CHAPTER 17: COSTEFFECTIVENESS ANALYSIS AND COST-UTILITY ANALYSIS

Purpose: This chapter reviews cost-effectiveness Analysis (CEA) and cost-utility Analysis
(CUA). CEA or CUA are often used instead of CBA when analysts are unable or unwilling to
oneti!e the a"or policy ipact (e.g.# lives saved or national defence).
CEA copares (utually e$clusive) alternatives on the basis of the ratio of their costs and a single
%uantified but not oneti!ed effectiveness easure# such as dollars per lives saved. &rogras that
cost less per life saved are ore efficient than other progras. Cost-utility analysis also relates
costs to a single benefit easure# but the benefit easure is a construct ade up of several
(usually two) benefit categories# reflecting both %uantity and %uality. 'or e$aple# the benefit
easure ay be quality-adjusted life-years ((A)*)# which cobines both the nuber of
additional years of life and the %uality of life during those years. &rogras are copared on the
basis of dollars per %uality-ad"usted life-year# +,(A)*. As CUA easures both %uantity and
%uality of ipacts# it coes a step closer to CBA than CEA
COST-EFFECTIVENESS ANALYSIS
The Two CEA R!"os
-ince CEA involves two etrics (cost and an effectiveness easure) one cannot obtain a single
easure of social net benefits. one can only copute the ratio of the two. This can be done in
two ways/ cost per unit of outcoe effectiveness or outcoe effectiveness per unit cost# i.e.
CEi 0 Ci,Ei 1 average cost per unit of effectiveness 1 lower is better
ECi 0 Ei,Ci 1 average effectiveness per unit cost 1 larger is better
As CEA coputes the ratio of input to output (or vice versa)# it is a easure of technical
efficiency and is not necessarily a good easure of allocative efficiency.
I#$re%e#!& CEA R!"os
)i2e benefit-cost ratios# which can lead to the inappropriate choice of policies# CEA ratios can
also be isleading because they ignore pro"ect scale. 3n choosing aong utually e$clusive
pro"ects# such as alternative student-teach ratios in classroos# it is iportant to increental cost
and effectiveness. 4ather than copute CEA ratios loo2ing "ust at the cost and effectiveness of
each policy# one should base the on the increental cost and effectiveness of the logically prior
alternative. Actual choice should proceed as follows/ 'irst# construct a cost-effectiveness
frontier. -econd# eliinate all strictly doinated alternatives 1 alternatives that have less
effectiveness for the sae cost or higher cost for the sae effectiveness. Third# by e$tended
doinance# eliinate any alternatives that lie to the 5orthwest of the cost-effectiveness frontier.
'inally# choose the reaining alternative with the sallest increental cost-effectiveness ratio.
The selected pro"ect will only be efficient for soe range of shadow prices of effectiveness#
however.
CEA 'here S$&e Pro(&e%s Are Irre&e)#!: I*e#!"$& Pro+r% ,u*+e!s or I*e#!"$&
Pro+r% E--e$!")e#ess
The cost effectiveness ratios in CEAs do not ta2e different scales of pro"ects into account. This is
not a proble if all alternatives have the sae cost (fi$ed budget) or if all alternatives have the
sae level of effectiveness (fi$ed effectiveness)# as shown in Tables 67.6 and 67.8. But if the
Boardan# 9reenberg# :ining# ;eier , Cost-Benefit Analysis# <
rd
Edition
3nstructor=s >anual 67-6
scales differ# as in Table 67.8# it is not clear which pro"ect is best. Although pro"ect A has the best
CE ratio# one ight prefer pro"ect B.
I%pos"#+ Co#s!r"#!s !o De& w"!h S$&e D"--ere#$es
3n order to use CEA for decision a2ing a coon practice is to ipose a constraint# either a
iniu acceptable level of effectiveness# denoted by E# or a a$iu acceptable cost# denoted
C . 3f we ipose a iniu level of effectiveness# we ay either inii!e costs# Ci# or the cost-
effectiveness ratio# CEi. 3f we ipose a a$iu cost# we could either a$ii!e effectiveness or
inii!e the cost-effectiveness.
A# I&&us!r!"o# o- !he D"--ere#! CE Ru&es
Table 67.? provides an illustration of alternative decision-a2ing rules. Even in CEA# decision
a2ers ust often a2e trade-offs between costs and non-oneti!ed benefits to a2e decisions#
iplicitly oneti!ing benefits.
Se#s"!")"!. A#&.s"s: The Pro(&e% o- R!"os
-pecial care is re%uired in investigating the sensitivity of CEA ratios to uncertainty in costs and
effectiveness because the distribution of the ratio of rando variables is often very different fro
their individual distributions. Even if both costs and effectiveness are norally distributed# there
is no guarantee that their ratio will be norally distributed. 3ndeed# it will usually be s2ewed.
>onte Carlo sensitivity analysis is particularly useful in CEA because it reveals the distribution of
the ratio.
/esure%e#! o- Cos!s
The easureent of costs in CEA varies enorously. 3n the health care area# costs often# and
ost narrowly# consist of the cost of edication. >ore broadly# costs ight include other
treatent costs# such as the doctors@s tie or hospitali!ation. This is iportant# for e$aple# in
the case of drugs for schi!ophrenia# which ay be e$pensive but ay reduce the tie in hospital#
which is even ore e$pensive. Even ore broadly# costs ight also include waiting tie or tie
lost fro wor2# which are borne by patients or eployers. Abviously# it is preferable to include
all social costs# although costs that are constant across all alternatives can be oitted because this
will not change the CE ran2ings# although it will change the CE ratios.
O%"!!e* I%p$!s: Te$h#"$& )ersus A&&o$!")e E--"$"e#$.
CEA alost invariably oits ipacts that would be included in CBA. >ost CEA studies consider
only budgetary costs. 4elevant non-budgetary opportunity costs are often oitted. 'urtherore#
CEA considers only one easure of effectiveness. 3n practice# however# pro"ects often have
ultiple benefits. 'or e$aple# regulations that save lives ay also reduce in"uries or illnesses.
-iilarly# new drugs ay effectively cure a disease and also have fewer side effects than current
drugs. To easure allocative efficiency# all costs and benefits should be ta2en into consideration.
Ane way to get closer to doing this -- that is# to reach a Bhalfway houseC between standard CEA
and CBA -- is to copute the following adjusted CE ratio/
Boardan# 9reenberg# :ining# ;eier , Cost-Benefit Analysis# <
rd
Edition
3nstructor=s >anual 67-8
ess effectiven
benefits social other - costs social
0 E C
D
(67.?)
3f the nuerator can be fully valued and oneti!ed# then this ad"usted CE ratio incorporates all
the ipacts that would be included in a CBA.
Because CEA oits iportant social costs and benefits# it is fre%uently a poor guide of allocative
efficiency.
COST-UTILITY ANALYSIS
CUA is used ost in the area of health care. The easure of effectiveness is usually %uality-
ad"usted life years ((A)*).
The /e#"#+ o- L"-e 0u&"!.-A*1us!e* L"-e-Yers2 Th! Is3
(A)* cobines two distinct variables 1 %uality (health status) and %uantity (years) of health# as
shown in Table 67.E.
For%u&!"#+ He&!h S!!us I#*e4 #* /esur"#+ 0ALYs
There are four coon ethods for deriving utility-li2e easures of health status or (A)*s/
15 He&!h r!"#+ %e!ho*6 This derives health ratings fro %uestionnaires with health
e$perts# potential sub"ects of treatent# or ebers of society in general. 3ndividuals are as2ed
to assign values between F and 6 to various (well-described) health states.
75 T"%e !r*e-o-- %e!ho*6 4espondents as2ed to copare different cobinations of length
and %uality of life. The trade-offs in the responses provide a basis for ran2ing various states (in
%uality and years)
85 S!#*r* +%(&e %e!ho*6 4espondents are presented with a decision tree with two
alternatives li2e the following/ one alternative is ipaired health for t years. the other is noral
health for n years with probability p or iediate death with probability 1-p. The p at which an
individual is indifferent can be interpreted as the respondent@s utility of the forer alternative.
95 He&!h "#*e4 %e!ho*6 Gealth status is assessed in ters of a health inde$ with various
diensions of well-being# such as obility# absence fro pain# etc. 'or e$aple# the -hort 'or
Gealth -urvey (-'-<H) provides eight diensions of assessent. ;ith several levels of well being
on each diension# the inde$ can distinguish aong thousands of health status. 4esearchers use
the standard gable or tie trade-off ethod to elicit respondents@ utilities for a subset of the
statuses and then statistically estiate weights that can be used to assign utilities to any of the
statuses.
So%e C)e!s o# CUA
3ssues related to (A)* are not all resolved/
_ Iiscounting is soewhat probleatic as one cannot trade off near years of health for far
years of health (and vice versa).
_ >ethods are based on %uestionnaires# so there ay be hypotheticality probles
(respondents siply haven@t thought about the issues very uch)# saple selection
Boardan# 9reenberg# :ining# ;eier , Cost-Benefit Analysis# <
rd
Edition
3nstructor=s >anual 67-<
probles (potential treatent candidates ight e$aggerate the ButilityC they would receive
fro a better health state following treatent)# or fraing effects (i.e. how %uestions are
as2ed) as discussed in Chapter 6?.
USE OF LEA:UE TA,LES
CUA and CEA usually copare utually e$clusive pro"ects. )eague Tables draw upon ultiple
CUA@s and CEA@s to ran2 policies sharing the sae cost-effectiveness easure# such as cost per
life saved. Alternative pro"ects (policies) are usually not utually e$clusive. The a"or purpose is
to highlight policies that are at the e$trees1 decision a2ers should do ore of those that have
very low CE or CUA ratios relative to all other policies# and do less of those that have very high
CE or CUA ratios. Ane should bear in ind# however# that the studies in such tables have
different authors# different data and different ethodologies/ they easure cost differently# oit
different costs and benefits# they differ in scale# etc.
CONCLUSION: 'HEN IS CEA CLOSE TO C,A;
CEA easures technical efficiency# not allocative efficiency. The ost cost-effective alternative is
not necessarily worth doing (i.e. it ay not be allocatively efficient). 3f all social costs are
easured# there is only one benefit (effectiveness) and pro"ects are of siilar scale# then the
ran2ings by CBA and CEA will be the sae. 3f these conditions do not apply# the analyst could/
6) Try to incorporate significant non-budgetary social costs and other categories of benefits into
an ad"usted cost-effectiveness easure.
8) Io CBA.
<) >ove to a ore %ualitative evaluation ethod# such as ulti-goal analysis.
Boardan# 9reenberg# :ining# ;eier , Cost-Benefit Analysis# <
rd
Edition
3nstructor=s >anual 67-?