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Immediate and Future Costs and Benefits
The time profiles
of costs and benefits between alternative health care strategies
are sometimes similar, but often different. For example, time
profiles are similar when two medications for the same
indication are compared.
Time profiles are different
in a comparison of surgery vs. long-term treatment with medication.
In this situation, surgical costs are incurred in the present,
whereas medication costs stretch well into the future.
In general, individuals
and society have a positive value of time preference--they prefer
to defer costs to the future and to acquire benefits sooner rather
than later. For example, $100 five years from now is valued less
than $100 today because of the opportunity cost associated with
deferred consumption (i.e. the value of what is foregone by not
having the $100 over the next five years).
Discounting is a
technique used to reflect the present value of a cost or health
benefit that will occur at some future date. It is not an
adjustment for inflation. Future costs are discounted to account
for the time value of money, and future health benefits are discounted
to account for the delay in satisfaction from these outcomes.
The effect of discounting is to give future costs and health
benefits less weight in an economic analysis.
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