Economics Notes: Types of economic evaluation
Authors: S Palmer, S Byford, J Raftery
Journal: BMJ (1999)

The pursuit of efficiency in the healthcare sector requires priority to be given to those treatments which provide the greatest benefit per unit of cost. Alternative interventions often have to be compared to determine whether a change in the mix of interventions would increase efficiency. Although economic evaluations approach costs in a common format, they differ in the way they approach benefits. These differences play a critical role in developing criteria for efficiency.1

Cost benefit analysis involves measuring costs and benefits in commensurate terms, usually monetary. Welfare economics shows that under certain conditions any net excess of monetary benefits over costs represents the gain in welfare by society.1 Cost benefit analysis makes it possible to determine, firstly, whether an individual intervention offers an overall net welfare gain and, secondly, how the welfare gain from that intervention compares with that from alternative interventions. Increased use of interventions with the greatest net gain will increase efficiency. By valuing all costs and benefits in the same units, cost benefit analysis compares diverse interventions using the net benefit criterion. Cost benefit analysis thus simultaneously addresses issues of productive and allocative efficiency.

Practical measurement difficulties and objections to valuing health benefits in monetary terms have limited the use of cost benefit analysis in health care, though recent approaches using the concept of “willingness to pay”2 have revived interest in it.

Cost effectiveness analysis measures health benefits in natural units such as life years saved or improvements in functional status (units of blood pressure or cholesterol). Since costs and benefits are measured in non-comparable units, their ratio provides a yardstick with which to assess relative (productive) efficiency.3 This decision rule does not, however, enable us to evaluate the relative efficiency of interventions which provide more benefit at greater cost or less benefit at lower cost.4

If an intervention is both more expensive and more effective than an alternative, then the criterion for efficiency becomes the ratio of the net increase in costs to the net increase in effectiveness (the incremental cost effectiveness ratio). However, the additional expense of the new intervention means that resources have to be redirected from elsewhere. An economic evaluation assesses whether or not the additional benefits generated by the new intervention are greater than the loss in benefits from the reduction in other programmes—that is, is the reallocation efficient? A major limitation of cost effectiveness analysis is its inability to compare interventions with differing natural effects.5 For example, interventions aimed at increasing life years gained cannot be directly compared with those which improve physical functioning. Cost effectiveness analysis therefore cannot directly address allocative efficiency.4

Cost utility analysis is an adaptation of cost effectiveness analysis which measures an intervention’s effect on both the quantitative and qualitative aspects of health (morbidity and mortality) using a utility based measure such as quality adjusted life years (QALYs).6 Like cost effectiveness analysis, relative efficiency is assessed using an incremental ratio, here a cost utility ratio. An intervention is deemed productively efficient, relative to an alternative, if it results in higher (or equal) benefits at lower cost. The use of a single measure of health benefit enables diverse healthcare interventions to be compared so cost utility analysis can address both productive efficiency and allocative efficiency.

In cost utility analysis the optimal decision rule involves ranking the incremental cost utility ratios of different interventions and selecting those with the lowest ratios (best value) until the budget is depleted.7,8 The lower the incremental ratio, the higher the priority in terms of maximising health benefits derived from a given level of expenditure.8 The point at which resources are exhausted defines a maximum price for a unit of effectiveness—for example, £20 000 per QALY—that is affordable within the budget. Eliminating interventions with an incremental cost above this price in favour of those with lower incremental costs would be considered an improvement in allocative efficiency.

In practice huge difficulties exist in obtaining enough information to facilitate such ranking. Information is required on the full costs and benefits of all health problems and all alternative interventions. Within each health problem subgroups with different levels of potential health gain must be distinguished.