Cost-Effectiveness Analysis

Cost-effectiveness analysis (CEA) compares the costs and health consequences of competing interventions, expressing consequences in a natural or generic unit of health rather than in money. Its central output is the incremental cost-effectiveness ratio (ICER) — the additional cost per additional unit of health gained — which decision-makers compare against a threshold representing the value, or opportunity cost, of the resources required.

Definition

Cost-effectiveness analysis is an economic evaluation that compares the incremental costs of an intervention with its incremental health effects measured in natural units (such as life-years gained) or, in its cost-utility form, in quality-adjusted life-years, summarised as an incremental cost-effectiveness ratio.

Scope

This topic covers the structure of a cost-effectiveness analysis, the incremental cost-effectiveness ratio, the cost-utility variant that uses quality-adjusted life-years, the role of the cost-effectiveness threshold, and the handling of uncertainty. It is a methodological reference and does not endorse any particular intervention or threshold.

Key concepts

• Incremental cost-effectiveness ratio (ICER)
• Cost-utility analysis and the QALY
• Cost-effectiveness threshold
• Net monetary and net health benefit
• Dominance and extended dominance
• Discounting of costs and effects
• Probabilistic sensitivity analysis and the cost-effectiveness plane
• Decision-analytic modelling

Mechanisms

CEA compares two or more options by computing, for each pair, the difference in cost divided by the difference in effect — the ICER. An option is said to dominate another if it is both less costly and more effective. To decide whether a non-dominated option offers value, the ICER is compared with a threshold: if the cost per unit of health gained is below the threshold the intervention is judged cost-effective. When effects are measured in quality-adjusted life-years the analysis is called cost-utility analysis, a special case that allows interventions across very different conditions to be compared on a common health scale. The same comparison can be restated as net monetary benefit (effects valued at the threshold minus costs) or net health benefit, which avoid some statistical awkwardness of ratios. Costs and effects accruing over time are discounted to present value, and because inputs are uncertain, probabilistic sensitivity analysis propagates that uncertainty, often displayed on the cost-effectiveness plane or as an acceptability curve. The threshold itself is understood to represent the health forgone elsewhere when resources are committed, linking CEA directly to opportunity cost.

Clinical relevance

Cost-effectiveness and cost-utility analyses underpin many health-technology appraisals and coverage recommendations, so clinicians and students encounter ICERs and thresholds when interpreting why a therapy is or is not funded. The topic explains how these population-level value judgements are constructed; it is not guidance for treating an individual patient.

Evidence & guidelines

Consensus methodological guidance is provided by the Second Panel on Cost-Effectiveness in Health and Medicine (Sanders and colleagues, 2016) and by Drummond and colleagues' standard textbook; the meaning and basis of decision thresholds are discussed by McCabe and colleagues (2008) in relation to the threshold used by the National Institute for Health and Care Excellence.

History

Cost-effectiveness analysis took shape in medicine during the 1970s; Weinstein and Stason's 1977 paper set out its foundations and the incremental logic that remains central. Garber and Phelps later grounded the method in welfare economics, and successive expert panels standardised its conduct. Debate over the cost-effectiveness threshold — whether it reflects willingness to pay or the opportunity cost of displaced care — became a defining methodological theme, examined by McCabe and colleagues and others.

Debates

What should the cost-effectiveness threshold represent?

Whether the threshold should reflect society's willingness to pay for a unit of health or the health opportunity cost of displaced services is contested; McCabe and colleagues argue it should represent the health forgone elsewhere in a fixed-budget system, with substantial implications for which interventions are judged cost-effective.

Key figures

• Milton Weinstein
• William Stason
• Karl Claxton
• Christopher McCabe
• Gillian Sanders

Seminal works

• weinstein-stason-1977
• garber-phelps-1997
• sanders-2016

Frequently asked questions

What is an incremental cost-effectiveness ratio?

It is the difference in cost between two interventions divided by the difference in their health effect — the extra cost per extra unit of health gained. It is compared with a threshold to judge whether the additional benefit justifies the additional cost.

Is cost-utility analysis the same as cost-effectiveness analysis?

Cost-utility analysis is a form of cost-effectiveness analysis in which the health effect is measured in quality-adjusted life-years. Using a generic outcome lets interventions for very different conditions be compared on the same scale.