Cost-effectiveness
Encyclopedia
Cost-effectiveness analysis (CEA) is a form of economic analysis
that compares the relative costs and outcomes (effects) of two or more courses of action. Cost-effectiveness analysis is distinct from cost-benefit analysis
, which assigns a monetary value to the measure of effect. Cost-effectiveness analysis is often used in the field of health services, where it may be inappropriate to monetize health effect. Typically the CEA is expressed in terms of a ratio where the denominator is a gain in health from a measure (years of life, premature births averted, sight-years gained) and the numerator is the cost associated with the health gain. The most commonly used outcome measure is quality-adjusted life years (QALY). Cost-utility analysis
is similar to cost-effectiveness analysis.
s, for example, competing designs are compared not only for purchase price, but also for such factors as their operating radius
, top speed, rate of fire
, armor protection, and caliber and armor penetration
of their guns. If a tank's performance in these areas is equal or even slightly inferior to its competitor, but substantially less expensive and easier to produce, military planners may select it as more cost effective than the competitor. Conversely, if the difference in price is near zero, but the more costly competitor would convey an enormous battlefield advantage through special ammunition, radar
fire control
and laser
range finding, enabling it to destroy enemy tanks accurately at extreme ranges, military planners may choose it instead—based on the same cost effectiveness principle.
Cost effectiveness analysis is also applied to many other areas of human activity, including the economics of automobile usage.
, the cost-effectiveness of a therapeutic or preventive intervention is the ratio of the cost of the intervention to a relevant measure of its effect. Cost refers to the resource expended for the intervention, usually measured in monetary terms such as dollar
s or pounds
. The measure of effects depends on the intervention being considered. Examples include the number of people cured of a disease, the mm Hg reduction in diastolic blood pressure
and the number of symptom-free days experienced by a patient. The selection of the appropriate effect measure should be based on clinical judgement in the context of the intervention being considered.
A special case of CEA is cost-utility analysis
, where the effects are measured in terms of years of full health lived, using a measure such as quality-adjusted life years or disability-adjusted life years.
Cost-effectiveness is typically expressed as an incremental cost-effectiveness ratio
(ICER), the ratio of change in costs to the change in effects.
A complete compilation of cost-utility analyses in the peer reviewed medical literature is available from the Cost-Effectiveness Analysis Registry
website.
A 1995 study of the cost-effectiveness of over 500 life-saving medical interventions found that the median cost per intervention was $42,000 per life-year saved. A 2006 systematic review found that industry-funded studies often concluded with cost effective ratios below $20,000 per QALY and low quality studies and those conducted outside the US and EU were less likely to be below this threshold. While the two conclusions of this article may indicate that industry-funded ICER measures are lower methodological quality than those published by non-industry sources, there is also a possibility that, due to the nature of retrospective or other non-public work, publication bias may exist rather than methodology biases. There may be incentive for an organization not to develop or publish an analysis that does not demonstrate the value of their product. Additionally, peer reviewed journal articles should have a strong and defendable methodology, as that is the expectation of the peer-review process.
Financial analysis
Financial analysis refers to an assessment of the viability, stability and profitability of a business, sub-business or project....
that compares the relative costs and outcomes (effects) of two or more courses of action. Cost-effectiveness analysis is distinct from cost-benefit analysis
Cost-benefit analysis
Cost–benefit analysis , sometimes called benefit–cost analysis , is a systematic process for calculating and comparing benefits and costs of a project for two purposes: to determine if it is a sound investment , to see how it compares with alternate projects...
, which assigns a monetary value to the measure of effect. Cost-effectiveness analysis is often used in the field of health services, where it may be inappropriate to monetize health effect. Typically the CEA is expressed in terms of a ratio where the denominator is a gain in health from a measure (years of life, premature births averted, sight-years gained) and the numerator is the cost associated with the health gain. The most commonly used outcome measure is quality-adjusted life years (QALY). Cost-utility analysis
Cost-utility analysis
Cost–utility analysis is a form of financial analysis used to guide procurement decisions. The most common and well-known application of this analysis is in pharmacoeconomics, especially health technology assessment .-CUA in health economics:...
is similar to cost-effectiveness analysis.
General application
The concept of cost effectiveness is applied to the planning and management of many types of organized activity. In the acquisition of military tankTank
A tank is a tracked, armoured fighting vehicle designed for front-line combat which combines operational mobility, tactical offensive, and defensive capabilities...
s, for example, competing designs are compared not only for purchase price, but also for such factors as their operating radius
Radius
In classical geometry, a radius of a circle or sphere is any line segment from its center to its perimeter. By extension, the radius of a circle or sphere is the length of any such segment, which is half the diameter. If the object does not have an obvious center, the term may refer to its...
, top speed, rate of fire
Rate of fire
Rate of fire is the frequency at which a specific weapon can fire or launch its projectiles. It is usually measured in rounds per minute , or per second .-Overview:...
, armor protection, and caliber and armor penetration
Penetration (weapons)
Strictly speaking penetration occurs when a projectile enters a target without passing through it and perforation occurs when the projectile completely passes through the target, but the word penetration is commonly used to refer to either....
of their guns. If a tank's performance in these areas is equal or even slightly inferior to its competitor, but substantially less expensive and easier to produce, military planners may select it as more cost effective than the competitor. Conversely, if the difference in price is near zero, but the more costly competitor would convey an enormous battlefield advantage through special ammunition, radar
Radar
Radar is an object-detection system which uses radio waves to determine the range, altitude, direction, or speed of objects. It can be used to detect aircraft, ships, spacecraft, guided missiles, motor vehicles, weather formations, and terrain. The radar dish or antenna transmits pulses of radio...
fire control
Fire control
control of fire 'control of fire' is the practice of reducing the heat output of a fire, or reducing the area over which the fire exists, or suppressing or extinguishing the fire by depriving a fire of fuel, oxygen or heat ....
and laser
Laser
A laser is a device that emits light through a process of optical amplification based on the stimulated emission of photons. The term "laser" originated as an acronym for Light Amplification by Stimulated Emission of Radiation...
range finding, enabling it to destroy enemy tanks accurately at extreme ranges, military planners may choose it instead—based on the same cost effectiveness principle.
Cost effectiveness analysis is also applied to many other areas of human activity, including the economics of automobile usage.
CEA in pharmacoeconomics
In the context of pharmacoeconomicsPharmacoeconomics
Pharmacoeconomics refers to the scientific discipline that compares the value of one pharmaceutical drug or drug therapy to another. It is a sub-discipline of health economics. A pharmacoeconomic study evaluates the cost and effects of a pharmaceutical product...
, the cost-effectiveness of a therapeutic or preventive intervention is the ratio of the cost of the intervention to a relevant measure of its effect. Cost refers to the resource expended for the intervention, usually measured in monetary terms such as dollar
Dollar
The dollar is the name of the official currency of many countries, including Australia, Belize, Canada, Ecuador, El Salvador, Hong Kong, New Zealand, Singapore, Taiwan, and the United States.-Etymology:...
s or pounds
Pound sterling
The pound sterling , commonly called the pound, is the official currency of the United Kingdom, its Crown Dependencies and the British Overseas Territories of South Georgia and the South Sandwich Islands, British Antarctic Territory and Tristan da Cunha. It is subdivided into 100 pence...
. The measure of effects depends on the intervention being considered. Examples include the number of people cured of a disease, the mm Hg reduction in diastolic blood pressure
Blood pressure
Blood pressure is the pressure exerted by circulating blood upon the walls of blood vessels, and is one of the principal vital signs. When used without further specification, "blood pressure" usually refers to the arterial pressure of the systemic circulation. During each heartbeat, BP varies...
and the number of symptom-free days experienced by a patient. The selection of the appropriate effect measure should be based on clinical judgement in the context of the intervention being considered.
A special case of CEA is cost-utility analysis
Cost-utility analysis
Cost–utility analysis is a form of financial analysis used to guide procurement decisions. The most common and well-known application of this analysis is in pharmacoeconomics, especially health technology assessment .-CUA in health economics:...
, where the effects are measured in terms of years of full health lived, using a measure such as quality-adjusted life years or disability-adjusted life years.
Cost-effectiveness is typically expressed as an incremental cost-effectiveness ratio
Incremental cost-effectiveness ratio
The incremental cost-effectiveness ratio of an intervention in health care is a term used in cost-effectiveness analysis in health economics. It is defined as the ratio of the change in costs of a therapeutic intervention to the change in effects of the intervention.The term does not...
(ICER), the ratio of change in costs to the change in effects.
A complete compilation of cost-utility analyses in the peer reviewed medical literature is available from the Cost-Effectiveness Analysis Registry
Cost-Effectiveness Analysis Registry
The Cost-Effectiveness Analysis Registry was developed by the Center for the Evaluation of Value and Risk in Health at the Institute for Clinical Research and Health Policy Studies, Tufts Medical Center, Boston, MA. The Registry contains detailed information on over 2,800 cost-utility analyses...
website.
A 1995 study of the cost-effectiveness of over 500 life-saving medical interventions found that the median cost per intervention was $42,000 per life-year saved. A 2006 systematic review found that industry-funded studies often concluded with cost effective ratios below $20,000 per QALY and low quality studies and those conducted outside the US and EU were less likely to be below this threshold. While the two conclusions of this article may indicate that industry-funded ICER measures are lower methodological quality than those published by non-industry sources, there is also a possibility that, due to the nature of retrospective or other non-public work, publication bias may exist rather than methodology biases. There may be incentive for an organization not to develop or publish an analysis that does not demonstrate the value of their product. Additionally, peer reviewed journal articles should have a strong and defendable methodology, as that is the expectation of the peer-review process.