Cost-Benefit Analysis and Cost-Effectiveness Analysis: The basics

Cost-Effectiveness Analysis (CEA)

The term Cost-Effectiveness Analysis (CEA) properly refers to an evaluation where the consequences of different interventions are measured using a single outcome. Therefore, it is used in health economics to compare the financial costs of therapies whose outcomes can be measured purely in terms of health effect (like years of life saved, for instance).

Unlike Cost-Benefit Analysis (CBA), where costs and benefits are measured in monetary terms, CEA measures benefits in natural units as mentioned above (deaths averted, heart attacks avoided, cases detected, etc.).

Although it is the commonest form of economic analysis in health economics literature, it does not permit comparisons to be made between courses of action that have completely different therapeutic outcomes.

Cost-Effectiveness Analysis may be used in two distinct situations:

  1. Where interventions are completely independent: The costs and effects of one intervention are not affected by the introduction of other interventions
  2. Where interventions are mutually exclusive: Implementing one intervention means that another cannot be implemented, or the implementation of one intervention results in changes to the costs and effects of another intervention.

Independent programmes:

Cost-effectiveness ratios (CERs) must be calculated for each programme and placed in rank order.

CER = Costs of intervention/ Health effects produced


The following table shows the costs, effects, and CER of three hypothetical programmes

According to cost-effectiveness analysis, programme C should be given priority over A as it has a lower CER. However, the decision to implement a programme should be informed by the extent of available resources.

Mutually exclusive interventions

Typically, choices will have to be made between different treatment regimens for the same condition, different doses, or treatment versus prophylaxis- mutually exclusive interventions.

The key question is, “what are the additional benefits to be gained from the new therapeutic intervention (for instance), and at how much extra cost?”. To answer this question, one uses incremental cost-effectiveness ratios (ICERs):

ICER = (Difference in costs between programmes P1 and P2)/ (Difference in health effects between programmes P1 and P2)

The principle of incremental cost-effectiveness may be understood using a simple example.


Patients with diabetes mellitus are at risk of developing diabetic neuropathy- which may result in diabetic ulcer(s) and amputation(s). The routine treatment protocol involves only testing and control of blood sugar levels. Many patients present with complications of diabetic neuropathy- like diabetic ulcer. By checking peripheral pulses, performing visual inspection of the feet, and monofilament testing for peripheral neuropathy increases the cost of each consultation- an additional 10 minutes is required per patient, and equipment costs are around $100 (say). The effect of this intervention is measured in terms of ulcers/ amputations prevented. Compared to the original programme, the alternative programme is marginally more expensive, but yields considerably better outcomes for patients. Here, we consider not only the additional cost over and above the original programme, but also the additional effects resulting from the (new) intervention.

Alternative interventions are ranked according to their effectiveness- based on maximum effect without considering cost.

Calculating Incremental Cost-Effectiveness Ratios

The incremental cost, incremental effect, and ICER of P1 is the same as its costs, effects, and CER as it is compared to doing nothing.

To obtain the incremental cost of P2, the cost of P1 is subtracted from the cost of P2. Similarly, to obtain incremental effect, subtract the effect of P1 from P2.

ICER for P2 is given as:

(100,000-150,000)/(1,500-1,300) = -25,000/200  = -125

The negative ICER for P2 indicates that adopting P2 will result in an improvement in life-years and reduction in costs.

For P3, ICER is obtained by performing the same calculations compared to P2.

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