Cost-benefit analysis (CBA) is a technique used to evaluate the costs and benefits of projects or interventions. It involves identifying and assigning monetary values to all relevant costs and benefits, including both direct and indirect effects. These costs and benefits are then discounted to present values and compared to determine if the net benefit is positive. If multiple alternatives exist, CBA can be used to select the alternative with the highest net benefit. Sensitivity analysis is also conducted to account for uncertainty in the estimates.

1. Cost Benefit Analysis (CBA)
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2. Outline
• Economic evaluation
• CBA, background
• Classification of cost & benefits
• Assigning value to cost & benefits
• CBA techniques
• Sensitivity analysis
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3. Are both costs (inputs) and consequences (outputs) of the alternatives
examined?
Is there
comparison
of two or
more
alternatives
?
No Yes
No
Examines only
consequences
Examines only
costs
2 PARTIAL EVALUATION
Cost- outcome description
1A. PARTIAL
EVALUATION
Outcome
description
1B. PARTIAL
EVALUATION
Cost description
Yes
3A. PARTIAL
EVALUATION
Efficacy of
effectiveness
evaluation
3B. PARTIAL
EVALUATION
Cost analysis
4. FULL ECONOMIC EVALUATION
• Cost- minimization analysis
• Cost- effectiveness analysis
• Cost- utility analysis
• Cost-benefit analysis
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4. CBA: background
• In healthcare appraisals, CBA is usually defined, as a technique in
which all costs and benefits are measured in terms of money.
Drummond et al. (2005)
Aim
 To establish which of the possible alternatives has the greatest net
benefit.
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5. CBA: background
Main decision rule
An activity should be undertaken if the net benefit is positive.
If only one activity with a positive net benefit can be undertaken then
the rule is to choose the activity with the highest net benefit.
CBA requires costs & benefits to be measured in monetary
terms and a wide range of costs and benefits has to be
considered therefore, it is not commonly used.
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6. CBA: Steps
1. Define aim of the study
2. Define status quo and alternatives
3. Identify Costs and Benefits
4. Assign Values to Costs and Benefits
5. Apply appropriate CBA technique
6. Sensitivity analysis
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7. 8
Classification of cost
Relation to cost of object Direct, Indirect
Behaviour Fixed (committed, discretionary, shut down ),
variable
semi variable
Controllability Controllable
uncontrollable
Purpose of decision making Sunk, differential, opportunity, absorption, marginal

8. Classification of cost (behaviour)
Fixed Cost
• Remain constant and do not depend on the amount of output
if a hospital pays Rs.1.5 lac per month as rent for the premises,
this amount is constant and has to be paid even if no patient is
admitted to the hospital for the entire month.
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9. Classification of cost (behaviour)
Committed Fixed Costs
• can not be altered
Rent, taxes, salaries, etc.
Discretionary/ managed/ programmed Fixed Costs
• Can be altered for short term
advertisement, R & D
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10. Classification of cost (behaviour)
Shut Down Costs
• fixed costs that are incurred by the organization even when it is
shut down and and there is no manufacturing or service delivery
if an MRI center is temporarily shut down for a period of one
month, it would still have to pay the rent for the premises,
insurance for the equipment etc.
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11. Classification of cost (behaviour)
Variable Costs
• directly proportionate to the quantity of output, such as cost of
direct labor, direct material, etc.
if Rs 200/- are required for a film by a Radiologist to undertake
one X-ray, Rs 4000/- would be required for 20 films to
undertake 20 radiographs by the same radiologist.
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12. Classification of cost (behaviour)
Semi Variable Costs
• vary with the quantum of output but not in direct proportion
electricity bill, telephone bill, etc.
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13. 14

14. Classification of cost (behaviour)
Step Costs
• Remains fixed for a range
of time periods or for a
certain quantum of output
and then steps up to the
next level of cost.
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15. Classification of cost (controllability)
Controllable Cost
• Controlled by the intervention of any member of the
organization.
the cost of expired medicines can be controlled in a hospital if
the pharmacist is careful in inventory control and issues the
medicines well before their expiry date.
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16. Classification of cost (controllability)
Uncontrollable Costs
• Can not be controlled by the initiative of an individual.
The pharmacist may be able to control cost of expired
medicines but he shall have no control over the unwanted
medicines prescribed by an overzealous medical officer.
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17. Classification of cost (decision)
Sunk Costs
• incurred in the past and can not be reversed or recovered by any
subsequent decisions.
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18. Classification of cost (decision)
Differential Cost
• Indicates the difference in the total cost involved between two or
more alternatives.
• Incremental cost: when an alternative option results in an
increase in the total cost involved
• Decremented cost: when an alternative option results in an
decrease in the total cost involved
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19. Classification of cost (decision)
Opportunity Cost
• The cost of foregoing an opportunity in favour of another
alternative.
• if a building originally constructed for a PHC is used as a
community center, the planners must consider the ‘opportunity
cost’ of not providing primary health care to an entire village, the
disease burden, and morbidity/mortality resulting from the lack
of PHC in the area.
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20. Classification of cost (decision)
“Absorption” or “full cost”
• Takes into account both the variable costs and the fixed costs.
• Demand is not taken into consideration
• To overcome these disadvantages, ‘marginal costing
technique’ is adopted.
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21. 22

22. Marginal cost application
• A pharmaceutical company is producing 100 units of drug A at a cost
of INR 100.
• The business produces additional 100 units at a cost of INR 90.
• Marginal cost = change in total cost ÷ change in quantity.
• That gives us: INR 90/100
• which equals INR 0.90 per unit as the marginal cost.
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23. Classification of Benefits
• Direct: money saved
• Indirect: productivity gain
• Intangible: psychological (difficult to quantify)
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24. Valuation of indirect benefit
• Human capital approach:
• Friction cost method
• Revealed preference
• Stated preference
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25. Human capital approach
Valuation of death
• Before intervention: Target group missed 20 days of work per year on
an average
• After intervention, missed 7 days of work per year
• Average income: INR 50,000
• Average earning: INR 200/ days (considering 250 work days in a year)
• 13 days of productivity gained @ INR 200 = INR 2,600
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26. Human Capital Approach
Valuation of morbidity
• More complicated process
• Valuation may be more than work days lost
• Return to work might not mean the same level of productivity.
• Change in health may require job switching

27. Human Capital Approach
Limitations
• Not equitable: High wage workers may have higher indirect benefits
than lower-wage earners
• No market price for many groups: homemakers, elderly, children.

28. Friction cost method
• Value of productivity loss during friction period
• Friction period: time taken to replace a worker and train replacement
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29. Revealed preferences
• Based on consumer choices involving health vs money
• Example:
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Job A Job B
Income = INR 40000
Risk of death = 0
Income = INR 42000
Risk of death = 1/1000
Value of life = INR 2000 x 1000 = INR 2000000

30. Stated preference/ contingent valuation
• Survey based
• Respondents are given hypothetical scenarios and asked how much
are they willing to pay or how much would they want to receive as
compensation
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31. CBA techniques
1. Benefit-cost ratio
2. Net profit
3. Payback period (break-even analysis)
4. Return on investment/ Accounting Rate of Return
5. Net Present Value
6. Internal Rate of Return
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32. CBA techniques
Benefit-cost ratio (BCR)
BCR = net benefit ÷ net cost
Interpretation:
• BCR > 1, the project can be implemented
• BCR <1, the project should not be implemented
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33. Example
Year Project A Project B Project C
0 -8000 -8000 -10000
1 4000 1000 2000
2 4000 2000 2000
3 2000 4000 6000
4 1000 3000 2000
5 500 9000 2000
6 500 -6000 2000
BCR 12000/4000 = 3 19000/14000 = 1.35 16000/10000 = 1.6
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34. CBA techniques
Net profit
• Difference between the total cost and total benefits over the life of
the project
• Drawback: Does not take into account timing of cash flow
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35. Example
Year Project A Project B Project C
0 -8000 -8000 -10000
1 4000 1000 2000
2 4000 2000 2000
3 2000 4000 6000
4 1000 3000 2000
5 500 9000 2000
6 500 -6000 2000
Net profit 4000 5000 6000
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36. CBA techniques
Payback period
• Time taken to pay back the initial investment
• Drawback: Ignores overall profitability of the project
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37. Example
Year Project A Project B Project C
0 -8000 -8000 -10000
1 4000 1000 2000
2 4000 2000 2000
3 2000 4000 6000
4 1000 3000 2000
5 500 9000 2000
6 500 -6000 2000
Pay back period 2 year 4 year 3 year
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38. CBA techniques
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39. CBA techniques
Return on investment/ accounting rate of return
• Provides a way of accounting for the net profitability of the
investment required
• ROI = (average annual profit ÷ total investment) X 100
Drawback
• Does not take into account timing of cash flow
• Does not take into account the interest rate
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40. Example
Year Project A Project B Project C
0 -8000 -8000 -10000
1 4000 1000 2000
2 4000 2000 2000
3 2000 4000 6000
4 1000 3000 2000
5 500 9000 2000
6 500 -6000 2000
ROI
(average annual profit ÷ total investment) X 100
{(4000÷6)÷8000} X 100
= 8.33 %
{(5000 ÷ 6) ÷ 14000} X 100
=5.95 %
{(6000 ÷ 6) ÷ 10000} X 100
= 10 %
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41. CBA techniques
Net present value
• Takes into account the profitability of a project and the timing of cash
flows that are produced
• NPV = discount factor x cash flow in year t
• discount factor = 1/(1+ r)t
• t = time of cash flow
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42. EXAMPLE
YEAR PROJECT A (discounting@ 8%) PROJECT B (discounting@ 10%) PROJECT C (discounting@ 12%)
CF DF DCF CF DF DCF CF DF DCF
0 -8000 1.0000 -8000 -8000 1.0000 -8000 -10000 1.0000 -10000
1 4000 0.9259 3703.6 1000 0.9091 909.1 2000 0.8929 1785.8
2 4000 0.8573 3429.2 2000 0.8264 1652.8 2000 0.7972 1594.4
3 2000 0.7938 1587.6 4000 0.7513 3005.2 6000 0.7118 4270.8
4 1000 0.7350 735 3000 0.6830 2049 2000 0.6355 1271
5 500 0.6806 340.3 9000 0.6209 5588.1 2000 0.5674 1134.8
6 500 0.6302 315.1 -6000 0.5645 -3387 2000 0.5066 1013.2
NET
PROFIT
4000
NPV 2110.8 NET
PROFIT
5000
NPV 1817.2 NET
PROFIT
6000
NPV 1070
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CF: Cash flow, DF: Discount factor, DCF: Discounted cash flow

43. CBA techniques
• Discount rate can be considered as long as the NPV is positive
• Internal rate of return: discount rate at which NPV is ZERO
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44. Sensitivity analysis
• An example of CBA in public health is Wang et al.(2005), who
estimated the costs and benefits of using bike and pedestrian
trails to reduce healthcare costs arising from inactivity.
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45. Sensitivity analysis
Result:
• Annual cost per person of using the trails = USD 209.28
• Annual reduction in medical costs = USD 564.41.
• Net benefit = $355.13 per person
• BCR = 2.94, which means that every $1 investment in trails for
physical activity led to $2.94 in direct medical benefit.
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46. Sensitivity analysis
• The sensitivity analyses
indicated the ratios
ranged from 1.65 to 13.40
• The most sensitive
parameter affecting the
cost-benefit ratios were
equipment and travel
costs
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47. Resources:
• https://www.cdc.gov/dhdsp/programs/spha/economic_evaluation/docs/podcast_iv.pdf
• Textbook of Public Health and Community Medicine AFMC
• Oxford Textbook of Global Public Health
• Wang, G., Macera, C. A., Scudder-Soucie, B., Schmid, T., Pratt, M., & Buchner, D. (2005). A cost-
benefit analysis of physical activity using bike/pedestrian trails. Health promotion practice, 6(2),
174–179. https://doi.org/10.1177/1524839903260687
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