible state of the world, lead to a different conclusion about which program is preferable. The second question is, if there are differences, which method should a decision maker use? Such a normative conclusion obviously depends on the decision maker's objectives, so this question will be addressed in an indirect way by showing which objectives are consistent with the choices made under each method.