Abstract:
Portfolio theory is central to the analysis
of risk in many areas of economics but is
seldom used appropriately in health economics.
This contribution examines the use
of portfolio theory in the context of cost-effectiveness
analysis (CEA).A number of modifications
are needed to apply portfolio analysis
to the economic evaluation of health
care interventions. First,the method of
reporting the results of a CEA,and consequently
some of the underlying assumptions,
needs to be modified. Second, portfolio
theory needs to be expressed in terms of
effects on individuals aggregated to a population.
Finally, one needs to allow for the
possibility of synergy between the various
ealth interventions. This paper derives a
general formula for a portfolio of health care
interventions that allows for synergies between
interventions where the population
effects are aggregated from individual
effects. A number of special cases are also
derived to highlight the nature of the formulation
of the modified portfolio theory. We
conclude that, while modified portfolio theory
adds a theoretical foundation to health
care evaluations, it may not be operational
until estimates of the correlation between
interventions are available, and the question
of uncertainty is resolved in health care evaluation.
Also, while a synergy may be present
at the individual level, when aggregated
over a large population it may not be significant
given the standard assumption of constant
returns to scale.
