Cost-Effectiveness Analysis

Cost-effectiveness analysis (CEA) compares two or more health interventions in terms of both their costs and their health effects, expressing value as the additional cost required to gain an additional unit of health. Its central output is the incremental cost-effectiveness ratio (ICER) — the difference in cost divided by the difference in effect between an intervention and its comparator — which lets decision-makers judge whether the added health is worth the added cost.

Definition

Cost-effectiveness analysis is a form of full economic evaluation that compares the incremental costs and incremental health effects of alternative interventions, summarising value as an incremental cost-effectiveness ratio (cost per unit of health gained).

Scope

This entry covers the logic and components of CEA: incremental analysis, the ICER, the cost-effectiveness plane and acceptability thresholds, the analytic perspective and time horizon, discounting, decision-analytic modelling, and sensitivity analysis. When health effects are measured in quality-adjusted life years it is often called cost-utility analysis. It is a methodological reference and does not set thresholds, prices, or treatment recommendations.

Core questions

• What are the incremental costs and incremental health effects of one option versus its comparator?
• From whose perspective and over what time horizon are costs and effects counted?
• How should future costs and effects be discounted?
• How robust is the result to uncertainty in inputs (sensitivity analysis)?

Key concepts

• Incremental cost-effectiveness ratio (ICER)
• Cost-effectiveness plane
• Cost-utility analysis and the QALY
• Analytic perspective and time horizon
• Discounting of future costs and effects
• Decision-analytic and Markov modelling
• Deterministic and probabilistic sensitivity analysis
• Dominance and extended dominance

Mechanisms

CEA estimates the incremental cost and incremental effect of an intervention relative to a comparator and divides one by the other to obtain the ICER. Costs and effects are counted from a stated perspective (for example health-care payer or societal) over an appropriate time horizon, with future values discounted to present terms; Weinstein and Stason (1977) laid out these foundations. When effects span survival and quality of life, they are combined into quality-adjusted life years, yielding cost-utility analysis. Because trials rarely capture lifetime costs and outcomes, analysts often build decision-analytic models — frequently Markov state-transition models — to extrapolate over time (Sonnenberg & Beck, 1993). Parameter uncertainty is explored through deterministic and probabilistic sensitivity analysis, and results are summarised on the cost-effectiveness plane and against a willingness-to-pay threshold. The Second US Panel (Sanders et al., 2016) and CHEERS (Husereau et al., 2013) provide consensus methods and reporting standards.

Clinical relevance

CEA underlies many coverage and reimbursement decisions and helps explain why some technologies are recommended for routine use and others are not. It is a reference method for appraising the value of interventions at the population level and does not prescribe care for an individual patient.

Evidence & guidelines

Consensus methods guidance is provided by the Second US Panel on Cost-Effectiveness in Health and Medicine (Sanders et al., 2016) and standard texts such as Drummond et al. (2015); reporting is standardised by CHEERS (Husereau et al., 2013). Decision-modelling practice draws on foundational guides such as Sonnenberg and Beck (1993) for Markov models.

History

CEA in health care was formalised in the 1970s, with Weinstein and Stason's 1977 paper articulating its foundations — perspective, incremental analysis, discounting, and the cost-per-outcome ratio. The first US Panel on Cost-Effectiveness in Health and Medicine (1996) standardised methods, and the Second Panel updated them in 2016. Reporting standards such as CHEERS (2013) and decision-modelling methods matured alongside, making CEA a core analytic component of HTA.

Debates

Which analytic perspective should CEA take?

Whether costs should be counted from a health-care payer perspective or a broader societal perspective (including productivity and informal care) affects results; the Second Panel recommended reporting both via an impact inventory, but practice varies.

Key figures

• Milton C. Weinstein
• Peter J. Neumann
• Michael Drummond
• Gillian D. Sanders

Seminal works

• weinstein-stason-1977
• sanders-2016
• sonnenberg-1993

Frequently asked questions

What is an ICER?

The incremental cost-effectiveness ratio is the difference in cost between an intervention and its comparator divided by the difference in health effect, expressed as cost per unit of health gained (for example cost per QALY).

How does cost-effectiveness analysis differ from cost-utility analysis?

Cost-utility analysis is a form of CEA in which health effects are measured in quality-adjusted life years, allowing comparison across very different interventions on a common scale.