Cost-Benefit Analysis (CBA)

Cost-Benefit Analysis (CBA) provides a framework for evaluating the social desirability of a proposed public program and for evaluating alternatives. It is intended to promote the efficient use of society's scarce resources by comparing the monetary value of all benefits of a social [Page 109]program with all costs associated with the program. A program improves society's welfare if the benefits associated with it exceed the costs. The socially optimal level of the program is attained when the change in social benefit associated with the last increment of the program equals the change in social cost. In other words, the social optimum is achieved when the marginal social benefit and marginal social cost coincide. Interest in health care CBA stems from concerns about the rising costs of providing health services. Policymakers and health care providers conduct formal analyses of benefits and costs to help them promote greater efficiency in providing health care services. CBA can be applied to evaluate the social desirability of health initiatives such as disease screening programs, alternative treatment procedures, new health care technologies, and medical research. Managed care providers can use CBA to determine which care programs are worth the cost.

Conceptually, CBA is a simple application of marginal analysis. Information is gathered on the value of social benefits and social costs associated with a proposed program. Net benefits of the program are expressed in terms of the sum of a future stream of discounted benefits relative to costs. When the present value of social benefits exceeds the present value of social costs, a program will hold positive net benefits for society. Such a program becomes a candidate for adoption. The CBA is often used to evaluate alternative programs. All else equal, a program with a lower CBA will be preferable to an alternative with a higher CBA.