Cost-effectiveness analysis

The concept of cost-effectiveness is applied to the planning and management of many types of organized activity. It is widely used in many aspects of life.

In the acquisition of military tanks, for example, competing designs are compared not only for purchase price, but also for such factors as their operating radius, top speed, rate of fire, armor protection, and caliber and armor penetration of their guns. If a tank's performance in these areas is equal or even slightly inferior to its competitor, but substantially less expensive and easier to produce, military planners may select it as more cost-effective than the competitor.

Conversely, if the difference in price is near zero, but the more costly competitor would convey an enormous battlefield advantage through special ammunition, radar fire control and laser range finding, enabling it to destroy enemy tanks accurately at extreme ranges, military planners may choose it instead – based on the same cost-effectiveness principle.

In the context of pharmacoeconomics, the cost-effectiveness of a therapeutic or preventive intervention is the ratio of the cost of the intervention to a relevant measure of its effect. Cost refers to the resource expended for the intervention, usually measured in monetary terms such as dollars or pounds. The measure of effects depends on the intervention being considered. Examples include the number of people cured of a disease, the mm Hg reduction in diastolic blood pressure and the number of symptom-free days experienced by a patient. The selection of the appropriate effect measure should be based on clinical judgment in the context of the intervention being considered.

A special case of CEA is cost–utility analysis, where the effects are measured in terms of years of full health lived, using a measure such as quality-adjusted life years (QALY) or disability-adjusted life years. Cost-effectiveness is typically expressed as an incremental cost-effectiveness ratio (ICER), the ratio of change in costs to the change in effects. A complete compilation of cost-utility analyses in the peer-reviewed medical and public health literature is available from the Cost-Effectiveness Analysis Registry website.^[6]

A 1995 study of the cost-effectiveness of reviewed over 500 life-saving interventions found that the median cost-effectiveness was $42,000 per life-year saved.^[7] A 2006 systematic review found that industry-funded studies often concluded with cost-effective ratios below $20,000 per QALY and low quality studies and those conducted outside the US and EU were less likely to be below this threshold. While the two conclusions of this article may indicate that industry-funded ICER measures are lower methodological quality than those published by non-industry sources, there is also a possibility that, due to the nature of retrospective or other non-public work, publication bias may exist rather than methodology biases. There may be incentive for an organization not to develop or publish an analysis that does not demonstrate the value of their product. Additionally, peer reviewed journal articles should have a strong and defendable methodology, as that is the expectation of the peer-review process.^[8]

CEA has been applied to energy efficiency investments in buildings to calculate the value of energy saved in $/kWh. The energy in such a calculation is virtual in the sense that it was never consumed but rather saved due to some energy efficiency investment being made. Such savings are sometimes called negawatts. The benefit of the CEA approach in energy systems is that it avoids the need to guess future energy prices for the purposes of the calculation, thus removing the major source of uncertainty in the appraisal of energy efficiency investments.^[9]

• Cost–benefit analysis – Systematic approach to estimating the strengths and weaknesses of alternatives
• Cost overrun – Unexpected incurred costs in excess of budgeted amounts
• Efficiency – Degree to which a process minimizes waste of resources
• National Institute for Health and Care Excellence – Non-departmental public body of the Department of Health in the UK
• Distributional cost-effectiveness analysis

• Tufts CEA Registry
• Global Health Cost-Effectiveness Analysis Registry
• Why some drugs are not worth it BBC report
• World Health Organization – CHOICE (Choosing Interventions that are Cost Effective)
• ISPOR-CO, The Colombian Chapter of The International Society for Pharmacoeconomics and Outcomes Research
• International Cost Estimating and Analysis Association