In a world with unlimited resources, it would be unnecessary to have methods to determine the best way to allocate those resources among alternative uses. But resources are limited: in 1994, U.S. health spending will exceed $1 trillion for the first time and spending is projected to grow 50 percent faster than gross domestic product for the remainder of the decade (Burner, McKusick, and Waldo 1992). Similar trends are evident in other countries (Schieber, Poullier, and Greenwald 1993). Throughout the world, there are pressures on public budgets. Policymakers and the public have begun to recognize that every dollar spent on health care is no longer available for spending on education, crime control, or infrastructure improvement. Further, much of what we now spend is wasted on care that does not improve our health or yields small improvements in health at exorbitant cost (Siu et al. 1986; Winslow et al. 1988; Enthoven and Kronick 1989; CBO 1992a).

In the public sector, even in the face of mounting cost pressures, the balancing of benefits and costs has typically not been a criterion in deciding whether medical services should be made available or should be covered under public insurance. At one extreme, policymakers have focused exclusively on costs, rejecting higher cost alternatives without any consideration of their potential benefits (e.g., some state Medicaid programs in the United States). Others have focused exclusively on benefits while ignoring the costs of achieving these benefits.