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Benefit-Cost Ratio

The benefit-cost ratio (BCR) represents the ratio of total benefits over total costs, both
discounted as appropriate. The formula for calculating BCR is:

For example, a BCR value of 1.2:1 will indicate that for every $1 invested (costs), society would
gain $1.2 (benefits).
Example: CBA of School-Based Tuberculin Screening Program
This study was conducted in 1995 to compare tuberculin screening strategies:
screening of all kindergartners and high school entrants (screen-all strategy), versus
screening limited to high-risk children (targeted screening).
The tuberculosis incidence in the United States declined for three decades as a result of school-
based screening programs for tuberculosis infection recommended by the U.S. Public Health
Service.
As the screening programs were revised to focus on persons at high risk of infection, the
majority of health departments discontinued tuberculin screening of schoolchildren. But such
screening had a resurgence beginning in 1985.
This study considered the costs and benefits of two alternative school-based tuberculosis
screening strategies to help in making decisions regarding initiation or continuation of screening
programs. Table 1 shows the results of the study:
Table 1. Impact of two programs of tuberculin screening of kindergartners and high school
entrants in Santa Clara County, California, with baseline assumptions
Strategy Group
Program
cost($)
Benefits($)
Cases
prevented
(discounted
cases
prevented)
Net annual
cost
(net
benefits)($)
Benefit-
cost
ratio
Screen-all Kindergartners 183,868 58,201 11.1 (3.9) 125,628 0.31

High school
entrants
287,452 217,176 37.2 (16.1) 70,276 0.76
Both 471,320 275,377 48.3 (20.0) 195,904 0.58
Targeted
screening
Kindergartners 42,218 41,099 7.9 (2.7) 1,119 0.97

High school
entrants
155,925 169,136 28.9 (11.3) (13,211) 1.08
Both 198,143 210,235 38.6 (11.3) (12,092) 1.06
Source: Boetani M. JAMA 1995; 274(8): 6139.
Findings: Tuberculin Screening
For the two tuberculin screening programs:
The program cost of the screen-all program is $471,320 per year, and the net cost is
$195,904.
The targeted screening program costs less, $198,143, and produces a net saving of
$12,090.
For each dollar invested in the screen-all program, $0.58 is saved (BCR = 0.58).
For each dollar invested in the targeted screening program, $1.06 is saved (BCR = 1.06).
On the other hand, the screen-all program results in more cases prevented than does the
targeted screening.
These findings should be considered when deciding which strategy to employ in school-based
tuberculosis screening programs.
Advantages and Limitations of BCR as a Summary Measure
Benefit-cost ratio is a simple summary measure that allows a straightforward communication of
results of a CBA for decision making.
However, many researchers have highlighted these two shortcomings of BCR that limit its
usefulness when comparing the results of various cost benefit analyses:
1. BCR is sensitive to how costs and benefits of a project are classified. Let us consider the
previous example, with an additional assumption that the analyst classified the benefits
from costs averted for high school entrants as a negative cost for the program. Table 2
presents the results of calculating BCRs for both classifications:
Table 2. Benefit-cost ratios for screen-all versus targeted screening programs
Strategy Group
Classification A
(screen-all)
Classification B
(targeted screening)
Cost($
)
Benefits(
$)
Benefit
-cost
ratio
Cost($)
Benefits(
$)
Benefit
-cost
ratio
Screen-
all
Kindergartne
rs
183,86
8
58,201 0.31 183,868 58,201 0.31

High school
entrants
287,45
2
217,176 0.76
(287,45
2
217,176
) =
70,276
0 0
Both
471,32
0
275,377 0.58 254,144 58,201 0.23
Targete
d
screenin
g
Kindergartne
rs
42,218 41,099 0.97 42,218 41,099 0.97

High school
entrants
155,92
5
169,136 1.08
(155,92
5
169,136
) =
13,211
0 0
Both
198,14
3
210,235 1.06 29,007 41,099 1.42
The reclassification of some benefits as negative costs changed the BCRs of both
strategies:
For every dollar invested in the screen-all program:
the return in benefits fell from $0.58 to $0.23, and
the BCR for the targeted screening program increased from 1.06 to 1.42.
2. BCR is scale sensitive, i.e., it is sensitive to sizes of the numerator and denominator in the
ratio.
One reason that the targeted screening strategy with original classification has a higher
BCR than the screen-all strategy (represented by Classification A in the table above) is
that its costs and benefits are much lower than those of the screen-all strategy.
Therefore, a BCR is a good summary measure when we consider only one program relative to no
program, in which scale (how large or small) is not a factor.
The same is true when we are interested in determining whether an intervention would have a
BCR exceeding or falling short of a certain value and thus are not interested in scale
considerations.
Advantages and Limitations of NPV as a Summary Measure
Unlike a BCR, an NPV is not sensitive to classification of benefits and costs because it measures
the absolute difference between them.
This is one of the main reasons that most economists prefer to use NPV as the summary measure
of a CBA.
Furthermore, by using NPV as summary measures of CBA we can compare alternatives among a
group of projects and pick the preferred alternatives that meet our budget constraints.
This can be done both for programs equally successful in achieving a desired health outcome and
for those with different health outcomes.
Choosing the alternative(s) with the largest NPV that does not exceed a given budget is the
decision rule for selecting the preferred program(s).
To make the right choice when the additional consideration of budget constraint is a factor in a
CBA, we have to provide information on a project's resource requirements.
Presenting the discounted costs together with the NPV of a project provides this information and
allows decisionmakers to make informed choices about resource use.
Incremental Summary Measures
When we are conducting a CBA of a project or intervention, we are comparing it to a "no
intervention" baseline.
NPV can also be used to consider the benefits and costs of alternatives such as:
expanding an existing program,
adopting an intervention to replace an existing intervention, or
the alternative with respect to a program which will definitely be adopted.
Incremental NPV is a summary measure that is used to compare programs under those
circumstances. It is calculated as follows:
Incremental NPV = ( PV Benefits
B
PV Benefits
A
) ( PV Costs
B
PV Costs
A
)
Incremental NPV = NPV
B

NPV
A

Here the baseline, intervention A, is either the existing intervention or the intervention deemed to
be less effective.
Example: Incremental NPV for the Screen-All Strategy
We can calculate the incremental NPV for the screen-all strategy with respect to targeted
screening in a school-based tuberculosis screening program. Using the Costs and Benefits values
from Table 1 , the incremental net present value for screening all kindergartners versus targeted
screening is:
Incremental
NPV
= (
PV
Benefits
All

PV Benefits
TS
) (
PV
Costs
All


PV
Costs
TS

)
=
( $58,201
$41,099 )

( $183,868
$42,218 )
= $124,509

The results of similar calculations for high school entrants and both groups of students are shown
in Table 3.
Table 3. Incremental net present value (NPV) for the screen-all strategy
Strategy Group Program cost($) Benefits($)
Incremental
annual cost
(incremental benefit)
($)
Screen-all Kindergartners 183,868 58,201 124,509
High school entrants 287,452 217,176 57,065
Both 471,320 275,377 183,812
Targeted
screening
Kindergartners 42,218 41,099 . . .
High school entrants 155,925 169,136 . . .
Both 198,143 210,235 . . .
As is evident, the incremental costs exceed incremental benefits when comparing the screen-all
strategy with targeted screening.
Conducting a Sensitivity Analysis
Having estimated the summary measures, we can then study the impact of different input
variables on the results of our analyses by conducting a sensitivity analysis.
Sensitivity analysis takes into account the uncertainty associated with the assumptions and
parameters of CBA by studying how changes in variable values impact the results.
A conclusion of CBA is considered "robust" with respect to a variable if a relatively large change
in the value of the variable does not change the conclusion.
We can conduct both one-way and multi-way sensitivity analyses, in which a single variable or
multiple variables are altered, respectively.
The results of a multi-way sensitivity analysis will be more informative, however, because our
estimates involve interdependent epidemiologic, clinical, and economic data.
The results of simultaneous changes in more than one variable are bound to more accurately
reflect interactions between these variables and their impact on conclusions of our CBA.
Please see the Sensitivity Analysis section of the cost analysis tutorial for more detail.
Advantages and Limitations of CBA
As a decision-making tool that helps allocate scarce resources to programs that maximize
societal economic benefit, CBA compels analysts to study the full economic impact of all
potential outcomes of an intervention.
Expressing the results of this comprehensive analysis in purely monetary terms makes it possible
to compare:
different programs having different health outcomes, or
health programs to nonhealth programs.
Furthermore, the identification of all resource requirements (costs) and benefits of an
intervention or program allows analysts to examine its distributional aspects, (e.g., who will
receive these benefits and who will bear the costs).
The major limitation of CBA is the empirical difficulty associated with assigning monetary
values to benefits (e.g., extended human life, improved health, and reduced health risks).
Besides the complexity of various methods designed to value these benefits, analysts usually
confront controversy over the appropriateness of attaching a certain monetary value to human
life.
Measuring the cost per unit of health outcome in CEA circumvents the need to make an explicit
valuation of human life.
Nevertheless, when decisions are to be made as to whether to implement a life-saving
intervention based on its cost-effectiveness measure, policy makers must make the implicit
decision as to whether the investment is worth the lives it will save. CBA makes this
consideration explicit.
Finally, as in any other study, the results of CBA are only as good as the assumptions and
valuations on which they are based.
Hence, understanding the implications of analysis assumptions and methods is essential for a
correct interpretation of results.
Test Your Understanding
Please answer the questions before you look at the "Our Answers" section.
1. A negative net present value (NPV) implies that benefits exceed costs.
True False
2. NPV is a ratio of the computed present values.
True False
3. The table below is a summary of a CBA study for two competing projects: A and B.
Projects A B
Costs (million $) 2.2 8.5
Benefits (million $) 6.0 14.1
4. Assuming that all costs and benefits:
are present values, and
were computed for the same time period,
please answer these questions:
C. Compute the benefit-cost ratios (BCRs) for each project.

D. How would you interpret the results to the policy maker, using layman's
language?

E. Based solely on the results from the preceding question, which project would you
recommend?

F. Compute the NPV for each project.

G. Interpret the results of the answers to the previous question.

H. Based on those results, what would be your recommendation?

I. Do these change your previous recommendations? Why or why not?

5. Why do we conduct sensitivity analyses?

Our Answers
1. A negative net present value (NPV) implies that benefits exceed costs.
False. A negative NPV implies that costs exceed benefits.
2. NPV is a ratio of the computed present values.
False. NPV is the difference between computed present values. Benefit-cost ratio is a
ratio.
3. The table below is a summary of a CBA study for two competing projects: A and B.
Projects A B
Costs (million $) 2.2 8.5
Benefits (million $) 6.0 14.1
4. Assuming that all costs and benefits:
are present values, and
were computed for the same time period,
please answer these questions:
C. Compute the benefit-cost ratios (BCRs) for each project.
BCR
A
= 6 / 2.2 = 2.7:1
BCR
B
= 14.1 / 8.5 = 1.7:1
D. How would you interpret the results to the policy maker, using layman's
language?
One dollar spent on Project A returns 2.7 dollars.

One dollar spent on Project B returns 1.7 dollars.
E. Based solely on the results from the preceding question, which project would you
recommend?
Project A has a higher return per dollar spent so we would recommend it over
Project B.
F. Compute the NPV for each project.
NPV
A
= 6 2.2 = $3.8
NPV
B
= 14.1 8.5 = $5.6
G. Interpret the results of the answers to the previous question.
Project A gives us a net benefit worth $3.8 million.

Project B gives us a net benefit worth $5.6 million.
H. Based on those results, what would be your recommendation?
Society gains more from Project B than from Project A.
Therefore we would recommend Project B.
I. Do these change your previous recommendations? Why or why not?
Yes. However, other relevant factors need to be taken into consideration:
Project B has about four times the capital outlay of Project A.
Society might not be able to implement Project B because of limited
resources.
Political or societal support might also play a part.
5. Why do we conduct sensitivity analyses?
We conduct sensitivity analyses to test the robustness of the results.
Our conclusions are robust if they do not change when we vary parameter values over
ranges that reflect the uncertainty in the underlying assumptions/data.

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