Understanding the risks associated with resource allocation decisions in health: An illustration of the importance of portfolio theory

John F.P. Bridges

Research output: Contribution to journalArticle

Abstract

While a number of health economists have recently applied portfolio theory to the economic evaluation of health care, its importance for resource allocation and medical decision making has not been well illustrated. Portfolio theory is concerned with optimal investment strategies, based on both return and risk, and demonstrates the potential benefits from pooling different investments into a single portfolio. Portfolio theory differs from other methods that focus on risk in medicine as it focuses on the variance around the mean for a single aggregated health outcome measure. This paper demonstrates the importance of using a portfolio theory framework when evaluating a number of health interventions from the perspective of a representative individual and it expands upon the existing literature on portfolio theory in several ways. First, it highlights the importance of distinguishing between risk and uncertainty. Next, it demonstrates that portfolio theory has implications for all types of statistical analysis of multiple interventions in medicine and not only for issues of resource allocation. Through a number of included simulations, this paper also illustrates the importance of accounting for covariance (the relationship between risks) and synergies (the relationship between outcomes). Finally, possible applications and limitations to implementing portfolio theory in medical and resource decision making are discussed.

Original languageEnglish (US)
Pages (from-to)257-275
Number of pages19
JournalHealth, Risk and Society
Volume6
Issue number3
DOIs
StatePublished - Sep 1 2004

Keywords

  • Economic evaluation
  • Portfolio
  • Risk
  • Uncertainty

ASJC Scopus subject areas

  • Public Health, Environmental and Occupational Health

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