Despite the growing literature on economic evaluation of health care programmes, little attention has been paid to the theoretical foundations of cost-effectiveness and cost utility analyses and the validity of the decision rules adopted as methods of achieving the stated goals. We show that although applications of the techniques can be used to pursue some managerial objectives in the context of highly constrained environments, such applications are inconsistent with both welfare economic objectives and the interpretations of the findings of these applications. Alternative strategies are identified as potential and practical methods for pursuing welfare economic objectives.