A Simple Method for Converting a Cost-Effectiveness Analysis into a Cost-Benefit Analysis with an Application to State Mental Health Expenditures

Abstract

If cost-effectiveness and cost-benefit analyses are to produce identical rankings of programs, there is a simple equivalence between the criteria that enables one to derive a value for the effect that is being maximized. The value depends on knowing two magnitudes: (1) the cutoff cost-effectiveness ratio and (2) the marginal cost of public funds. The method is illustrated by trying to value state psychiatric hospital episodes using the revealed preference approach. Values varied by the state undertaking the expenditure (from a high of $52,526 in Pennsylvania to a low of $2,177 in Wisconsin) and the size of the predetermined federal budget assumed (a $1 billion budget produces a $10,418 value, and the actual budget of $7 billion produces a $54,540 value).