AbstractThis explores the applicability of Sen's capability approach to the economic evaluation of health care programmes. An individual's ‘capability set’ describes his freedom to choose valuable activities and states of being (‘functionings’). Direct estimation and valuation of capability sets is not feasible at present. Standard preference‐based methods such as willingness to pay are feasible, but problematic due to the adaptive and constructed nature of individual preferences over time and under uncertainty. An alternative is to re‐interpret the QALY as a cardinal and interpersonally comparable index of the value of the individual's capability set. This approach has limitations, since the link between QALYs and capabilities is not straightforward. Nevertheless, the QALY approach is recognisable as an application of the capability approach since it pays close attention to functionings, through the use of survey‐based multi‐attribute health state valuation instruments, and permits conceptions of value other than the traditional utilitarian ones of choice, desire‐fulfilment and happiness. Furthermore, suitably re‐interpreted, it can account for (i) non‐separability between health and non‐health components of value; and suitably modified it can also account for (ii) process attributes of care, which may have a direct effect on non‐health functionings such as comfort and dignity, and (iii) sub‐group diversity in the value of the same health functionings. Copyright © 2005 John Wiley & Sons, Ltd.