Center for Prevention
and Health Services
ISSUE August 2004
An Employer Decision Support Tool
This issue brief summarizes information presented at Cost-Effectiveness Analysis: An
Employer Decision Support Tool, a web-based seminar at the National Business Group
on Health sponsored by the Agency for Healthcare Research and Quality. Statistics
and figures that are not annotated with a source were presented by the speakers.
A glossary of italicized terms and a bibliography of additional cost-effectiveness resources
are listed at the end of the brief.
Table of Contents: Large employers face a challenging future in
Introduction 1 managing health care benefits. Managers have many
Cost-Effectiveness Analysis Basics 2 program and coverage options, but are limited by
Why Employers Use CEA 3 budget constraints and data availability.
Common Applications 4
Traditionally, decision-makers have used return on
S t r ategic Implicat i o n s 6
Practical Examples 9 investment calculations to help guide their
S t r ategic Tips for Interpreting CEA 10 investment choices, but they can also consider
Sample Abstract 11 another tool — cost-effectiveness analysis.
Case Studies 12
Cost-effectiveness analysis (CEA) is a method of
Resources 17 financial evaluation that has gained prominence
References 19 within academic and policy communities in the last
20 years. But this methodology can also have
business applications as a decision support tool. This
issue brief explains cost-effectiveness analysis, outlines its usefulness to employers,
demonstrates how cost-effectiveness relates to corporate strategy, and gives examples
of its applications in health benefits decisions.
August 2004 ISSUE Brief 2
Cost-Effectiveness Analysis Basics
Cost-effectiveness analysis is a specific type of economic analysis in which all costs are
related to a single, common effect. Decision makers can use it to compare different
resource allocation options in like terms. A general misconception is that CEA is merely a
means of finding the least expensive alternative or getting the “most bang for the buck.”
In reality, CEA is a comparison tool; it will not always indicate a clear choice, but it will
evaluate options quantitatively and objectively based on a defined model. CEA was
designed to evaluate health care interventions, but the methodology can be used for non-
health economic applications as well. It can compare any resource allocation with
measurable outcomes to any other
resource allocation with measurable
Cost-effectiveness analysis, or
Conducting, Evaluating, and CEA, is a comparison tool to help
Using Analyses evaluate choices. It will not
always indicate a clear choice,
Increasing numbers of analyses are
but it will evaluate options
conducted in academia or research quantitatively based on a defined
organizations and published in model. For managers, CEA
peer-reviewed journals. Government provides peer-reviewed evidence
organizations use analyses to help for decision support.
shape public policy. Health insurers use
CEAs to determine which kinds of
health interventions to cover. There is
a growing body of work that quantitatively compares the health returned on different
interventions employers cover in their benefits packages. As employers are increasingly
asking providers to practice evidence-based medicine, they can direct this trend by
evaluating and acting on evidence, or by holding health plans and consultants accountable
for evaluation and action.
3 ISSUE Brief August 2004
The cost-effectiveness ratio is simply the sum of all benefits divided by the sum of all costs.
This is comparable to a return on investment calculation; however, the benefits are not
measured in terms of just dollars, but in a ratio that incorporates both health outcomes
and dollars. Since healthier employees are more productive, improved outcomes actually
do translate into dollars. But it is important to keep these values separate, so a decision
maker can understand what kind of health benefit is
returned on the investment. For instance, three
investment choices could have cost-effectiveness ratios of
Cost-Effectiveness Ratio =
$10,000/premature birth avoided, $20,000/workplace
(All benefits) injury prevented, or $30,000/life year gained. The
decision maker must then choose the health intervention
that is right in terms of budget and population health
CEAs compare several program strategies and then rank them by of cost-effectiveness
ratios. An analysis of two screening interventions might show you that one costs
$10,000/life year gained while the other costs $40,000/life year gained. The first
intervention requires monthly screening and the second requires biannual screening.
Realizing that compliance is a greater problem with monthly screening, the decision
maker would have to implement the most appropriate coverage strategy for the population
in question. Sometimes, the analysis compares to baseline options such as “do nothing” or
“usual care.” Both are valid strategic options.
Why Employers Use CEA
✓ Supports objective decision making: Decision makers can consider options in a
comparable and objective way that provides support for the final decision.
✓ Brings clarity to data sources and outcomes: CEA evaluates options in similar terms to
avoid “comparing apples to oranges.”
August 2004 ISSUE Brief 4
✓ Allows for strategic review of organizations: CEA might justify some operational
centers operating at a loss to increase overall return on investment, employee health,
✓ Can be used in a host of operational and benefits areas including:
• Screening coverage
• Strategic Planning
• Labor Relations
• Disease Management
• Disability Management
• Wellness and Prevention Programs
✓ Presents evidence that can help gain support for changes in benefits plans or
employer-sponsored health programs.
Evaluating Program Options
In the case of health screening, it is often difficult to determine the most cost-effective
frequency. Too frequent screening has high cost and possibly limited health benefits, while
too infrequent screening has low cost, but poor health outcomes. Determining
appropriate screening frequencies is a useful application of cost-effectiveness analysis. The
following table taken from an analysis on cervical cancer screening shows that life years
are saved at a relatively low cost in the first comparison (screening versus no screening),
but at a very high cost in the second comparison (the marginal cost and benefit of
decreasing the interval between screenings). Typically, an intervention that costs less than
$30,000/life year gained is considered cost-effective medicine. Based on this analysis,
cervical cancer screening every four years is a relatively cost-effective benefit to cover. It is
certainly more cost-effective than screening every three years.
5 ISSUE Brief August 2004
Table 1: Example Data from an Analysis of Cervical
Cancer Screening Frequency
Screen every four years Screen every three
vs. no screening years vs. screen every
Life expectancy increase, days 93.8 1.6
Life expectancy increase, days (discounted 5%)* 9.5 0.2
Cost increase, dollars (discounted 5%) $264 $91
Cost per life year gained $10,101 $184,528
Source: E d dy D.M. “Screening for Cervical Cancer,” Annals of Internal Medicine 1990; 113: 214-226.
* Annual discount rat e adjust future costs and benefits to account for time preference and opportunity cost.
Justifying Program Implementation
When building a case to justify the use of funds, strong data is often compelling evidence.
Cost-effectiveness analyses can be used to support qualitative arguments for health
interventions. The following table examines a depression treatment improvement
program. Treatment facilities in the study were offered training for practice leaders and
nurses, enhanced educational and assessment resources, and trained psychotherapists for
patient follow-ups. Not only was the intervention relatively cost-effective, but it also
increased attendance in workers suffering from depression.
Table 2: Example Data from an Analysis of a Depression
Treatment Improvement Program
program vs. usual
Quality-adjusted life year increase 0.0226
Cost increase $485
Cost per quality adjusted life year $21,460
Days of employment increase 20.9
Source: Schoenbaum M. et al. “The Cost-effectiveness of Practice-Initiated Quality Improvement for Depression:
Results from a Randomized, Controlled Trial,” JAMA 2001; 286: 1325-1330.
August 2004 ISSUE Brief 6
Cost-effectiveness analysis can be a valuable source of information and data for employers.
Most employers are not in the business of conducting analyses; however, it is reasonable to
expect carriers to rationalize and explain different coverage options in terms of cost-
A System View
Because cost-effectiveness analysis examines a comprehensive set of costs and outcomes, it
is important to avoid narrow strategy that only considers implication for individual
department programs or cost centers. Managers can examine all parts of the health
benefits system to determine if financial losses in one area are recouped in another. For
example, dollars spent in richer benefit reimbursement might increase utilization and
avoid future costs of treatment.
The diagram below presents a system view of employer-sponsored health care.
• Diverse Workforce
• Work Environment
• HR & Benefits
• Vendors & Providers
Health Symptoms Diagnosis & Benefit
Behavior & Disease Treatment Reimbursement
• Health Stat u s
• Health Care Costs
Source: Michael Thompson, PricewaterhouseCoopers
7 ISSUE Brief August 2004
Employers can use cost-effectiveness analysis to review each system component and
choose the best strategy to optimize utilization, improve outcomes, and encourage
healthier and more beneficial lifestyle choices.
Unconventional methods like cost-effectiveness analysis are not an ideal fit for all
organizations. Every company that provides health benefits has a different strategy for
plan design and analysis. In some organizations, an attempt to incorporate cost-
effectiveness analysis into decision making might be resisted or rejected altogether. To
avoid such a misstep, assessment of corporate culture is necessary.
The diagram below shows health care strategy as a continuum. Organizations that are
more access-oriented analyze specific health care costs and delegate cost reduction
responsibility to their carriers. Goals focus on controlling costs so that employers can
continue to offer health care access through employee benefits. Organizations that are
more system-oriented involve employees, employers, and health plans in dialogue about
whole health management. Shared goals focus on increasing health and changing
utilization patterns to control future costs.
Oriented Health Care Strategy Oriented
Aware & E n g age &
Health Care Health &
Access & Cost
Delegated Integrated &
Health Plans Optimized
Source: Michael Thompson, PricewaterhouseCoopers
August 2004 ISSUE Brief 8
To assess where large employers believe they lie on this continuum, a number of benefits,
health, and human resources professionals rated their organizations on a scale from 1
(mostly access-oriented) to 5 (mostly system-oriented) for the four component areas as
well as overall approach.
9 ISSUE Brief August 2004
Employers can use CEA to compare specific drugs on their formularies or evaluate the
cost-effectiveness of their entire pharmaceutical benefits packages. In comparing specific
drugs, such as high-cost statins and beta-blockers, benefits managers address not only cost
differences between brand name and generic, but disparities in effectiveness as well. This
might include examining effectiveness per dose cost. For example, a particular statin may
be the least expensive option per dose, but comparing it to other options in terms of cost
and ability to reduce LDL levels may prove it is a less cost-effective choice (see Table 3).
In analyzing an entire pharmacy program, employers determine costs for particular drugs
in terms of tiers and responsibility. The recent trend has been for employers to shift more
of the costs of medications to employees through higher co-pays or co-insurance, but this
may not always be the most cost-effective long-term solution. Abandoning this strategy
may create a financial loss on some prescriptions, but overall cost savings could be
substantial if absenteeism, presenteeism, and disability are reduced in the process.
Companies might also consider how they will price brand name drugs versus generics,
especially for medications that have proven to be similar in safety and effectiveness.
Table 3: Example Data from a Comparison of Six Statins
Daily Dose (% LDL reduction/dose cost)
Statin 5 mg 10 mg 20 mg 40 mg 80 mg
Statin A N/A 39%/$2.04 43%/$3.07 50%/$3.07 60%/$3.07
Statin B N/A N/A 22%/$1.56 25%/$1.56 35%/$1.97
Statin C N/A 21%/$0.96 27%/$1.11 31%/$1.97 N/A
Statin D N/A 22%/$2.50 32%/$2.52 34%/$3.07 37%/$3.76
Statin E 45%/$2.22 52%/$2.22 55%/$2.22 63%/$2.22 N/A
Statin F 26%/$1.63 30%/$2.18 30%/$2.18 41%/$3.72 47%/$3.73
Source: Michael Jacobs, Mercer Human Resource Consulting
If decision makers were only looking for the lowest cost alternatives, they might select
10mg of statin C. However, 40mg of statin E is the most cost-effective option. This
dosage has the highest LDL reduction for the cost associated with it. Benefit managers
can consider this information in making formulary decisions; however, this may not be
the most favorable option when factors such as employee health characteristics, unions,
and other issues weigh into the choice.
August 2004 ISSUE Brief 10
Disease Management and Treatment
Cost-effectiveness analysis is a useful tool in developing and evaluating disease
management and treatment programs. It allows employers to determine objectively what
services to cover, for which populations, and how often. Employers, providers, and
insurers will normally seek the dominant choice — that choice which has lower costs and
better outcomes than other choices in the same situation. Often, lower costs may be
realized at the expense of outcomes, or better outcomes achieved at unacceptable costs. In
such cases, cost-effectiveness analysis can compare options and lead to smarter choices.
Employers and health plans can also use CEA to determine limits on coverage — for
what age, for which populations, how often, and other restrictions. A helpful reference for
such decisions may be the United States Preventive Services Task Force recommendations
for clinical services. The Task Force critically examines published research, including cost-
effectiveness analyses, to determine the practical feasibility of health interventions
recommended in the literature.
Strategic Tips for Interpreting a CEA
✓ Consider perspective. Which parties are incurring costs and which parties are
receiving benefits? Many studies take a broad societal perspective; they are usually not
written for an employer audience.
✓ Identify the strategies under comparison. Does the study compare different
alternatives (treat using drug A vs. treat using drug B) or examine incremental
changes in the same health intervention (screen every two years vs. screen every four
✓ Be aware of the analytic horizon. When are costs incurred and when are benefits
received? Most studies use a 3-5% annual discount rate to adjust both costs and
benefits to a present value, but if a benefit is not received until 10 years after an
intervention begins, this is important information to note.
✓ Analyze all stated assumptions. Are the assumptions built into the economic model
clearly defined, and are they valid for employers?
✓ Examine the sensitivity analysis. How do differences in data inputs affect the
outcome? Think how this relates to the health characteristics of your employee
✓ Understand all metrics. How did the author present the cost-effectiveness ratio?
Most studies measure the costs of increased quality of life ($/quality adjusted life year
gained), disability prevented ($/disability adjusted life year prevented) or of life saved
($/life year gained). A study that measures quality adjusted life years is called a
cost-utility analysis, a specific type of CEA.
11 ISSUE Brief August 2004
The following abstract from a study published in the Journal of the American Medical
Association shows that nicotine patch therapy, in conjunction with physician counseling,
is a cost-effective approach to smoking cessation. This is an example of information in
published CEAs that can support coverage decisions and justify health improvement
Cost-effectiveness of the transdermal nicotine patch as an adjunct to physicians' smoking
K. Fiscella and P. Franks
Primary Care Institute, Highland Hospital, Rochester, NY, USA.
OBJECTIVE: To determine the incremental cost-effectiveness of the transdermal nicotine
patch. DESIGN: Decision analytic model that evaluated the incremental cost-effectiveness
of the addition of the nicotine patch to smoking cessation counseling. Costs were based
on physician time and the retail cost of the nicotine patch, and benefits were based on
quality-adjusted life years (QALYs) saved. PATIENTS: Male and female smokers aged 25
to 69 years receiving primary care. INTERVENTION: Addition of the nicotine patch to
physician-based smoking cessation counseling. MAIN OUTCOME MEASURE: Costs
(1995 dollars) per QALYs saved discounted by 3% annually. RESULTS: The use of the
patch produced one additional lifetime quitter at a cost of $7,332. The incremental cost
effectiveness of the nicotine patch by age group ranged from $4,390 to $10,943 per
QALY for men and $4,955 to $6,983 per QALY for women. A clinical strategy involving
limiting prescription renewals to patients successfully abstaining for the first two weeks
improved the cost-effectiveness of the patch by 25%. CONCLUSIONS: The findings
provide support both for the routine use of the nicotine patch as an adjunct to physicians’
smoking cessation counseling and for health insurance coverage of nicotine patch therapy.
From JAMA 1996; 275: 1247-1251.
August 2004 ISSUE Brief 12
Case Study 1 — A Large Manufacturing Company Redefines
This global manufacturer of document management systems operates in more than 130
countries with more than 35,000 employees worldwide and 27,000 employees in the
United States. The company’s services include document management and mail security
products and systems.
In 2001, this company took a bold step to stem the rising costs of its health care benefits.
In analyzing where costs were the highest, the company found that those employees with
chronic conditions such as diabetes and asthma incurred the highest cost. Startlingly, they
found that many of these individuals did not refill their prescriptions properly because of
the high co-insurance price. Using predictive modeling to come to this conclusion and
hoping that increasing compliance would lower costs, the company’s medical director
restructured its pricing tiers for pharmaceuticals. The organization implemented a new
multi-tiered system in which generics and those drugs targeting chronic conditions such
as diabetes and asthma (including prescriptions for inhalers and insulin) would require co-
pays as low as 10% of the total cost.
After implementing this new pricing system at the end of 2001, the company realized
significant cost savings. Lower co-payments for the two chronic conditions had increased
compliance. Cost savings also came from fewer emergency room visits and hospital
admissions due to better personal disease management. Median medical costs for each
employee with diabetes fell 12%, and the company saved $1,000 per employee. For those
with asthma, median medical costs dropped 15% with a savings of $900 per person. The
company predicts savings estimated at $1 million in 2004 and even more in future years.
By using data-driven, total health strategy, a change that seemed costly has proven to be
13 ISSUE Brief August 2004
Case Study 2 — A Large Airline Reexamines Health Benefits Strategy
This airline has more than 3,000 daily departures, flies to 38 states including the District
of Columbia and 41 sites internationally, and employs more than 28,000 individuals. The
organization recently faced several challenges:
• Negotiating with nine unions twice
• Filing for bankruptcy
• Outsourcing health care administration, which had been done internally
• Consolidating 23 health plans down to a single one
During this period, many employees expressed discontent about plan changes, coverage
decisions, and health care access. New executive leaders decided to fundamentally change
health benefit strategy, including the use of cost-effectiveness analysis in plan design
decisions. The company took the following actions:
• Requesting reports from vendors to assess health plan information
• Forming a collaborative union management group
• Establishing an internal plan performance group, including both finance and labor
relations staff, to review health care data sets
The airline is currently pursuing strategy that will facilitate positive health plan changes,
made in collaboration with its unions and its health insurance carrier. Although it still
faces serious financial challenges, the airline is now examining its health plan through
data-driven discussions on whole health management and including cost-effectiveness
analyses in health benefit strategy.
August 2004 ISSUE Brief 14
Cost-effectiveness analyses provide quantitative support to managerial decision-making.
Budget requests and in-house proposals for health program change can be more
convincing with the addition of cost-effectiveness data. Asking vendors and consultants to
support their products and proposals with cost-effectiveness data assures managers they
are purchasing based on value. Organizations use these approaches and others because
they recognize that objective economic analyses such as CEA are sound corporate strategy.
15 ISSUE Brief August 2004
Glossary of Cost-effectiveness Terms
Many definitions are from Prevention Effectiveness: A Guide to Decision Analysis and
Economic Evaluation. See references for more information.
✓ Agency for Healthcare Research and Quality (AHRQ): A federal agency with the
mission to improve the quality, safety, efficiency, and effectiveness of health care for all
✓ Analytic horizon: The time period over which the costs and benefits of health
outcomes that occur as the result of an intervention are considered.
✓ Annual discount rate: Adjustment made to the value of future costs and
benefits to account for time preference and opportunity cost.
✓ Approach, access-oriented: Providing employees access to the health system through
their benefits packages and managing costs by analyzing data for each covered benefit.
✓ Approach, system-oriented: Promoting employee health through an interrelated
system of programs and benefits and managing costs with the knowledge that
investment in one program or benefit may be offset by savings in others.
✓ Cost-effectiveness: The minimum cost for a given benefit, the maximum benefit for a
given cost, or a balance of low costs and high benefits that has maximum utility.
✓ Cost-effectiveness analysis (CEA): An economic analysis in which all costs are
related to a single, common effect, usually in terms of cost expended per outcome
✓ Cost-effectiveness ratio: The ratio of total costs of investment to total accrued
benefits, in terms of both dollars and benefit value.
✓ Cost-utility analysis (CUA): A type of cost-effectiveness analysis in which benefits
are expressed in terms of cost per QALY gained.
✓ Dominant choice: Choice with both lower costs and higher benefits than all other
August 2004 ISSUE Brief 16
✓ Life year gained: An outcome measure that incorporates only duration of survival,
not quality of life.
✓ Quality adjusted life year (QALY): A frequently used outcome measure that
incorporates the quality and desirability of a health state with the duration of survival;
quality of life is integrated with length of life using a multiplicative formula.
✓ Return on investment (ROI): The ratio of capital investment in dollars to accrued
return in dollars.
✓ Sensitivity analysis: Mathematical calculations that isolate factors involved in an
analysis to indicate the degree of influence each factor has on the outcome of the
✓ Societal perspective: Analytic view that includes all benefits of a program regardless
of who receives them and all costs regardless of who pays them.
17 ISSUE Brief August 2004
✓ Agency for Healthcare Research and Quality
AHRQ is a leader in advancing the science of cost-effectiveness analysis in health care.
This page explains current initiatives in this discipline, including the Research
Initiative in Clinical Economics.
✓ United States Preventive Services Task Force
USPSTF is an independent panel of experts in primary care and prevention that
systematically reviews the evidence of and develops recommendations for clinical
✓ National Health Service Centre for Reviews and Dissemination
The United Kingdom’s National Health Service maintains databases of economic
evaluations and health technology assessments at the University of York.
✓ Harvard Center for Risk Analysis CEA Registry
The Harvard School of Public Health maintained a reference list of cost-effectiveness
analyses from 1976-2001. It does not include more current studies, but serves as a
useful historical database.
August 2004 ISSUE Brief 18
✓ Haddix A., Teutsch S., Corso P. Prevention Effectiveness: A Guide to Decision
Analysis and Economic Evaluation. New York: Oxford University Press, 2003.
Officials from AHRQ and CDC collaborated with leading academics on this text. It
gives in-depth explanations of cost-effectiveness analysis beginning with theory and
concluding with application.
✓ Gold M. R., Siegel J. E., Russell L. B., Weinstein M.C. Cost-Effectiveness in Health
and Medicine. New York: Oxford University Press, 1996.
This report details the recommendations of the Panel on Cost-Effectiveness in Health
in Medicine, a committee of researchers convened by the United States Public Health
Service to establish guidelines for analyses. The findings of the Panel are also outlined
in three articles in the Journal of the American Medical Association (JAMA 1996;
276: 1172-1177, 1253-1258, and 1339-1341).
✓ Schoenbaum M., Unutzer J., Sherbourne C., Duan N., Rubenstein L.V., Miranda J.,
Meredith L.S., Carney M.F. and Wells K. “The Cost-effectiveness of Practice-Initiated
Quality Improvement for Depression: Results from a Randomized, Controlled Trial,”
JAMA 2001; 286: 1325-1330.
Dr. Schoenbaum, a speaker at the May 2004 web event, conducted an analysis of a
quality improvement program for depression treatment (see Page 3, Table 2 ). His
publication demonstrates the usefulness of cost-effectiveness analysis as an evaluative
✓ Neumann P.J. “Why Don’t Americans Use Cost-Effectiveness Analysis?” American
Journal of Managed Care 2004; 10: 308-312.
Neumann presents a short editorial explaining resistance to cost-effectiveness analysis
in the United States. He surmises the positions of different stakeholder groups toward
CEA and offers thoughts to help decision makers better use CEA in the future.
19 ISSUE Brief August 2004
✓ Fuhrmans V. “A Radical Prescription.” Wall Street Journal, May 10, 2004.
✓ Haddix A. et al. “Prevention Effectiveness: A Guide to Decision Analysis and
Economic Evaluation.” New York, NY: Oxford University Press, 2003.
✓ Fiscella K. and Franks P. “Cost-effectiveness of the transdermal nicotine patch as an
adjunct to physicians’ smoking cessation counseling.” JAMA 1996; 275: 1247-1251.
and Health August 2004
Services Cost-Effectiveness Analysis:
An Employer Decision Support Tool
Ian Dixon and Andrew Lundeen, National Business Group on Health
About the Center for Prevention and Health Services (CPHS)
The Center houses the Business Group’s projects and resources that relate to the delive ry
of preventive and other health services through employe r - s p o n s o re health plans and work s i t e
programs. Through the Center, employers can find practical toolkits to address pre ve n t i ve
health and health promotion issues at the worksite. Em p l oyers will find current information
and recommendations from federal agencies and professional associations, model programs
from other employers, and the latest clinical and health services research results. In addition,
the Center provides opportunities for employer participation in teleconferences and in-person
solutions workshops. Currently, the Center has initiatives in racial and ethnic disparities in health
and health care, terrorism and public health emergency preparedness, maternal and child health,
preventive services, health services research and quality, health and work performance, benefit
design, and wellness programs.
For more information, visit http://www.businessgrouphealth.org/pre vention/index.cfm
or contact Ron Finch, EdD, Director, at email@example.com.
About the National Business Group on Health
The National Business Group on Health, formerly the Washington Business Group on Health,
is the national voice of large employers dedicated to finding innovative and forward-thinking
solutions to the nation’s most important health care issues. The Business Group represents over
200 members, primarily Fortune 500 companies and large public sector employers, who provide
health coverage for approximately 50 million U.S. workers, retirees, and their families. The
Business Group fosters the development of a quality health care delivery system and treatments
based on scientific evidence of effectiveness. The Business Group works with other organizations
to promote patient safety and expand the use of technology assessment to ensure access to
superior new technology and the elimination of ineffective technology.
Helen Darling, President
National Business Group on Health
50 F Street NW, Suite 600 • Washington DC 20001
Phone (202) 628-9320 • Fax (202) 628-9244 • www.businessgrouphealth.org