Costs, Direct versus Indirect

Within economic evaluation, the analysis of costs is meant to provide a valuation of the resources consumed as a result of an intervention. Such an analysis, like that involved in the valuation of outcomes, would result in different answers depending on the perspective of the analyst. The perspective adopted is, in turn, determined by the policy question that the evaluation is seeking to answer. For instance, the health sector perspective generally includes costs of treatment and cost offsets, that is, costs and cost savings to the health sector through, say, differences in hospitalizations associated with differences in outcomes between intervention [Page 228]alternatives. Such a perspective typically includes out-of-pocket payments incurred by patients and charges on other funders of healthcare, including government and health insurers. A narrower perspective on costs might be justified if the evaluation is to address specific funding questions, for instance, to an individual insurer where costs incurred beyond the organization are deemed not to be relevant. Alternatively, a broader societal perspective might be relevant in instances where it is of interest to compare the intervention with options outside the health sector or if the policy in question is concerned with the potential economic impact on patients and their households.

The adoption of the societal perspective generally means the inclusion of indirect costs. These refer to resources incurred outside the health sector, including costs to patients, carers, and firms. Direct costs, in contrast, pertain to the specific resources involved in the delivery of a health intervention, for example, costs of medications, medical consultations, and equipment used in treatment. These terms have very specific definitions in economic evaluation that may differ from their meanings in common parlance. For instance, the term indirect costs is sometimes used to refer to the cost of infrastructure such as building and core administrative staff, particularly in the context of university funding.

For purposes here, indirect costs are potentially factored into an economic evaluation in two ways:

• 1.
  Time inputs into an intervention such as waiting, treatment, and travel time. Such costs may be incurred by patients, their household, or other parties such as firms that employ patients. These enter into the evaluation specifically as costs.
• 2.
  Production gains to the economy resulting from improvements in health to patients. Confusingly, these are generally treated as benefits within an evaluation although it could be argued that such benefits are savings in disease costs that have been brought about by health gains. Again, such benefits are deemed to be to society rather than to any specific party. This approach to valuation is used in cost-benefit analyses and is typically labeled the “human capital approach.”

Both aspects of evaluation have in common the problem of how to value a unit of time, whether it is time spent in accessing and receiving treatment or time gained as a result of improved health (through improved survival or improved functioning translating into increased work or leisure time). The issues considered in this entry are thus generally relevant to both aspects of evaluation although the focus will be on Item 1, given that the primary interest is in the assessment of costs.

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