9.5.5 Discounting

Describes Different Approaches to Discounting

Discounting is a technique used in health economics to compare costs and benefits that occur at different points in time. It involves adjusting the value of future costs and benefits to reflect the time preference of individuals and society. The basic idea behind discounting is that people value goods and services less when they are received in the future compared to when they are received today.

There are two main approaches to discounting: the constant rate approach and the declining rate approach. The constant rate approach assumes that the rate of discount remains constant over time, whereas the declining rate approach assumes that the rate of discount declines as time goes on. The choice of approach depends on the time horizon of the analysis and the preferences of the decision maker.

The most commonly used rate of discount in health economics is 3%. This rate has been recommended by the World Health Organization (WHO) and the US Panel on Cost-Effectiveness in Health and Medicine. However, other rates of discount may be used depending on the context of the analysis.

For example, in a cost-effectiveness analysis of a vaccination program that prevents a disease with long-term consequences, such as cervical cancer, the costs and benefits of the program may occur over several decades. Therefore, a declining rate of discount may be more appropriate than a constant rate of discount.

In summary, discounting is a key concept in health economics that is used to compare costs and benefits that occur at different points in time. The choice of the discount rate depends on the time horizon of the analysis and the preferences of the decision maker.

References:

1. Drummond, M. F., Sculpher, M. J., Claxton, K., Stoddart, G. L., & Torrance, G. W. (2015). Methods for the economic evaluation of health care programmes. Oxford university press.