Indirect Costs and Discounting in Health Care Decision-Making: The Role of Distortionary Taxation

Two important unresolved issues in the evaluation of health care programs are the treatment of indirect costs and the selection of the appropriate discount rate. This paper emphasizes the role of distortionary taxation in addressing these issues. It establishes that: (i) indirect government-paid costs should be treated differently from indirect privately-paid costs; (ii) direct and indirect government costs of a health program should be discounted by the gross rate of return, while consumers' monetary valuations of the program's effects, less direct private costs, should be discounted at the net rate of return; and (iii) the present value of total government costs should be multiplied by a marginal cost of funds before it is comparable to the present value of net private benefits.