Cost‑Effectiveness Analysis in Public Health
Expert-defined terms from the Advanced Certificate in Economic Evaluation in Public Health Interventions course at LearnUNI. Free to read, free to share, paired with a professional course.
The ACER is the ratio of total costs to total health outcomes for a single inter… #
It provides a baseline measure of efficiency but does not compare alternatives directly.
Example #
In a vaccination program, the ACER might be $150 per disability‑adjusted life year (DALY) averted.
Practical application #
Useful for preliminary screening of interventions when resources are limited.
Challenges #
ACER can be misleading if multiple interventions are compared because it ignores the incremental nature of decision‑making and may overstate the value of a less efficient option.
A BIA estimates the financial consequences of adopting a new health intervention… #
It focuses on affordability rather than value for money.
Example #
A health department evaluates the 5‑year budget impact of introducing a new hepatitis B vaccine, projecting incremental expenses and potential savings from avoided treatments.
Practical application #
Helps policymakers decide whether an intervention can be funded given fiscal constraints.
Challenges #
Requires detailed cost data, assumptions about uptake rates, and may be sensitive to changes in population demographics or policy environment.
The CET represents the maximum amount a decision‑maker is prepared to pay for a… #
g., per QALY or DALY). It serves as a benchmark to judge whether an ICER is acceptable.
Example #
In many low‑ and middle‑income countries, the CET is set at one to three times the gross domestic product per capita.
Practical application #
Enables consistent ranking of interventions across disease areas.
Challenges #
Determining an appropriate CET is contentious; thresholds may not reflect true opportunity costs and can be politically driven.
CEA compares the relative costs and outcomes (often expressed in natural units l… #
The result is usually expressed as an ICER.
Example #
Comparing a school‑based nutrition program to a community‑wide health education campaign, CEA quantifies the additional cost per child gaining one healthy weight year.
Practical application #
Guides resource allocation decisions by identifying interventions that provide the greatest health benefit per dollar spent.
Challenges #
Requires robust data on both costs and effects; results can be sensitive to methodological choices such as discount rates and perspective.
CUA is a form of CEA that incorporates patient preferences for different health… #
It allows comparison across diverse health programs.
Example #
A CUA of a new antiretroviral regimen may report an ICER of $800 per QALY gained compared with standard therapy.
Practical application #
Facilitates cross‑program priority setting when health benefits differ in nature (e.g., mental health vs. infectious disease).
Challenges #
Utility elicitation can be methodologically complex; cultural differences may affect preference measurement.
The discount rate adjusts future costs and health outcomes to their present valu… #
Standard rates range from 3 % to 5 % per annum.
Example #
A cost incurred in year 5 is multiplied by (1 + discount rate)^‑5 to obtain its present value.
Practical application #
Ensures comparability of interventions with different time horizons, such as preventive vaccines versus acute treatments.
Challenges #
Choice of discount rate can substantially alter conclusions; different rates for costs and outcomes add complexity.
An intervention is strictly dominated if it is both more costly and less effecti… #
Extended (or weak) dominance occurs when an intervention’s ICER is higher than that of a more effective option, making it inefficient.
Example #
A screening test that costs $200 more and prevents 0.5 fewer cases than another test is strictly dominated.
Practical application #
Dominated options are excluded from further analysis, simplifying the decision set.
Challenges #
Accurate identification of dominance requires precise estimates; measurement error may misclassify interventions.
HALY is a generic metric that combines mortality and morbidity into a single fig… #
QALYs and DALYs are specific types of HALY.
Example #
A program that reduces malaria incidence may produce 10,000 HALYs over a decade.
Practical application #
Provides a common language for comparing disparate health programs.
Challenges #
Selection of the appropriate HALY type influences results; data on disability weights may be scarce.
The ICER is the ratio of the difference in costs to the difference in effectiven… #
It quantifies the additional cost required to gain one extra unit of health outcome.
Example #
An ICER of $1,200 per QALY indicates that each additional QALY achieved by a new drug costs $1,200 compared with the comparator.
Practical application #
Central decision‑making metric in CEA; interventions with ICERs below the CET are considered cost‑effective.
Challenges #
Sensitive to small differences in effectiveness; uncertainty around the ICER often requires probabilistic analysis.
INB translates cost‑effectiveness into monetary terms #
INB = (λ × ΔEffect) – ΔCost, where λ is the willingness‑to‑pay threshold. A positive INB indicates that an intervention is cost‑effective at the given λ.
Example #
With λ = $5,000 per DALY, ΔEffect = 0.8 DALYs, and ΔCost = $3,200, INB = $1,800, suggesting cost‑effectiveness.
Practical application #
Facilitates statistical testing and regression analysis in CEA.
Challenges #
Requires specification of λ, which may be uncertain; interpretation depends on the chosen threshold.
A Markov model is a mathematical framework that simulates the progression of a c… #
A Markov model is a mathematical framework that simulates the progression of a cohort through a series of health states over discrete time cycles, allowing for recurring events and long‑term outcomes.
Example #
A chronic disease model with states “healthy,” “diseased,” “complication,” and “death” can estimate lifetime costs and QALYs of a therapeutic regimen.
Practical application #
Captures disease dynamics where events can recur, such as infection cycles or treatment failures.
Challenges #
Requires assumptions about transition probabilities; model complexity can increase computational burden.
NMB is calculated as (λ × Effect) – Cost #
It expresses the value of an intervention in monetary terms, facilitating comparison across alternatives. The intervention with the highest NMB is deemed optimal.
Example #
For λ = $3,000 per QALY, an intervention achieving 0.5 QALYs at $1,200 yields an NMB of $300.
Practical application #
Simplifies decision analysis and allows for probabilistic sensitivity analysis using standard statistical software.
Challenges #
Dependent on the chosen λ; if λ is mis‑specified, NMB may mislead decision makers.
Opportunity cost represents the health benefits forgone when resources are alloc… #
In CEA, it is often expressed as the health gain that could have been achieved elsewhere with the same spending.
Example #
Funding a new screening program may prevent 1,000 DALYs but simultaneously displace a vaccination program that could have averted 1,500 DALYs; the latter loss is the opportunity cost.
Practical application #
Provides an economic rationale for setting realistic CETs based on actual health system constraints.
Challenges #
Quantifying opportunity costs requires comprehensive data on all competing interventions, which is rarely available.
PSA incorporates parameter uncertainty by assigning probability distributions to… #
g., ICERs).
Example #
Assigning a beta distribution to utility weights and a gamma distribution to cost parameters, then running 10,000 simulations to produce a cloud of ICER points.
Practical application #
Provides decision makers with the probability that an intervention is cost‑effective at various thresholds.
Challenges #
Requires computational resources and expertise in statistical modeling; results can be sensitive to the choice of distributions.
A QALY combines length of life with quality of life, where each year of perfect… #
A QALY combines length of life with quality of life, where each year of perfect health equals 1 QALY and less-than-perfect health is weighted by a utility value between 0 and 1.
Example #
A patient living 5 years with a utility of 0.8 accrues 4 QALYs (5 × 0.8).
Practical application #
Enables comparison of interventions across disease areas by standardizing health outcomes.
Challenges #
Utility measurement can be culturally sensitive; some argue QALYs undervalue certain health states or populations.
A reference case defines a set of methodological assumptions (e #
g., perspective, discount rate, time horizon) that should be consistently applied in CEAs to enhance comparability and credibility.
Example #
The WHO reference case recommends a societal perspective, 3 % discount rate, and lifetime horizon for chronic disease evaluations.
Practical application #
Researchers align their analyses with the reference case to facilitate policy uptake.
Challenges #
Strict adherence may limit flexibility needed for context‑specific analyses; updating reference cases can be slow.
Sensitivity analysis explores how changes in key parameters affect the results o… #
Sensitivity analysis explores how changes in key parameters affect the results of a CEA, identifying which variables drive uncertainty.
Example #
Varying vaccine efficacy from 70 % to 95 % and observing the impact on the ICER.
Practical application #
Helps prioritize data collection and informs robustness of conclusions.
Challenges #
One‑way sensitivity may oversimplify interactions; comprehensive multi‑parameter analysis can be resource‑intensive.
The societal perspective includes all costs and benefits regardless of who incur… #
g., transportation), and indirect costs such as productivity losses.
Example #
In evaluating a smoking cessation program, costs include counseling fees, participant travel, and lost workdays due to quitting attempts.
Practical application #
Provides the most comprehensive estimate of an intervention’s economic impact, supporting broader policy decisions.
Challenges #
Data on indirect costs may be scarce; assigning monetary values to intangible outcomes can be controversial.
The time horizon defines the period over which costs and effects are measured in… #
It should be long enough to capture all relevant differences between interventions.
Example #
A lifetime horizon is appropriate for chronic disease interventions, while a 5‑year horizon may suffice for short‑term treatments.
Practical application #
Determines the extent of future benefits included, influencing the ICER.
Challenges #
Longer horizons increase uncertainty; projecting costs and outcomes far into the future may require strong assumptions.
WTP represents the maximum amount a society or individual is prepared to spend f… #
g., per QALY). It is often used interchangeably with the cost‑effectiveness threshold.
Example #
A WTP of $50,000 per QALY is frequently cited in high‑income country analyses.
Practical application #
Guides interpretation of ICERs and informs reimbursement decisions.
Challenges #
Estimating WTP empirically is difficult; values may vary across populations and over time.
Yield refers to the amount of health benefit generated per unit of resource inve… #
Yield refers to the amount of health benefit generated per unit of resource invested, often expressed as cases averted, DALYs saved, or QALYs gained per dollar spent.
Example #
A malaria net distribution program may yield 0.02 DALYs averted per $1 invested.
Practical application #
Helps compare efficiency of interventions with different scales and modalities.
Challenges #
Accurate measurement requires reliable epidemiological data; yield can be context‑dependent.
A zero‑cost intervention is one that incurs no additional financial outlay for t… #
A zero‑cost intervention is one that incurs no additional financial outlay for the implementing agency, often because costs are borne by another party or are already embedded in existing services.
Example #
A health promotion campaign that uses existing community radio channels without extra fees.
Practical application #
Attractive in resource‑constrained settings where any additional spending is scrutinized.
Challenges #
Hidden costs (e.g., staff time) may be overlooked, leading to underestimation of true resource use.
Costs associated with negative side effects of an intervention, including medica… #
Incorporating adverse event costs ensures a more accurate net cost estimate.
Example #
Adding the cost of managing chemotherapy‑induced neutropenia to the total cost of a cancer regimen.
Practical application #
Helps decide whether the benefits of a high‑risk intervention outweigh its additional costs.
Challenges #
Data on frequency and severity of adverse events may be limited; valuation of patient discomfort is complex.
The BCR is the ratio of total benefits (expressed in monetary terms) to total co… #
A BCR > 1 indicates that benefits exceed costs.
Example #
A BCR of 1.8 means $1.80 of benefit for every $1 spent.
Practical application #
Provides a straightforward metric for policymakers assessing the overall economic return of a program.
Challenges #
Translating health outcomes into monetary values can be ethically contentious; BCR does not convey the distribution of benefits.
CBA compares the monetary value of all benefits of an intervention with its tota… #
Unlike CEA, CBA expresses health outcomes in monetary terms.
Example #
Valuing a reduction in disease burden using a VSL (value of statistical life) and subtracting program costs to calculate net benefit.
Practical application #
Allows direct comparison of health programs with non‑health projects (e.g., infrastructure).
Challenges #
Requires robust methods to assign monetary values to health outcomes; may undervalue intangible benefits.
NPV aggregates all discounted future costs and benefits into a single present‑va… #
NPV aggregates all discounted future costs and benefits into a single present‑value figure, indicating whether an intervention yields a net gain (> 0) or loss (< 0).
Example #
An intervention with discounted benefits of $5 million and discounted costs of $3 million has an NPV of $2 million.
Practical application #
Used in investment decisions and long‑term health program planning.
Challenges #
Sensitive to discount rate selection; future benefits that are highly uncertain can dominate NPV calculations.
External validity refers to the extent to which CEA results can be applied to se… #
External validity refers to the extent to which CEA results can be applied to settings or populations beyond the original study environment.
Example #
A CEA conducted in urban hospitals may have limited external validity for rural clinics due to differing cost structures.
Practical application #
Encourages analysts to report context‑specific parameters to aid adaptation.
Challenges #
Differences in healthcare systems, price levels, and disease epidemiology can hinder transferability.
Fixed costs are expenses that do not change with the volume of services delivere… #
In CEA, they are allocated across the expected number of units treated.
Example #
A laboratory’s $200,000 annual rent is a fixed cost that must be spread over all tests performed.
Practical application #
Accurate allocation of fixed costs prevents underestimation of per‑unit costs.
Challenges #
Determining appropriate allocation bases (e.g., number of patients, time) can be arbitrary.
HIA is a systematic process that predicts the health effects of a policy, progra… #
HIA is a systematic process that predicts the health effects of a policy, program, or project before it is implemented, often incorporating economic evaluation elements like CEA.
Example #
An HIA of a new public transport system may estimate reductions in traffic‑related injuries and associated cost‑effectiveness.
Practical application #
Informs policymakers about potential health consequences, supporting evidence‑based decisions.
Challenges #
Requires interdisciplinary expertise; predictions may be uncertain.
This metric expresses the additional cost required to prevent one additional cas… #
It is calculated as ΔCost ÷ ΔCases Averted.
Example #
An incremental cost of $10,000 to avert 100 extra cases yields $100 per case averted.
Practical application #
Useful when the primary outcome is disease incidence rather than QALYs or DALYs.
Challenges #
Does not capture severity differences between cases; may overlook broader societal benefits.
In probabilistic analysis, the joint probability distribution defines the simult… #
In probabilistic analysis, the joint probability distribution defines the simultaneous behavior of multiple correlated parameters, ensuring realistic simulation of combined uncertainty.
Example #
Correlating drug price and adherence rates to reflect that higher prices may reduce adherence.
Practical application #
Improves the credibility of PSA results by preserving relationships between variables.
Challenges #
Requires data on parameter correlations, which are often unavailable.
Long‑term follow‑up refers to the extended observation period after an intervent… #
Long‑term follow‑up refers to the extended observation period after an intervention to capture delayed effects, cost offsets, or sustainability of benefits.
Example #
Monitoring cardiovascular outcomes for ten years after a lifestyle intervention.
Practical application #
Provides evidence on durability of health gains, influencing the choice of time horizon.
Challenges #
Attrition, changing standards of care, and data collection costs can limit feasibility.
A Markov cohort model tracks a hypothetical group of individuals as they transit… #
A Markov cohort model tracks a hypothetical group of individuals as they transition between defined health states over successive cycles, assuming that all members in a state are identical.
Example #
A cohort of patients with chronic kidney disease moving between “stage 3,” “stage 4,” “dialysis,” and “death.”
Practical application #
Enables estimation of lifetime costs and outcomes for chronic conditions.
Challenges #
The “memoryless” property may oversimplify diseases where history influences future risk.
NHB expresses the health gain of an intervention after accounting for its costs,… #
It allows direct comparison of health outcomes without monetary conversion.
Example #
With λ = $20,000 per QALY, an intervention costing $4,000 and delivering 0.3 QALYs yields an NHB of 0.1 QALYs.
Practical application #
Facilitates decision making when monetary thresholds are controversial.
Challenges #
Requires a chosen λ; interpretation may be less intuitive for non‑economic audiences.
The opportunity cost of capital reflects the return that could be earned on the… #
The opportunity cost of capital reflects the return that could be earned on the funds if they were invested elsewhere, influencing the choice of discount rate for financial costs.
Example #
Using a 5 % discount rate to reflect the average return on government bonds.
Practical application #
Aligns health economic analyses with broader fiscal policy considerations.
Challenges #
Capital markets fluctuate; selecting a single rate may not capture sector‑specific financing conditions.
A partial economic evaluation focuses on a subset of cost components (e #
g., only direct medical costs) or outcomes, without conducting a full CEA.
Example #
Estimating only the program’s implementation costs without measuring health outcomes.
Practical application #
Useful for early‑stage assessments or when data on outcomes are unavailable.
Challenges #
May mislead decision makers if omitted costs or benefits are substantial.
Weighting involves assigning a utility value to each health state based on popul… #
Weighting involves assigning a utility value to each health state based on population preferences, typically derived from instruments like EQ‑5D or standard gamble methods.
Example #
A health state “moderate arthritis” receives a utility weight of 0.6.
Practical application #
Enables conversion of survival time into QALYs for CUA.
Challenges #
Preference heterogeneity across cultures; methodological differences can produce varying weights.
Resource allocation is the process of distributing limited health resources amon… #
CEA provides evidence to inform this process.
Example #
Allocating a fixed budget to fund a mix of vaccination, screening, and health education programs based on their cost‑effectiveness.
Practical application #
Supports transparent and evidence‑based decision making at national or institutional levels.
Challenges #
Political pressures, equity considerations, and stakeholder interests may conflict with pure efficiency criteria.
A sensitivity coefficient quantifies the degree to which changes in a specific p… #
A sensitivity coefficient quantifies the degree to which changes in a specific parameter affect the ICER or NMB, often expressed as the slope of the relationship.
Example #
A 10 % increase in drug price leading to a 5 % rise in the ICER yields a sensitivity coefficient of 0.5.
Practical application #
Identifies high‑impact parameters for targeted data collection or further research.
Challenges #
Linear approximations may not capture non‑linear effects; interactions among parameters can complicate interpretation.
In some models, the probability of moving between health states varies over time… #
In some models, the probability of moving between health states varies over time, reflecting disease progression or aging effects.
Example #
The probability of developing hypertension increases with each successive year in a cohort model.
Practical application #
Improves realism of long‑term simulations for chronic diseases.
Challenges #
Requires detailed longitudinal data; increases model complexity.
The utility scale ranges from 0 (equivalent to death) to 1 (perfect health), tho… #
The utility scale ranges from 0 (equivalent to death) to 1 (perfect health), though negative values are allowed for health states considered worse than death.
Example #
A utility of 0.85 indicates a health state 85 % as desirable as perfect health.
Practical application #
Standardizes the measurement of health‑related quality of life across studies.
Challenges #
Different elicitation methods (e.g., time trade‑off vs. visual analogue scale) may produce divergent utilities.
Variable costs change proportionally with the volume of services delivered, such… #
Variable costs change proportionally with the volume of services delivered, such as consumables, labor per patient, or medication.
Example #
The cost of syringes increases with each additional vaccination administered.
Practical application #
Critical for estimating incremental costs when scaling up an intervention.
Challenges #
Distinguishing between truly variable and semi‑fixed costs can be ambiguous.
Threshold adjustment updates the CET over time to reflect changes in macro‑econo… #
Threshold adjustment updates the CET over time to reflect changes in macro‑economic conditions, health system capacity, or societal preferences.
Example #
Raising the CET from $30,000 to $35,000 per QALY following a 5 % increase in GDP per capita.
Practical application #
Keeps cost‑effectiveness decisions aligned with current fiscal realities.
Challenges #
Frequent adjustments may create instability; political influences can distort the process.