Cost-effectiveness

In 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.

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