Deriving and applying monetary values

The text on this page is taken from an equivalent page of the IEHIAS-project.

Use of monetary values to assess health impacts involves quantifying health outcomes in terms of their perceived significance, using a monetary scale. This is usually done either by 1) conducting surveys of the public's willingness-to-pay for specific benefits (or to avoid damages), or their willingess-to-accept to lose the benefit, or accept the damage; or 2) by inferring these preferences from market prices or consumer behaviour. The value thus derived is then used to weight different health outcomes, so that they can be compared and aggregated.

Scope

Purpose:

The purpose of monetary valuation is to summarise all value judgements about impacts of concern (which may vary in their nature - e.g. health effects, biodiversity loss) in a single metric of utility, and use money (e.g. euros) as the metric. In this way, the different impacts are weighted and made comparable, enabling a cost-benefit-analysis (CBA) to be conducted if wished. Monetary values also have the advantage of being more intuitive, and less abstract than other measures, such as utility scores. Because there is no natural basis on which to weight different impacts (e.g. health effects), the preferences of the population are used. These are repressented as the willingness to pay to avoid undesirable effects (e.g. illness or death). More detailed, monetary values can be used as guidance for investment decisions, for ranking alternative policies, for technology assessment, for CBA about policies that reduce health impacts and for green accounting.

Damages and risks from human activities are quantified using the concept of external costs. These are costs that are not included in the market price of the goods and services being produced: i.e. a cost not borne by those who create it. Avoiding external costs represents a benefit, so policies can be compared in terms of the external costs they save.

Boundaries:

Monetary values may be applied wherever it is possible to derive a financially-based measure of the preference structure between different health outcomes. Its use becomes more problematic, therefore, for outcomes that have not been previously experienced or for populations whose preferences and behaviours have not (and cannot be) either directly studied or inferred (e.g. future generations).

Method description

Input:

Two primary inputs are needed for monetary valuation:

• data on the incidence of each health outcome within the study population (under each assessment scenario);
• a measure of the 'unit value' of each health outcome (e.g. based on public preferences).

Output:

The output is a measure (or set of measures) of the damages (e.g. external costs) due to the attributable health effects.

Rationale:

Monetary costs are estimated as the product of the attributable incidence of a defined health outcome within a population and a measure of the 'unit cost' of that outcome, summed over all outcomes of interest.

Measures of the unit cost are usually derived from willingness-to-pay (WTP) studies, which sample the general public.

Costs may be calculated either for specific health endpoints or to aggregated measures of health effects, such as DALYs. Using a single health endpoint is preferable because it is both more precise and informative. It is also likely to reflect more closely the preferences of the public. Applying costs to aggregate measures such as DALYs is problematic because of the difficulty in obtaining measures of willingness-to-pay for such abstract outcomes. Nevertheless, it can be justifiable when directly derived measures of WTP are not available.

Method:

Monetary valuation is used to summarise value judgements of impacts into a single metric, namely money (e.g. euros). The procedure itself consists of two steps: 1) deriving a monetary value and 2) applying the monetary values.

Derivation of monetary values

Monetary values can be derived either from previous studies, or through purpose-designed surveys. When data from previous surveys are used, care is needed because values are not always directly transferable between different populations, time periods or settings. In that case values have to be translated into the target context using benefit transfer methods. The same approach is used to estimate future values.

Monetary values are usually based either on the willingness to pay (WTP) to avoid an adverse outcome, or the willingness to accept (WTA) a benefit. Where new values must be derived, two main approaches can be used. Contingent valuation studies (CVS) can be done for non-market goods (providing so-called 'stated preferences') while market prices are used for market goods. Alternatively, 'revealed preferences' can be derived, by inferring preferences from market data. In this context, the WTP for morbidity is sometimes seen as consisting of a cost-of-illness (resource costs such as medical costs, and opportunity costs, such as productivity loss) and a disutility.

Revealed preference methods include a number of approaches, such as the avoidance cost, hedonic pricing, travel cost and averting behaviour/prevention cost methods.

The avoidance cost method has mainly been used to evaluate the impacts of climate change. Avoidance costs (i.e. costs of mitigation measures) are assumed to reflect the choices made in trying to a specified (policy) target.

The hedonic pricing method assumes that environmental goods or services are reflected in market attributes such as properties or wages. Welfare measures are thus obtained from observed differences in property prices or wages offered in the job market. The hedonic price function is, however, sensitive to a number of factors, so that comparison between functions derived from different studies needs to be done with care. Estimating hedonic price functions can also be resource-intensive, thereby limiting its application.

The travel cost method has been used mainly in the recreational arena. Recreational use values are estimated through the analysis of travel expenditures. The travel cost model is based on the recognition that the cost of travelling to a site is an important component of the full cost of a visit and that there would be variation in travel costs across any sample of visitors (Freeman, 2003). Travel cost models are very sensitive to many aspects including model specification, the choice of functional forms, treatment of travel time and substitute sites.

Averting costs, or defensive/preventive expenditures, assume that individuals spend money on certain activities that reduce their risks (e.g. impact of pollution, risks of accidents) and that these activities are pursued to the point where their marginal cost equals their marginal value of reduced impact. Averting goods related to pollution include air filters, water purifiers and noise insulation, while averting goods that reduce risks of death include seat belts and fire detectors. One criticism of the averting cost method is that the consumer decides whether or not to buy the averting good depending on whether his or her marginal benefit is not less than the marginal cost of purchasing the good. The marginal cost equals the marginal benefit only for the last person to purchase the averting good; for all other consumers, the willingness to pay exceeds the marginal cost of a reduction in risks/impacts. Another problem arises when the averting activity produces joint benefits, such as when it reduces the risk of injury or property damage as well as the risk of death. As with the replacement cost method, however, an advantage of the technique is that it makes direct use of market prices.

Multi-attribute utility analysis is a methodology that asks for the preferences of policy makes rather than the public.

Aggregation:

The overall impact is assessed simply by multiplying the incidence of the health outcome by the allocated monetary value, and then aggregatinf the results across all the outcomes of interest:

Impact = Σ (endpoints * monetary value)

Aggregation can be adapted to reflect the specific question posed in the assessment (e.g. damage due to lung cancer, damage due to long-range air pollution, total damages of a policy option).

Where health effects occur in different years, monetary values can be discounted to a common year, on the asumpotion that a negative impact in the future is valued less than at the present. It needs to be recognised, however, that discounting may already be implicit in the CVSs themselves, so 'double-counting' is a danger.