Health care evaluation, utilitarianism and distortionary taxes

Cost Utility Analysis (CUA) and Cost Benefit Analysis (CBA) are methods to evaluate allocations of health care resources. Problems are raised for both methods when income taxes do not meet the first best optimum. This paper explores the implications of three ways that taxes may fall short of this ideal. First, taxes may be distortionary. Second, they may be designed and administered without reference to information that is used by providers of health care. Finally, the share of tax revenue that is devoted to health care may be suboptimal. The two methods are amended to account for these factors.