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COST-EFFECTIVENESS ANALYSIS

DR AMIR NASIR MPH Semester II, IPHSS, KMU

Knowing what you get for what you pay

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Contents

• Economic Evaluation / analysis

• Types of economic analysis/ evaluations

• Differentiating between types of analysis

• Conducting a cost effectiveness analysis

• Summary

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Economic Evaluation

COST OUTCOME/ RESULT

Economic Evaluation

• Economic evaluation is the comparative

analysis of alternative courses of action in

terms of both their costs and results in order

to assist policy decisions

Rationale of economic evaluation

• To assess the efficiency and effectiveness

• Policy making, Planning & Management

• Prioritization and resource allocation

• Avoiding wasteful expenditure

• Cost minimization

• Accountability

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Types of Economic evaluations

• Cost Minimization analysis (CMA)

• Cost effectiveness analysis (CEA)

• Cost utilization analysis (CUA)

• Cost benefit analysis (CBA)

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Cost Minimization analysis

Outcomes of 2 actions is equal

Costs are different

Only costs are compared

Result: least cost alternative.

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Cost minimization example

Interventions Cost Outcome

Malaria treatment A Cost high same as Tx B Reject

Malaria treatment B Cost low same as Tx A Select

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Differentiation Example: cost minimization & Cost

effectiveness

Type of analysis Cost Outcome /Result Best

option

Cost minimizatio

n

Buying CT scan machine of XYZ company

Costs:Seller Agent A : $10Seller Agent B : $12Seller Agent C : $16

(Guarantee 10 years)

Outcome

A:CT machine of XYZ company B:CT machine of XYZ company C:CT machine of XYZ company

(Fixed outcome)

Agent ?

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Cost effectiveness analysis

•Outcome of 2 or more actions is unequal

•Costs are also different

•Cost per unit health outcome is calculated

and compared

•Compares Cost per unit health outcome

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Cost effectiveness analysis

Intervention A cost Outcome Cost/ unit outcome

Intervention B cost Outcome Cost/ unit outcome

Intervention C cost outcome Cost /unit outcome

Choose the most cost effective

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Cost effectiveness analysis

• defined by the National Institute for Health and Clinical Excellence (NICE)

“Economic study design in which consequences of different interventions are measured using a single outcome, usually in ‘natural’ units (for example, life-years gained, deaths avoided, heart attacks avoided or cases detected). Alternative interventions are then compared in terms of cost per unit of effectiveness.”

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Cost effectiveness analysis

• No monetary value assigned to outcome

• Outcome used:

– Cases (cost per cases detected/ prevented)

– Deaths (cost per death avoided)

– Years of life

– DALYs

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Cost-effectiveness Analysis

The most commonly CERs used are the: Average cost-effectiveness ratio (ACER)

Incremental cost-effectiveness ratio (ICER)

ICER=Cost B−Cost A

Effectiveness B−Effectiveness A

essBEffectivenCostB=ACER

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Incremental Cost effectiveness Ratio

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The Cost Effective Plane+ I

-

- +

Less effective and less expensive

More effective and more expensive

Less effective and more expensive

More effective and less expensive

IV

IIIII

Diff

eren

ce in

cos

t

Differences in effectiveness

Note: Origin is reference intervention

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B

A

D

C

Increased effectiveness

more costly

less costly

Intervention is less effective and more costly(Excluded)

Intervention is more effective and more

costly(Questionable)

Intervention is less effective and less

costly(Questionable)

Intervention is more effective and less costly

(Dominant)

Cost-effectiveness plane

Decreased effectiveness

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CEA; Applications • Planning and management

• Policy and decision making

• Resource allocation

• In Health services, when it’s inappropriate to 

monetize health effect.

• Used in differernt study designs

• Not the only criteria for decision making

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CEA; Applications

• Identifying most cost-effective intervention

• To provide empirical justification for a program

• To identify & exclude program wasting resources

• To evaluate the interventions in terms of efficacy

(cost effective ratio), absolute health gain and

affordability (absolute cost)

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CEA; Applications

• For example, in the case of health care:

- What is the best way to prevent heart attacks?

- What drugs are most cost effective in the

treatment of illness?

- What is the least cost way of providing

nutrition to poor children?

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Cost Benefit Analysis

Costs – Monetary terms (e.g. Dollars)

Outcome - monetary terms (e.g. dollars)

Result: Net benefit or cost-benefit ratio.

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CEA & CBA; DifferenceType of analysis Cost Result/ outcome

Cost Effectiveness

Cost Benefit

Cost utility QALY

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CEA & CBA example

Type of analysis Cost Outcome /Result

Cost effectiveness

• Spend 1 dollar , • Buy Haemophilus

vaccine• (Unit: Dollar)

Avert infectionDecrease by 1 case

(Unit: Health outcome)

Cost Benefit

• Spend 1 dollar • Buy Haemophilus

Vaccine • (Unit: Dollar)

Earns 5 dollars avoid work leave by

averting infection(Unit: Dollar)

HEA PTP: M212 Economic Evaluation

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Benefit Categories

Intervention

Direct Benefits Indirect Benefits

Savings in productivity.

Improved patient health status / utility.

Reduced health

services resource use

eg. LoS.

Family and friends quality

of life.

COST-BENEFIT ANALYSIS

Benefits

• Direct Benefits

• Indirect Benefits

• Intangible Benefits

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Cost benefit analysis

– Use of dollars as the common metric– No use of health outcome– Results expressed in benefit-cost ratio

• Advantages– Useful in describing non health outcomes – Comparisons with non health programmes– Long term projects

COST-BENEFIT ANALYSIS

• Disadvantages– Controversial– Assigns a value to human life– Not widely acceptable for health care

assessment

Ratio approachCost benefit ratio =

Cost/Benefit

Net

benefit approachNet

Benefit = Total Benefit – Total Cost

Approaches of Cost Benefit Analysis

Cost benefit analysis

Purposes of Cost Benefit Analysis

• To assess the economic efficiency

• To decide whether to implement a specific

program

• To select among competing/alternative

options

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Cost utility analysis

• Subset of cost effectiveness analysis

• Cost is in monetary terms

• Outcome is in terms of QALY or DALY

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QALY• The quality-adjusted life year is a generic

measure of disease burden, including both the

quality and the quantity of life lived.

• It is used in economic evaluation to assess the

value for money of medical interventions.

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QALY• 1 QALY = 1 year of life lived in perfect health

• 0 QALY = dead

• 1 year of life lived with chronic disease = 0.5

QALY

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Cost Effectiveness Methodology

• Define Objectives

• Structure Alternative interventions/actions

• Calculate Costs

• Observe outcome

• Calculate unit outcome

• Calculate cost per unit outcome

• Compare

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Cost effective Analysis on Antenatal Visits

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Limitations of traditional cost-effectiveness studies

• Different horizons

• Different types of costs included

• Different costing methods

• Different discounting rates

• Different outcome measures

• One dimension

• May not address variations by regions

• Conflicts of interests

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Other criteria to chose an intervention

• Feasibility

• Ethics

• Equity

• Sustainability

• Acceptability

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Some terminologiesAnalytic horizons the time period over which the costs and benefits

of health outcomes that occur as the result of an intervention are considered

Annual discount rate Adjustment made to the value of future costs

and benefits to account for time preference and opportunity cost

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Some terminologies Dominant choice Choice which both lowers the costs and higher

benefits than all other options

Sensitivity analysis Mathematical calculations that isolate factors

involved in an analysis to indicate the degree of influences each factor has on the outcome of the analysis

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Strengths & weaknesses

Strength Weakness

CME Easy to perform Effectiveness not assessed

CEA•Natural units of outcome•Compares actions with same outcome

Cannot assess actions with different outcomes

CUA Compares actions with different outcomes

QALY comparison may not be well defined

CBA Compares widely differernt interventions

Monetary terms some times controversial & not well accepted

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SummaryType of

analysis Cost Consequences Result

Cost minimization Money Identical in all respects Least cost

alternative

Cost effectiveness Money

Different magnitude of a common measure eg., LY’s

gained, blood pressure reduction.

Cost per unit of consequence eg.

cost per LY gained

Cost utility Money Single or multiple effects not

necessarily common. Valued as “utility” eg. QALY

Cost per unit of consequence eg. cost per QALY.

Cost benefit Money As for CUA but valued in money.

Net £ cost: benefit ratio.

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