Cost-effectiveness analysis (CEA) was developed in response to demands for improving population health while controlling rising healthcare costs in the United States, Canada, and England in the late 20th century. Over time, CEA was refined and its theoretical foundations were expanded through its application to global health problems. While CEA is sometimes criticized for its use of cost-effectiveness ratios and thresholds, its durability is due to its basis in consequentialist moral philosophy and its ability to help coordinate resource allocation decisions across diverse groups.

1. The longest-lasting,
most popular
(and yet most thoroughly discredited)
idea
in the history of
modern public policy
Jeremy A. Lauer, PhD
Economist
Economic Analysis and Evaluation
Health Systems Governance and Financing

2. Cost-effectiveness analysis

3. 1. Identify CEA’s connections to social choice and
– enumerate the reasons explaining its durability.
2. Review the foundations of CEA and
– clarify points of confusion.
3. Articulate an account of generalized CEA that differs
from, and
– is more liberal than, the standard version.
4. Reconcile disputes between generalized and
incremental CEA, and
– explain the source of controversies around threshold-
based rules in decision-making.
5. Link the theory of generalized CEA to real-world
decision making in a novel way.
What I said I would do

4. “The rapid and continuing growth of expenditures is a central
issue in many policy decisions concerning the medical care
system .... Policymakers, health professionals, and consumers
are seeking ways to control this growth while simultaneously
improving the quality of health care. Increasingly, the use of
cost-effectiveness analysis ... is being advocated...”
United States Congress Office of Technology Assessment. The Implications of Cost-
Effectiveness Analysis of Medical Technology, Washington, DC, 1980.
How to begin an article, 1980

5. “It has become increasingly popular to carry out cost-
effectiveness analyses in economic evaluations of healthcare
programmes.”
Karlsson G, Johannesson M. The decision rules of cost-effectiveness analysis.
Pharmacoeconomics. 1996 Feb;9(2):113-20.
How to begin an article, 1993

6. “An increasing number of health-care systems, both public
and private, such as managed-care organizations, are adopting
results from cost-effectiveness analysis as one of the
measures to inform decisions on allocation of health-care
resources.”
Eichler HG, Kong SX, Gerth WC, Mavros P, Jönsson B. Use of cost-effectiveness analysis
in health-care resource allocation decision-making: how are cost-effectiveness
thresholds expected to emerge? Value Health, 7(5):518-28, 2004.
How to begin an article, 2004

7. “… cost-effectiveness analysis (CEA) studies ... are routinely used
around the globe to inform priority setting in health care and public
health....”
Cookson R, Mirelman AJ, Griffin S, Asaria M, Dawkins B, Norheim OF, Verguet S, J Culyer A.
Using Cost-Effectiveness Analysis to Address Health Equity Concerns. Value Health,
20(2):206-212, 2017.
How to begin an article, 2017

8. “…decisions about whether to adopt technologies and
services in publicly funded benefit packages, involve balancing
health gains against the costs of the required resources: more
and more frequently this is done in an explicit way, on the
basis of analyses that build upwards from the biomedical
evidence to create information to support decision makers in
coming to judgements about value for money.”
Lauer et al., in preparation, 2018
How to begin, again, 2018

9. 1980
1993
2004
2017
2018
(and
so on)
What goes around is called a wheel

10. Perhaps this has an esoteric meaning

11. Or possibly it’s just a goldfish story*
*“It looks like new scenery,
every time!”

12. “I’m still where I was 40 years ago!”
In few fields of science can one claim:

13. Why is CEA so robust?
1. CEA expresses the idea that health is an
intrinsic benefit (i.e. it counts in its own
terms).
– Important distinction w.r.t. its main competitor,
benefit-cost analysis.

14. 2. CEA is rational:
– It respects individual autonomy.
– It is objective (i.e. it uses scientific methods which
are subject to continual open-source review).
– It is impartial to persons.
Why is CEA so robust?

15. Two mainstreams in moral philosophy
• Kant: Deontological concerns about rules of action:
the stream MCDA is in.
• Sidgwick: Utilitarian consequentialism:
the stream CEA is in.

16. 3. It belongs to a mainstream of moral
philosophy:
– the idea that actions should be judged by their
outcomes, or consequences, and
– that causal modelling can capture and organize
knowledge about the relevant states of the
world.
Why is CEA so robust?

17. 4. CEA solves a “coordination problem”
– how do disparate groups of people organize
themselves around a particular action or set of
actions?
– In economics, also called the problem of vertical
integration.
Why is CEA so robust?

18. 1. United States Congress Office of Technology Assessment. The Implications of
Cost-Effectiveness Analysis of Medical Technology, Washington, DC, 1980.
2. Drummond M, O’Brien B, Stoddart G, et al. Methods for the Economic
Evaluation of Health Care Programmes, Oxford University Press, 1987.
3. Canadian Coordinating Office for Health Technology Assessment. Guidelines
for economic evaluation of pharmaceuticals, Ottawa, Canada: Canadian
Coordinating Office for Health Technology Assessment, 1994.
4. Gold M, Siegel J, Russell L, et al. Cost-effectiveness in Health and Medicine.
New York & Oxford: Oxford University Press, 1996.
5. World Health Organization. Guide to Cost-Effectiveness Analysis, Geneva:
World Health Organization, 2003.
6. Gray AM, Clarke PM, Wolstenholme JL, Wordsworth S. Applied Methods of
Cost-effectiveness Analysis in Health Care, Oxford, 2011.
7. Wilkinson T, Sculpher MJ, Claxton K, et al. The International Decision Support
Initiative Reference Case for Economic Evaluation: An Aid to Thought. Value
Health, 2016; 19: 921-928.
Evolution is a fact

19. Cost-effectiveness analysis was developed and
refined in response to the demands of specific
settings:
– during the latter years
of the 20th century
– in the United States,
Canada and England
– [Refs 1, 2, 3, 4].
Beginnings matter

20. There was a perception, in those days, on the part
of decision makers, in those settings, that they had
a mandate to improve the health of populations:
through the regulation, financing or direct provision of
health services.
A la recherche du temps perdu…

21. The 1980 report of the “Office
of Technology Assessment of
the United States Congress”
cites over 650 references:
– applying economic analysis to healthcare,
– virtually all published in the 1970s, and
– a substantial minority of which were published by
government agencies.
The hard progress of experience

22. • In the early years of this century, staff at the
WHO became interested in the application of
cost-effectiveness analysis to health problems
in developing countries [Ref 5].
• Hundreds (if not thousands) of scientific
papers applying CEA to global health problems
have since been published.
New horizons

23. • The technical basis of CEA evolved to support the needs of
actors operating in a variety of jurisdictions.
• For example, generalized cost effectiveness analysis
(GCEA) was ostensibly created with the needs of lower
income countries in mind:
– not to solve the problem of the growing costs of medical care,
– but to prioritize essential services for under-served populations.
• Yet GCEA inevitably picked up themes from contemporary
debates, in particular, those about health maximization
and decision rules.
Changes in practice bring
changes in theory

24. • Birch S, Gafni A. Cost effectiveness/utility analyses.
Do current decision rules lead us to where we want
to be? J Health Econ. 1992 Oct; 11(3):279-96.
• Johannesson M, Weinstein MC. On the decision rules
of cost-effectiveness analysis. J Health Econ. 1993
Dec;12(4):459-67.
Do decision rules maximize health?

25. 1. So-called generalized cost-effectiveness
analysis:
– based on health maximization
– (not thresholds).
2. So-called incremental (or marginal) cost-
effectiveness analysis:
– based on decision rules
– involving thresholds.
Two schools of thought

26. Generalized vs incremental

27. Generalized vs incremental
b1

28. GCEA: focus on portfolios

29. Starting points and portfolios matter*
*Acknowledgements to Richard Cookson for this clarification.

30. • Interest in obtaining value for money for
health in developing countries continues to
grow:
– the founding of the International Decision
Support Initiative [Ref 7], and
– the increasing use of CEA by a variety of domestic
stakeholders and decision makers in developing
and emerging economies.
Global health, no longer public health

31. • In the guidelines, over the years, CEA is given
various justifications, often based
on common sense principles.
• However, CEA contains a cryptic
sub-text, known only to a few…
• CEA’s gnostic doctrine comes
from duality theory for linear programming.
The hidden story of CEA

32. Weinstein and Zeckhauser, 1973.

33. • WZ introduced the powerful idea of
mathematical programming to CEA.
• WZ also made CEA’s first* giant strategic
blunder:
– anchoring the notion of critical ratios in the
mythology of CEA.
• This resulted in lasting harms:
– notably, controversies over ratio-centric cost-
effectiveness thresholds.
“No hay bien que por mal no venga”
(every silver lining brings its cloud)
*The second giant mistake was arguably the (self-defeating) “CHOICE GDP thresholds”.

34. Weinstein and Zeckhauser, 1973.

35. • CEA was not pre-destined to have a ratio-centric
theory:
– nothing pre-determined about this,
– witness the many book-length guidelines.
• CEA could equally have been developed around
the concept of net benefit analysis, net cost
analysis or even just opportunity cost analysis.
• The latter is arguably the fundamental concept of
CEA, not critical ratios.
Different possible pasts for CEA

36. 1. Lagrangian constrained optimization.
2. Duality theory in linear programming.
• For our purposes, they’re the same:
– Both involve optimal E/C ratios.
• Because convex optimization, KKT theory, and
mathematical programming are the primary
superstructure of modern mathematical economics,
we’ll use the latter form of the problem (duality).
There are two sources of critical ratios

37. The formulation of WZ is that of the primal of
the linear-programming “knapsack problem”.

38. The critical ratio comes from the dual
of the knapsack problem
(N.B. There’s no critical ratio in the primal knapsack
problem.)

39. Two great ideas that go great together

40. The combination of:
– Linear programming (e.g. the simplex method of 1947,
without critical ratios), and
– Duality for linear programming, with critical ratios).
• These ideas go so well together that they usually
come pre-mixed:
Once you’ve seen it, you can’t unsee it

41. Duality is hard
(From the Preface to Nering ED, Tucker AW. Linear Programming and
Related Problems. Boston, MA: Academic Press, 1993.)

42. • Informal communications from George Dantzig:
– Duality for linear programming conjectured by John
von Neumann.
– Proved by Albert Tucker, post-WWII at Princeton:
• Some standard sources on duality are:
– Dantzig et al., 1956
– Luenberger, 1973;
– Nering and Tucker, 1993
– Bertsekas, 1995.
Duality is new

43. • Weinstein and Zeckhauser, 1973.
• On the glass-half-full view, without WZ:
– health economics would probably still be called
medical economics, and
– we’d possibly still be doing cost of illness studies, à
la Dorothy Rice.
• COI/CBA being the larger part of what
predated the emergence of CEA in health
economics.
Duality is contemporary to the
codification of CEA

44. 1. Focus on optimal portfolios (WHO-CHOICE).
2. Redefine thresholds (York CHE).
Two possible resolutions to CEA’s
critical ratio problem

45. York approach
What's in, what's out : designing benefits for universal health coverage
edited by Amanda Glassman, Ursula Giedion, and Peter C. Smith.

46. • Are a summary measure of opportunity cost.
• Are a measure of the marginal productivity of
the health system.
• Are a shortcut that avoids the need to
quantify the costs and benefits of all feasible
interventions.
• Are a measure of the health people forgo
when other options are funded than the ones
that would benefit them.
York thresholds are not ratios - they:

47. CHOICE approach:
efficient allocation doesn’t need ratios
(There are no critical ratios in the primal knapsack.)

48. Optimal portfolio of
activities
CVD
Cancers
Respiratory
Conditions
Diabetes
Current portfolio of
activities
CVD
Cancers
Respiratory
Conditions
Diabetes
“Magical rationalist” view of Efficient Allocation
“Presto, change-o!”

49. Current portfolio Optimal portfolio
Health system factors
Politics
Affordability
“Dismal realist” view of Efficient Allocation
We may never
get there…

50. • A given optimal portfolio requires a particular type of
health system, with a particular set of fixed assets.
• Information about the contents of the portfolio allows
actors in the health system to coordinate their choices.
• Human resources and facilities, and logistics and supply
networks, are fixed assets that are not replaceable,
transferable or created in the short term.
• Information about the optimal portfolio should
influence most decisions about asset-specific
investments.
• This is one of the meanings of priority setting –
determining which asset-specific investments to make.
CHOICE view of Efficient Allocation

51. Two kinds of decision-making
(N.B. they are not strongly method dependent)
• Localized, or incremental, decision-making:
– Starts from current situation and adds things one at a time,
– Often uses a threshold (of some kind).
• Strategic, context-setting, decision-making:
– Looks at many things at once, including the current
portfolio,
– Usually employs explicit maximization; sometimes uses a
threshold.
• When CEA is used to support localized decisions, we
term it incremental cost-effectiveness analysis (ICEA).
• When CEA is used to support strategic decisions, we
call it generalized cost-effectiveness analysis (GCEA).