Here's a quick overview to help you decide...

When you have a limited budget how do you decide if introducing an intervention is good value for money? Do the additional health benefits justify the additional costs?

Economic analysis allows us to compare the costs and benefits of introducing a new treatment or intervention compared to the existing practice. By taking into account not only the initial investment for a new programme or treatment but the potential downstream savings from a change in practice, as well as the impact on a patient’s health and wellbeing, the evidence provided by a health economic analysis gives decision makers the tools to allocate budgets in a way that will maximize the health of their local population.


Descriptions of some health economic terms:

Cost-effectiveness analysis – compares the costs of treatments as well as a common effect relevant to the disease or condition, for instance heart attacks avoided or life years gained, of a new treatment compared to usual practice.

Cost-utility analysis – a specific version of a cost-effectiveness analysis where the effects are measured as a utility. For submissions to AWMSG or NICE the preferred measure of utility is the Quality Adjusted Life Year (QALY).

Cost-benefit analysis – in this analysis costs and benefits are measured in monetary terms giving a result in terms of net monetary benefit of one programme compared to another.[i] This is type of analysis can be used where the outcomes of different programmes are not the same. Converting all benefits to a monetary value gives us a common outcome.

Discount rate – applying a discount rate allows us to compare costs and benefits that occur at different points in time. We apply a discount rate to costs and benefits that occur after year 1.

Incremental Cost Effectiveness Ratio (ICER) – all economic analysis should be comparative. We are interested in the incremental costs and benefits of introducing a new intervention or treatment compared to usual practice. The results are presented as the ratio of the difference in costs and benefits of the new intervention compared to usual practice.

Perspective – when we talk about the perspective of an analysis this tells you which costs and benefits are taken into account. For AWNSG or NICE a National Health Service (NHS) and Personal Social Services (PSS) perspective is most commonly used, so only costs and benefits to the NHS and PSS are considered in the analysis. Some models use a societal perspective, which includes changes in productivity and impacts on other government agencies, for instance to education or criminal services.

Quality Adjusted Life Years (QALYs) – a measure of utility that combines a patient’s health related quality of life as well as any gains or losses in length of life.


[i] Drummond MF, O’Brien B, Stoddart GL, and Torrance GW. Methods for the Economic Evaluation of Health Care Programmes. Oxford Medical Publications.