Cost effectiveness

In health economics, cost-effectiveness refers to the comparison of the relative expenditure (costs) and outcomes (effects) associated with two or more courses of action. Cost-effectiveness is typically expressed as an incremental cost-effectiveness ratio (ICER), the ratio of change in costs : change in effects.

ICER = (change in costs) / (change in effects)

Although ICER is an acronym for "incremental cost effectiveness ratio", the term "incremental" does not have the standard economic meaning. Normally, the effects of an incremental change refer to the effect of an additional unit of a specific measurement - for example, the effect of an additional dollar spent on a public health awareness campaign. However, in this case, we are not comparing the effects of an incremental change in some intervention, but rather the effect of switching interventions.

The change in effects is often measured in Quality Adjusted Life Years(QALY). A unit of QALY is defined as a year of perfect health. Health is measured on a spectrum from 0 to 1, where 0 health refers to death, and 1 refers to a state of perfect health. If, for example, intervention A allows a patient to live for three additional years than if no intervention had taken place, but only at a level of health of 0.6, than the intervention confers 3* 0.6 = 1.8 units of QALY to the patient. If intervention B confers two extra years of life at a health level of .75, than it's corresponding QALY rating is 1.5. ICER is a ratio of the differences between the costs and effects of two interventions - the difference in effects is therefore 1.8 - 1.5 = 0.3 QALY.

The meaning and usefulness of QALY is debated. Perfect health is hard, if not impossible, to define. Some argue that there are conditions worse than death, and that therefore there should be negative values possible on the health spectrum (indeed, some health economists have incorporated negative values into calculations). Determining the level of health depends on measures that some argue places disproportionate importance on physical pain or disability over mental health. The effects of a patient's health on the quality of life of others - caregivers, family etc. also does not figure into these calculations.

The equation for ICER often takes the following form:

(cost of intervention A in dollars) - (cost of intervention B in dollars) --- (QALY for intervention A) - ( QALY for intervention B)

In North America, US$50000 per quality-adjusted life year (QALY) is often suggested as the upper limit of an acceptable ICER. In other words, if the cost of conferring one extra year of "perfect" health to a patient exceeds US$50000, then policy makers will usually dismiss this new intervention as too costly.

CEA in Infrastructure Asset Management
Cost-effectiveness analysis is commonly used instead of a full cost-benefit analysis where the objective is to sustain the existing standard of service. In effect, the benefits side of the equation is held constant at some pre-determined standard of service, and various options for providing that standard of service are then compared, with the least-cost method identified as the preferred option.

The use of CEA is supported by the benefits identified in the Asset Management Plan where the whole-life cost is also detailed. As such, an indicative benefit-cost ratio is contained within the Asset Management Plan - allowing individual assets to be justified as part of a system of assets. This provides a framework for the safe use of CEA for individual assets.

CEA in pharmacoeconomics
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 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 literature is available at the CEA Registry Website

CEA in environmental economics
In environmental terms, "cost-effective measures" allude to various (mostly industrial) attempts to prevent environmental degradation as written in principle 15 of the Rio declaration of the Earth Summit conference 1992.