Cost-Identification Analysis

Standardized Methods

Medical decision models are commonly used to assess the cost-effectiveness of new healthcare interventions. Guidelines for cost-effectiveness analysis (CEA) have been developed so that the cost-effectiveness ratios of different interventions conducted by different analysts may be compared without concern that differences are methodological artifacts. Standardization also enhances the generalizability of study findings, allowing them to be applied to new settings.

Although there are a number of different guidelines for CEA, they largely agree on the principles of cost identification. These guidelines recommend that all relevant costs be included, that resources be valued at their opportunity cost, and that cost be estimated from the societal perspective using a long-term time horizon.

Standards have also been developed for budget impact analysis (BIA). This type of study provides healthcare plans or healthcare providers with information on the total cost of implementation. BIA generally uses a short-term horizon and the perspective of a particular health plan or provider.

Perspective of Analysis

Most studies consider all costs incurred in the healthcare system. Adoption of the societal perspective requires inclusion of costs incurred by patients and their families. These include cost of unpaid caregivers, cost of travel to medical care providers, and the value of time seeking care. A cost-identification analysis sometimes includes the value of wages lost due to illness. In practice, many studies ignore costs incurred by patients and their families. This may result in analyses that are biased in favor of interventions that shift costs from health system to patient.

Time Horizon

The time horizon is the period over which costs are identified. CEA guidelines recommend a long-term perspective, one that includes lifetime costs and outcomes. The use of a short time horizon may result in bias. A short-term horizon may favor an intervention that defers costs to the future or disadvantage one in which benefits are realized after significant delay. A short-term horizon may be appropriate to the immediate concerns of a BIA.

Cost-identification analysis ordinarily expresses the cost of care that spans more than 1 year in real (inflation-adjusted) terms. Future costs are discounted (expressed as the present value) to reflect the lower burden imposed by healthcare costs that will not be incurred until the future. Inflation adjustment and discounting are separate adjustments; both adjustments are needed.

The time horizon has an additional effect on cost-identification analysis; it determines whether fixed costs and development costs are included. In the short run, the decision to provide an additional health service does not increase institutional overhead (e.g., the cost of nonpatient care hospital departments such as human resources, finance, administration, and environmental services). These costs are fixed in the short run. In economic terms, the short-run marginal cost is the cost directly attributable to producing an extra unit of output and does not include the fixed costs of the enterprise.

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