Economic Evaluation Methods

Economic evaluation in health care is the comparative analysis of alternative courses of action in terms of both their costs and their consequences. It provides a structured way to weigh what is gained in health against what is spent, supporting decisions about which services, technologies, and programmes offer value when resources are limited.

Definition

Economic evaluation methods are analytic techniques that compare two or more health care options by relating their incremental costs to their incremental health consequences, in order to inform decisions about the efficient use of resources.

Scope

The entry covers the main forms of full economic evaluation — cost-effectiveness, cost-utility, cost-benefit, and cost-minimisation analysis — together with shared concepts such as the incremental cost-effectiveness ratio, the QALY, perspective, time horizon, discounting, and uncertainty analysis. It is methodological in framing and gives no clinical, pricing, or coverage recommendations.

Core questions

• How are the costs and health consequences of alternative options compared?
• What does an incremental cost-effectiveness ratio represent?
• Whose costs and outcomes count, and over what time horizon?
• How is uncertainty in the analysis characterised and reported?

Key concepts

• Cost-effectiveness analysis
• Cost-utility analysis and the QALY
• Cost-benefit and cost-minimisation analysis
• Incremental cost-effectiveness ratio (ICER)
• Analytic perspective (e.g., health system vs societal)
• Time horizon and discounting
• Sensitivity and probabilistic uncertainty analysis
• Decision-analytic modelling
• CHEERS reporting

Mechanisms

A full economic evaluation compares at least two options on both costs and consequences and expresses the trade-off as an incremental cost-effectiveness ratio — the additional cost per additional unit of health, often a quality-adjusted life-year (QALY) in cost-utility analysis. Results depend on choices about perspective (whose costs and outcomes are counted), time horizon, and the discount rate applied to future costs and effects, and on how uncertainty is handled through deterministic and probabilistic sensitivity analysis (Sanders et al., 2016; Drummond et al., 2015). Decision-analytic models extend trial or observational data over longer horizons. Reporting standards specify what an analysis should disclose so its assumptions can be judged (Husereau et al., 2013).

Clinical relevance

Economic evaluations inform how health systems and payers judge the value of technologies and programmes, and appraising them is part of evidence-based decision-making at the system level. This entry describes analytic methodology and is not a basis for individual treatment decisions, pricing, or coverage determinations.

Evidence & guidelines

Methodological guidance is set by the Second Panel on Cost-Effectiveness in Health and Medicine (Sanders et al., 2016) and the CHEERS reporting statement (Husereau et al., 2013), with the standard reference text providing the underlying methods (Drummond et al., 2015). These sources are methodological and do not recommend treatments or set prices.

History

Health economic evaluation developed from welfare economics and operations research into a distinct field over the late twentieth century, with the QALY emerging as a common outcome metric for cost-utility analysis. Successive U.S. panels on cost-effectiveness (1996 and 2016) and reporting standards such as CHEERS (2013) progressively standardised conduct and transparency, while the reference textbook by Drummond and colleagues codified the methods.

Debates

Which analytic perspective should be adopted?

Analyses can take a health-system or a broader societal perspective, and the choice changes which costs and benefits count; the Second Panel recommends presenting both via a reference case to make the implications explicit.

Are QALYs an adequate measure of health value?

The QALY enables comparison across very different interventions but has been criticised for how it values health states and life extension; debate continues over its equity implications and over alternative measures.

Key figures

• Michael Drummond
• Mark Sculpher
• Peter Neumann
• Don Husereau
• Andrew Briggs

Seminal works

• sanders-2016
• husereau-2013-cheers
• drummond-2015

Frequently asked questions

What is an incremental cost-effectiveness ratio?

It is the difference in cost between two options divided by the difference in their health outcomes, expressing how much extra must be spent to gain an additional unit of health, such as a quality-adjusted life-year.

How do cost-effectiveness and cost-utility analysis differ?

Both relate costs to health gained, but cost-effectiveness analysis uses a natural outcome unit (such as life-years), while cost-utility analysis uses a preference-weighted measure, typically the QALY, allowing comparison across different conditions.