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Cost-Effectiveness Basics
For Evidence-Based Policymaking
Harry P. Hatry
Urban Institute
Washington, DC

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Purposes of this Presentation
1. To encourage evaluators and decision makers to explicitly examine
together both cost of interventions and their effectiveness. C/E
currently is a highly underused analytical tool
2. To identify the many analytical issues.
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3.
Agenda
• A Bit of History
• What is it? What is it Not
• Major Features
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A Definition
Wikipedia:
• Cost-effectiveness analysis (CEA) is a form of economic analysis that
compares the relative costs and outcomes (effects) of different courses
of action.
• Cost-effectiveness analysis is distinct from cost–benefit analysis, which
assigns a monetary value to the measure of effect.
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5.
C/E is Not:
Effectiveness in reducing cost.
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Key Features of C/E
1. It explicitly calls for the analysis of the cost of the programs or
policies being examined--not only the effectiveness.
2. It explicitly looks into the future. It is a tool for prospective
analysis—to assess both future effectiveness and future cost.
Program Evaluation methodology is primarily retrospective. It
focuses on past effectiveness.
3. It specifically examines and compares alternatives. Evaluation
studies typically examine only the effects of the particular
intervention.
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Example: Display of Cost-Effectiveness Study
Results
Intervention Costs Health Benefits Incremental CER
compared to the null
1 $120 1.0 120
2 $140 5.5 25
3 $170 3.0 56
4 $190 7.0 27
Source: “W.H.O. Guide to Cost-Effectiveness Analysis,” 2003.
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Differences between C/E and C/B
• C/B analyses seek to monetize each effect. What is the monetary value
of reducing infant mortality by Y percent? Or of reducing automobile
commuting time Z minutes per day?
• C/E provides the data for each outcome indicator to decision makers.
• C/B typically provides a single C/B ratio .
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Issues in Estimating Costs
• Cost analysis is a legitimate important profession.
• Estimates should include both capital costs and annual operating and
maintenance costs. This is called “life-cycle costing.”
• Time phased costs should be calculated. How many years should be covered
by the analysis?
• To what extent do “overhead” costs need to be included?
• Should discount rates be applied to monetary costs to yield “present values”
equivalents? If so, what rates should be used?
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Source: Handbook of Practical Program Evaluation 4th ed. 2015.

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Two Other Important Issues
• Uncertainty of findings, especially in estimates about the future,
increasing with the length of the analysis period. Sensitivity analysis is
a way to make the uncertainties clearer.
• Who benefits? Who loses? Who pays the costs?
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12.
Thank You!
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