Prioritizing public health expenditures when there is a private alternative

Cost-effectiveness analysis often plays an important role in prioritization among different types of public health expenditures. Cost-effectiveness is defined as the maximal health benefits for given expenditures on health care. With a private health sector as a supplement to the public sector, the socially optimal ranking of treatments to be included in the public health program is changed. The larger are the costs per treatment for a given benefit-cost ratio, the higher priority should the treatment be given. The more heterogeneous preferences for a particular treatment are, the lower priority should this treatment be given. If the health budget does not exceed the socially optimal size, treatments with sufficiently low costs should not be performed by the public health system if there is a private alternative.