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1. COST- EFFECTI VENESS
ANALYSI S
Prabesh Ghimire
Economic Evaluation
Health Economic and Health Financing

2. Cost-effectiveness Analysis (CEA)
Compares the cost of an intervention to its effectiveness
measured in natural health units
• Costs: Monetary Unit
• Consequences: Natural units (Years of life saved, cases prevented)
CEA s used when alternatives produce a common health
outcome of interest but is achieved to different degrees.
 Typically expressed as a ratio
Cost per natural unit effect (C/E)
Effects per unit cost (E/C)
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3. Cost-effectiveness Analysis (CEA)
Mostly used in situations where a decision maker,
operating with a given budget is considering a limited
range of options within a given field.
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4. Steps of
Cost-Effectiveness
Analysis
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5. 1. Identification of two or more
alternatives and outcomes
Two alternatives can be compared if we are looking at a
similar outcome in natural units.
• Two different methods of screening for breast cancer can be
measured in terms of No. of true cases found
Even if two programs are different, it is possible to
measure outcomes, if units are same
• Number of deaths prevented
• Years of life saved
Example: Two child health programs “Nutrition program” versus
“IMNCI” to prevent childhood mortality
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6. Types of alternatives/interventions
Independent programs
• Cost and effectiveness of one program is not affected by
implementation of another program
• Example: Treatment of ARI and treatment of diarrhoea among
under 5 children
• Two programs in two different population/setting
Mutually exclusive programs
• If one program is implemented, another program cannot be
implemented
• Programs for same population
• Example: Two alternative antibiotics for treating ARI in children
(cotrimoxazole vs amoxicillin)
• Two types of diagnostic testing for malaria
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7. 2. Identification of perspectives for costing
In cost analysis, different perspective may be considered
• Patient and family: opportunity cost, transportation,
caretaker cost
• Health care provider: salary, equipment and drugs
• Ministry of health: salary paid to officials, storage,
transportation and distribution, volunteers,
administrative costs, training
• Societal: message communication, foreign assistance,
family member taking care of the sick
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8. 3. Determination of costs
Costing for each courses of action should include both
direct and indirect costs
• Direct costs specifically linked to health interventions
• Cost expenditures associated with adverse events
• Cost savings that accrue as a result of improved health
outcome
• Other opportunity and indirect costs
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9. Costing
Costing non-market items
• Volunteer’s time
• Family of patient’s waiting time
• Loss of sleep
• Leisure of patients
Two approaches
• Opportunity cost: valuing the time of the person at the wage or
income the person could have earned
• Market cost: what would be the cost if hospital or clinic hired
someone to do the work the volunteer has performed
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10. 4. Determination of cost-effectiveness
ratio
Different approaches based on nature of alternatives
• For independent interventions: Average cost-effectiveness ratio
(ACER)
Average C/E ratio =
• For mutually exclusive programs: Incremental cost effective ratio
(ICER)
ICER=
∆
∆
=
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11. Cost-effectiveness ratio
Calculating ICER for mutually exclusive
programs
• Order programs according to their effectiveness
• Calculate the incremental C/E ratio
• Eliminate dominated alternatives
• A program is dominated if the incremental C/E ratio decreases
for the next program with higher effectiveness
• Recalculate the incremental C/E ratios
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12. 5. Decision making
For independent program (ACER):
• Implement program in the order of their C/E ratio until
the budget is exhausted
• Lowest ACER is most cost-effective and hence given
the highest priority
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13. 5. Decision making
For mutually exclusive program (ICER)
If we are comparing program B to program A
Easy case
• B is more expensive and less effective (prefer A)→A dominates B
• B is less expensive and more effective (prefer B) →B dominates A
Not so easy case
• B is more expensive and more effective →
• B is less expensive and less effective →
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Now what?

14. Cost-effectiveness plane
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Exclude
Dominant
Questionable
Questionable

15. Choosing the best strategy
Choose the most effective strategy whose ICER is less
than the threshold cost/life years after excluding
dominated strategies
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16. Choosing the best strategy
Guidance on how to define the threshold cost/LY
Use gross domestic product (GDP) to derive categories of
cost-effectiveness:
• Highly cost-effective: <1GDP per capita
• Cost-effective: between 1 and 3GDP per capita
• Not cost-effective: >3GDP per capita
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17. Errors to avoid
Reporting ratios of total cost to total life years
Failing to exclude strongly or weakly dominated strategies
Claiming that strategy with the lowest ICER is the best
choice
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18. Limitations of CEA
Does not inform whether or not to expand/scale up the
program
Doesn’t take into account the social desirability of health
outcome.
Provides information about technical efficiency rather than
allocative efficiency
Cannot compare interventions with differing
consequences (outcomes)
Cannot compare programs with different goals
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19. Exercise 1
Calculate C/E ratio for following independent programs
Decide which is more effective and should be
implemented if there is fixed a budget of 600,000
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Intervention Cost Effectiveness
A 100,000 10
B 400,000 20
C 900,000 30

20. Exercise 2
Calculate C/E ratio for following mutually exclusive
programs
Decide which program would you consider for
implementation if there is fixed a budget of
a. 60,000 USD
b. 220,000 USD
c. 1,300,000 USD
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Intervention Cost in 00 (USD) Effectiveness
Prog. A 2000 0.2
Prog. B 10000 0.4
Prog. C 500 0.1
Prog, D 9000 0.3

21. Exercise 3
Calculate C/E ratio for following mutually exclusive
programs
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Intervention Cost in 00 (USD) Life expectancy
(years)
No intervention 2,500 4
A 5,000 8
B 6,000 7
C 7,000 10
D 12,000 12
E 13,000 13

22. 22
Queries & Discussions…
Prabesh Ghimire