Cost-effectiveness analysis (CEA) is a form of

economic analysis Economics () is the social science that studies the production, distribution, and consumption of goods and services. Economics focuses on the behaviour and interactions of economic agents and how economies work. Microeconomics analyz ...

that compares the relative costs and outcomes (effects) of different courses of action. Cost-effectiveness analysis is distinct from

cost–benefit analysis Cost–benefit analysis (CBA), sometimes also called benefit–cost analysis, is a systematic approach to estimating the strengths and weaknesses of alternatives. It is used to determine options which provide the best approach to achieving benefits ...

, 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 Monetization (American and British English spelling differences, also spelled monetisation) is, broadly speaking, the process of converting something into money. The term has a broad range of uses. In banking, the term refers to the process of co ...

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 year The quality-adjusted life year (QALY) is a generic measure of disease burden, including both the quality and the quantity of life lived. It is used in economic evaluation to assess the value of medical interventions. One QALY equates to one year ...

s (QALY).

Cost–utility analysis Cost–utility analysis (CUA) is a form of economic analysis used to guide procurement decisions. The most common and well-known application of this analysis is in pharmacoeconomics, especially health technology assessment (HTA). In health econo ...

is similar to cost-effectiveness analysis. Cost-effectiveness analyses are often visualized on a plane consisting of four quadrants, the cost represented on one axis and the effectiveness on the other axis. Cost-effectiveness analysis focuses on maximising the average level of an outcome, distributional cost-effectiveness analysis extends the core methods of CEA to incorporate concerns for the distribution of outcomes as well as their average level and make trade-offs between equity and efficiency, these more sophisticated methods are of particular interest when analysing interventions to tackle health inequality.

Applications

The concept of cost-effectiveness is applied to the planning and management of many types of organized activity. It is widely used in many aspects of life.

In military acquisitions

In the acquisition of military

tank A tank is an armoured fighting vehicle intended as a primary offensive weapon in front-line ground combat. Tank designs are a balance of heavy firepower, strong armour, and good battlefield mobility provided by tracks and a powerful engi ...

s, for example, competing designs are compared not only for purchase price, but also for such factors as their operating

radius In classical geometry, a radius ( : radii) of a circle or sphere is any of the line segments from its center to its perimeter, and in more modern usage, it is also their length. The name comes from the latin ''radius'', meaning ray but also the ...

, 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 Radar is a detection system that uses radio waves to determine the distance ('' ranging''), angle, and radial velocity of objects relative to the site. It can be used to detect aircraft, ships, spacecraft, guided missiles, motor vehicles, we ...

fire control Fire control is the practice of reducing the heat output of a fire, reducing the area over which the fire exists, or suppressing or extinguishing the fire by depriving it of fuel, oxygen, or heat (see fire triangle). Fire prevention and control i ...

and

laser A laser is a device that emits light through a process of optical amplification based on the stimulated emission of electromagnetic radiation. The word "laser" is an acronym for "light amplification by stimulated emission of radiation". The fi ...

range finding Length measurement, distance measurement, or range measurement (ranging) refers to the many ways in which length, distance, or slant range, range can be measurement, measured. The most commonly used approaches are the rulers, followed by transit ...

, enabling it to destroy enemy tanks accurately at extreme ranges, military planners may choose it instead – based on the same cost-effectiveness principle.

In pharmacoeconomics

In the context of

pharmacoeconomics 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 (expressed in monetary te ...

, 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 is the name of more than 20 currencies. They include the Australian dollar, Brunei dollar, Canadian dollar, Hong Kong dollar, Jamaican dollar, Liberian dollar, Namibian dollar, New Taiwan dollar, New Zealand dollar, Singapore 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 judgment in the context of the intervention being considered. A special case of CEA is

cost–utility analysis Cost–utility analysis (CUA) is a form of economic analysis used to guide procurement decisions. The most common and well-known application of this analysis is in pharmacoeconomics, especially health technology assessment (HTA). In health econo ...

, where the effects are measured in terms of years of full health lived, using a measure such as

s (QALY) or

disability-adjusted life year The disability-adjusted life year (DALY) is a measure of overall disease burden, expressed as the number of years lost due to ill-health, disability or early death. It was developed in the 1990s as a way of comparing the overall health and life ex ...

s. Cost-effectiveness is typically expressed as an

incremental cost-effectiveness ratio The incremental cost-effectiveness ratio (ICER) is a statistic used in cost-effectiveness analysis to summarise the cost-effectiveness of a health care intervention. It is defined by the difference in cost between two possible interventions, divided ...

(ICER), the ratio of change in costs to the change in effects. A complete compilation of cost-utility analyses in the peer-reviewed medical and public health literature is available from the Cost-Effectiveness Analysis Registry website. A 1995 study of the cost-effectiveness of reviewed over 500 life-saving interventions found that the median cost-effectiveness 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.

In energy efficiency investments

CEA has been applied to energy efficiency investments in buildings to calculate the value of energy saved in $/kWh. The energy in such a calculation is virtual in the sense that it was never consumed but rather saved due to some energy efficiency investment being made. Such savings are sometimes called ''

negawatt A negawatt market is a proposed idea of implementation of the demand response ( balancing the electrical grid through the changes in consumption) that uses an energy market where the commodity traded is a ''negawatt-hour'', a unit of energy sav ...

s''. The benefit of the CEA approach in energy systems is that it avoids the need to guess future energy prices for the purposes of the calculation, thus removing the major source of uncertainty in the appraisal of energy efficiency investments.

References

External links