Endogenous Patient Responses and the Consistency Principle in Cost-Effectiveness Analysis

In addition to incurring direct treatment costs and generating direct health benefits that improve longevity and/or health-related quality of life, medical interventions often have further or “unrelated” financial and health impacts, raising the issue of what costs and effects should be included in calculating the cost-effectiveness ratio of an intervention. The “consistency principle” in medical cost-effectiveness analysis (CEA) requires that one include both the cost and the utility benefit of a change (in medical expenditures, consumption, or leisure) caused by an intervention or neither of them. By distinguishing between exogenous changes directly brought about by an intervention and endogenous patient responses to the exogenous changes, and within a lifetime utility maximization framework, this article addresses 2 questions related to the consistency principle: 1) how to choose among alternative internally consistent exclusion/inclusion rules, and 2) what to do with survival consumption costs and earnings. It finds that, for an endogenous change, excluding or including both the cost and the utility benefit of the change does not alter cost-effectiveness results. Further, in agreement with the consistency principle, welfare maximization implies that consumption costs and earnings during the extended life directly caused by an intervention should be included in CEA.