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Cost-Benefit and Cost-Effectiveness Analyses

Cost-benefit and cost-effectiveness analyses are widely used tools in health services research to control health spending and efficiently allocate limited resources. The purpose of cost-benefit and cost-effectiveness analysis is to compare the cost and value of different health interventions and technologies and to evaluate whether this leads to improved health and extension of life. The term cost-benefit analysis is used when the impact of the health intervention is measured in monetary terms. However, cost-effectiveness analysis does not use money to measure effects. Instead, cost-effectiveness analysis typically uses health outcomes.

Both cost-benefit and cost-effectiveness analyses help manage the efficient provision of health services and resource allocation while providing an understanding of the cost and outcomes of various health interventions. This concept has become more important as health-related costs continue to rise. The federal government reported that national health expenditures in the United States amounted to $2.3 trillion in 2007, with per capita health spending estimated at $7,600. These sums have been projected to rise to more than $4 trillion and $12,320 per capita in 2015. Better use of cost-benefit and cost-effectiveness analyses can help reduce these projections or at least help ensure that resources allocated to the healthcare sector are justified by important health benefits.

Overview

A substantial part of healthcare expenditures is financed through insurance or a third-party payer. This renders many consumers insensitive to the actual price of healthcare, and they often shop on the basis of perceived quality. Healthcare providers, in turn, want to be regarded as “top quality” and often seek the latest technology to signal excellence to the consuming public. The pharmaceutical industry, medical equipment manufacturers, and medical electronics producers, to name a few, actively seek to meet this demand with new or at least differentiated products. Some have called this a medical arms race. At the root of it is a lack of cost-saving health technologies and a lack of confidence that money is being well spent. Money may be squandered with productive inefficiency, where inputs are not producing as much output as possible, or money may be squandered by producing output that is not sufficiently valued to cover the costs, were it not for insurance contributions.

Cost-benefit and cost-effectiveness analysis are used to address these problems of inefficiency by comparing two or more interventions. The analysis can be seen as a four-part procedure.

The Procedure

First, costs must be identified and measured. Generally, all relevant costs are measured, including those for the provision of health services and indirect patient costs, such as transportation costs and the value of lost labor output due to illness. Health service costs include direct costs, those that vary with output, and indirect production costs, such as overheads, which do not vary with output. Allocations may be included for fixed costs such as buildings and equipment. Fixed and variable costs overlap with direct and indirect costs. For example, fixed costs may be direct or indirect costs. The same is true for variable costs. Allocations for indirect production costs need to be linked to the output of health services in an efficient and fair manner. For example, custodial or heating and cooling support costs can be allocated by the proportion of square footage used to provide the relevant health services.

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