This document provides an overview of health care cost concepts and economic evaluation. It defines key cost terms like total cost, fixed cost, variable cost, marginal cost, and opportunity cost. It also explains different methods of economic evaluation used to analyze health care costs and outcomes, including cost-benefit analysis, cost-effectiveness analysis, cost-utility analysis, and cost-minimization analysis. Quality-adjusted life years (QALYs) and disability-adjusted life years (DALYs) are discussed as common measures used in cost-utility analysis to evaluate health outcomes.

1. Health Care Cost Concepts
and
Economic evaluation
Heera KC
Lecturer, Birat Health College
Purbanchal University
MSc. Nursing(Midwifery)

2. Cost
• Cost is defined, as the expenditure required for
achieving a desired object.
• Costs are the values of all the resources (e.g.
labor, buildings), tangible or intangible, used to
produce a good or a service.

3. Cost classification
1. Classification of cost by inputs
Capital cost: The production of all capital goods as
lifelong to consumption is known as capital cost. Cost
of vehicles, X-ray machine, building, long term
training, equipments.
Recurrent Cost: The cost of hospital daily operating
management as health care services are known as
recurrent cost.
Cost of health worker, drugs, vaccine, fuel,
maintenance, short term training.

4. Cont...
2. Classification by functions
It involves the kind of activities or functions for
which the resources are used. For example in health
programmes: training, management, logistic and
transportation, social mobilization, supervision,
monitoring and evaluation, communication.
3. Classification by level: central level, regional level,
district level, local bodies etc.

5. Cost concepts
1. Total cost
2. Fixed cost
3. Variable cost
4. Average cost
5. Marginal cost

6. Total cost
• Cost accounting view of total cost: Total cost refers to
the aggregation of all types of costs related to a cost
object, which means fixed costs, variable costs,
and mixed costs.
• For example, the total cost of a product line includes
not only the variable cost of the goods sold, but also
the costs of advertising the products and running the
production line on which the goods are manufactured.

7. • Investment view of total cost. Total cost refers
to all of the costs incurred to make an
investment, which includes the cost of the
investment, plus any broker commissions,
taxes, licenses, and fees related to the
transaction.

8. • Capital budgeting view of total cost
Total cost refers to the total cost of ownership,
where the costs of ongoing operations,
maintenance, and repairs, and the benefit of
any residual value are considered alongside the
initial purchase price of an asset.

9. Total cost
• It is the cost associated with all of the inputs.
• It is the sum of total value cost (TVC) and total
functional cost (TFC).
i.e. TC= TFC+ TVC
• TC= the total cost per unit of producing Q units of
output per unit of time.

10. Cont...
• Fixed cost
fixed costs are defined as expenses that do not change as
a function of the activity of a business, within the relevant
period. For eg: insurance, interest expense, property
taxes,
• Variable cost: Variable costs are expenses that vary in
direct proportion to the quantity of output.
Unlike fixed costs, which remain constant regardless of
output, variable costs are a direct function of
production volume, rising whenever production expands
and falling whenever it contracts.
Examples: raw materials, packaging, and labor price etc.

11. Cont...
• Marginal Cost is an increase in total cost that results
from a one unit increase in output. It is defined as:
• "The cost that results from a one unit change in the
production rate".
• For example, the total cost of producing one pen is $5
and the total cost of producing two pens is $9, then the
marginal cost of expanding output by one unit is $4
only (9 - 5 = 4).
• Marginal Cost = Change in Total Cost = ΔTC
Change in Output Δq

12. Cont...
• MC= Change in total cost/ Change in quantity
produced
• MC= (TC’- TC)/ (Q’- Q)
Where TC‟- total costs at higher output level
TC- total costs at lower output level
Q‟- higher level of output
Q- Lower level
of output

13. Cont...
Opportunity cost: Alternative cost is known as
opportunity cost. Because one has to be sacrificed for
others.

14. Cont...
Direct cost: These relate to the use of resources as a
direct result of the treatment and health care process.
They include:
• Cost of nursing, cost of equipment and material used in
providing services, drug acquisition costs, medical and
other staff time involved in delivering care and
administering procedures, allocation of organizational
overheads to the particular service
PLUS
• costs to other agencies/organisations involved in the
process.

15. Cont...
2. Indirect costs: These relate to any „losses‟ incurred to
society as a result of the impact of disease, illness and
treatments.
They include losses incurred from an inability to
engage in normal daily activities, work, domestic
responsibilities and social and recreational/ leisure
engagements.
Also known as Implicit cost. For eg: cost of visitors
of hospital inpatients treatment care, tax of medical
services.

16. Cont...
3. Intangibles: These relate to the suffering,
anxiety, distress and impact on Quality of Life
(QOL) resulting from illness, poor health and
their treatments.

17. ECONOMIC EVALUATION

18. Cost analysis
• Cost analysis is a resource tool for financial
management in hospital or department.
• It is an economic evaluation technique that
involves the systematic collection,
categorization and analysis of program or
intervention costs, and cost of illness.

19. Goals of cost analysis
1. Allocative efficiency (doing the right things)
• Allocate resources among objectives to produce
the greatest gain to society.
2. Technical efficiency (doing things right)
• Maximise the achievement of a given objective
within a given budget.

20. Types of Cost Analysis
1. Cost-benefit Analysis
2. Cost-effectiveness Analysis
3. Cost-utility Analysis
4. Cost-minimization Analysis
5. Cost-consequences Analysis

21. cont…
• Cost- benefit analysis- measures outcomes in
terms of monetary units.
• Cost- effectiveness analysis- measures
outcomes in terms of natural units.
• Cost- utility analysis- measures outcomes in
terms of utility.
• Cost minimization analysis- compares
interventions that have identical outcomes to
identify which is the cheapest one.
• Cost consequences analysis- compares
interventions in which the components of
incremental costs and consequences are
computed and listed without aggregating.

25. Cost Benefit Analysis (CBA)
• Economic evaluation technique.
• Measures all the positive (beneficial) and
negative (costly) consequences of an
intervention or program in monetary terms.

26. Cost-Benefit Analysis
• It is the implicit or explicit assessment of the
benefits and costs (i.e., pros and cons,
advantages and disadvantages) associated
with a particular choice.
• Benefits and costs may be monetary or non-
monetary.

27. Cost Benefit Analysis (CBA)
• The benefits are generally classified as
1. Tangible benefits
– Direct benefits,
– Indirect benefits and
2. Intangible benefits.

28. Importance of CBA
• Determines priorities among various
alternative programs or interventions.
• Provides an estimate of the potential value of
undertaking a course of action.
• Compares health- related interventions to those
in other economic sectors.

29. Importance of CBA
• Enables policy makers to determine whether
the value of its positive consequences.
• Estimates and totals up the equivalent money
value of the benefits and costs of projects to
establish whether they are worthwhile.
• Powerful and relatively easy tool for deciding
whether to make a change or not.

30. Advantages of CBA
• Allocates scarce resources to programs that
maximize societal economic benefits.
• Studies the full economic impact of all potential
outcomes of an intervention.
• Compares different programs having different
health outcomes, or health programs to non-
health programs.
• Analysis to examine its distributional aspects;
who will receive these benefits and will bear
the costs.

31. Drawbacks of CBA
• Measures costs and outcomes in monetary
terms and not disease specific.
• Difficulty in assigning monetary values to all
pertinent outcome including changes in the
length or quality of human life.
• Inaccurate cost and benefit estimation.
• Rely heavily on similar projects of past.
• Cant avoid unconscious bias of team members

32. Cost Effectiveness Analysis
• Cost effective means anything effective and
productive in relation to its cost.
• An economic study design
• Consequences of different interventions are
measured using a single outcome, usually in
„natural‟ units.
• Alternative interventions are then compared in
terms of cost per unit of effectiveness.

33. When to use CEA?
• Most useful when the interventions compared
have one clear and specific outcome.
• Operating within a given budget, is
considering a limited range of options within
a given field. Eg. Cancer screening techniques
to maximize cases detected.

34. Objectives of CEA
• To compare alternative programs with a
common health outcome.
• To assess the consequences of expanding an
existing program.

36. Drawbacks of CEA
• Data regarding direct costs are usually not
available.
• Does not facilitate comparisons across
different diseases when different outcomes
have been use.
• Cost-effectiveness is the only one criterion for
judging the effectiveness.

37. Cost- utility Analysis (CUA)
• A method used to compare costs and benefits
of interventions where benefits are expressed
as the number of life years saved adjusted to
account for loss of quality.
• Combines
• Length of life (survival), and
• Quality of life

38. Cost- utility Analysis (CUA)
• CUA is a type of economic evaluation of
different approaches to managed health care
costs.
- Mosby‟s Medical Dictionary

39. Measures of CUA
1. QALY
• QALY is a mathematical measurement that
combines quantity and quality of health to
calculate outcomes based on treatment that
influences health.
• It describes the cost of producing one year of
quality living experience.
• Score ranges from 0- 1.

40. Measures of CUA
2. DALY
• It can be used to measure the effect of ill health
in regard to function and premature mortality.
• Two mathematical equations are used to
calculate DALY.
1. Years of life lost (YLL)
2. Years lived with disability (YLD)

41. Measures of CUA
• YLL- no. of years of life lost due to premature
death.
• YLD- no. of healthy years lost due to disability
from the condition until remission or death.
•
• DALY- YLL+ YLD
• Score ranges form 1 (death)- 0 (best possible state
of health)

42. When to use CUA?
• When quality of life is the important outcome.
• When the program affects both morbidity and
mortality.
• When the programs being compared have a
wide range of different outcomes.
• When the program is being compared with a
program that has already been evaluated using
CUA.

43. Quantify Benefits - CUA
• Utilities are:
• A “preference-based” measure of health, that
relies on choice and uncertainty to elicit
preferences
• Typically based on a 0 (death) to 1 (perfect
health) scale

44. Advantages of CUA
• To measure health care costs and interventions.
• To evaluate the effect of a nursing intervention on
patient outcomes, when one of these outcomes is
QOL.
• To compare use of a nursing process management
with a disease process management.
• To assess cost utility for both medical intervention
and nursing interventions.
• To compare current practice and the change in
practice need.

45. Cost Minimization Analysis
• Specific type of analysis in which the outcomes
of the two or more health care interventions are
assumed equal.
• Economic evaluation is based solely on
comparative costs and result is least cost
alternative.

46. Cost Consequences Analysis
• A means to estimate whether the value of
results obtained is worth the investment.
• Form of CEA comparing alternative
interventions or programs in which the
components of incremental costs and
consequences are computed and listed, without
aggregating these results.

47. Advantages
• Simple to use and evaluates the entire program
of care.
• Allows decision makers to impute their own
values to the different costs and consequences.
• Incorporates several outcome measures and
easy to interpret the findings.
• Used to evaluate practice guidelines and disease
state management programs.

48. Drawback
• Difficulty of comparing outcomes between
different interventions in order to prioritize
them.

50. References
• Vati J. Principles and practice of nursing
management and administration. 1st ed. New
Delhi: Jaypee Brothers Medical Publishers Pvt.
Ltd; 2013
• Singh I. Leading and managing in health. 5th
ed.
• Basavanthappa BT. Nursing Administration.
Jaypee Brothers. 2002
• https://www.cdc.gov/dhdsp/programs/spha/econ
omic_evaluation/docs/podcast_iv.pdf