Cost-Benefit Analysis

(CBA)
Or
Benefit-Cost Analysis
(BCA)
Tommie N, PhD
BCA / CBA
Economic analysis that
assesses whether the
outcome (BENEFIT)
outweighs the resource
inputs (COST) of a
program or intervention
CBA Equation

Value of resources
consumed / Value
of the outcome
CBA
Grounded in welfare theory
(societal impact of irrigating, flood
control, public parks, etc)

Can assess whether program is

worthwhile (not related to external
standard)
CBA
May choose to do nothing if none of
programs/alternatives has a positive financial
benefit

Comparing interventions with different

outcomes

Can assess whether budget should be

expanded to accommodate new program
***Willingness to pay
Example
Cost Benefit ratio of making corona vaccine

Cost without vaccination $1,866,153

Cost with vaccination $720,862

= 2.6 : 1

Cost is 2.6 of not vaccinated for every $1

spend vaccinating. Costs more to not vaccinate
CBA Advantages
Decision maker can determine
whether benefits exceed the
cost of implementation

Decision maker can compare

programs with unrelated
outcomes
CBA Disadvantages
Placing a dollar value on human
life is controversial & difficult
CBA ratios
Usually expressed as benefit-cost
(BC), where the HIGHER the
number, the more cost-beneficial
Usually from the societal perspective

But can be used by a business to

decide whether a program or service
will make or lose money
Steps in CBA
1. Identify the program or
intervention
2. Identify alternatives
3. Identify costs and benefits
Measure (quantify) costs and
benefits
Calculate results of costs and
benefits
What is the value of a human life?
"The major disadvantage of the benefit-
cost framework is the requirement that
human lives and quality of life be valued
in monetary units.
Many decision-makers find this difficult
or unethical or do not trust analyses that
depend upon such valuations" -
Weinstein/Fineberg
Human capital calculations
Daily or Yearly wage rate

Missed time
(What's missed time and who is
paying for it)
Net Benefit (or net Cost)
{subtraction}
Net Benefit: Difference between the
total benefits & total costs = Total
Benefits- Total Cost
Net Cost = Total Cost- Total
Benefits
Cost Beneficial =
Net Benefit > 0
Net Benefit
Total Benefits - Total
Cost
Net Cost
Total Cost - Total Benefits
Net Benefit (or net Cost)
Cost beneficial
Net Benefit > 0

Net Cost < 0

Benefit to Cost Ratio (or Cost to Benefit)
{division}
Sum of total benefits/sum of total costs

Sum of total costs/sum of total benefits

Similar to incremental calculations

Don't forget about discounting

Cost beneficial if:

Benefit-to-cost > 1
Cost-to-benefit <1
Benefit to Cost Ratio (or Cost to Benefit) cost
beneficial
Benefit-to-cost > 1

Cost-to-benefit <1

***Depends on what you put 1st

Cost benefit calculations
Net Benefit is the sum of the total benefits -
sum of the total costs

Benefit/cost ratio is the sum of benefits divided

by sum of costs all at present value

Benefits may be cost savings, costs avoided, or

actual profit

If discounting must be done (more than 1 year

scope of project is the general rule), you would
use the discount factor & add up all of the
benefits & costs at the present value
Internal Rate of Return
Specify a HURDLE RATE

Find the rate of return that makes the costs and

benefits equal.

Accept projects with an IRR greater than the

chosen hurdle rate.
Summary
CBA measures costs AND benefits in monetary
terms

Can compare multiple programs with different

types of outcomes

Values indirect benefits using HC

Values intangible benefits using WTP

Can choose the "do-nothing" alternative

Example from chapter 7
Alternative A= hire RPh

Alternative B = automated dispensing machine

Costs:
-A $80,000 salary plus 20% fringe benefits x 3
years
-B $200,000 year 1 (cost upfront), $30,000 year
2 & 3 (maintenance)

Benefits (savings):
-A $120,000 per year X 3
-B $100,000 per year X 3

Discount rate 5%
Net Benefit A
Net benefit (NB) =

Total savings - total costs

Total savings = $120,000 + $120,000/1.05 +

$120,000/(1.05)2 = $343,129

Total costs = $96,000 + $96,000/1.05 + 96,000/

(1.05)2 = $274,503

NB = $343,129 - $274,503 = $68,626

Net Benefit B
Net benefit (NB) =

Total savings - total costs

Total savings = $100,000 + $100,000/1.05 +

$100,000/(1.05)2 = $285,941

Total costs = $200,000 (upfront) +

$30,000/1.05 (maintenance) + 30,000/(1.05)2
(maintenance) = $255,782

NB = $285,941- $255,782 = $30,160

Benefit:Cost ratio A
B:C = Benefit/Cost = $343,129 / $274,503 =
1.25:1

for every $1 spend for hiring pharmacist get

back $1.25
Benefit:Cost Ratio B
B:C = Benefit/Cost = $285,941 / $255,782 =
1.12:1

for every $1 spend on machine you get back

$1.12
Net benefit calculations?
Alternative A would be chosen because it has a
higher net benefit ($68,626 vs. $30,160)

***Better to higher pharmacist

Benefit-to-cost ratios?
Alternative A would be chosen because it has a
higher benefit-to-cost ratio (1.25:1 vs. 1.12:1)

***Better to higher pharmacist

END OF PRESENTATION

THANK YOU!

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YOU!!