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Last updated: 21/08/2005
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Cost-effectiveness analysis

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WHAT IS A COST-EFFECTIVENESS ANALYSIS?

A comparative methodology for economic evaluations

Purpose
Cost-effectiveness analysis identifies the economically most efficient way to fulfil an objective. Focused on the targeted major result of the activity(for example, the number of jobs created), the tool associates the effectiveness of a programme with its cost.

Definition
The costs are the expenses planned for the implementation of a programme. The effectiveness of an evaluation lies in the relationship results and objectives. The objective of cost-effectiveness analysis is to estimate the cost of the result's implementation. If we take the above example, the analysis estimates the cost of each job generated by a specific measure.

A comparative tool
The tool compares policies, programmes, or projects (for example, the costs of different programmes with similar impacts - which requires the identification of situations sufficiently similar to allow relevant comparisons). Conversely, in activities with similar costs, results and outcomes are compared. The tool presents alternatives, in order to identify the most appropriate one to achieve an result at least cost.

To find out more:

  • Example 2: cost-effectiveness analysis in the education field [FR]  (76 kb)
Fields of application

Decision-making assistance
Cost-effectiveness analysis is especially used in the context of the assistance to decision-making in public policies and programmes, and in public and private investments. In fields such as health, education, environment, employment, and road safety, cost-effectiveness analysis is frequently used to compare complex policies, although the tool is appropriate for other fields.

Its implementation may be challenging, particularly when an activity yields different types of outcomes at the same time.

Analysis of activities
The tool is generally more appropriate for the analysis of clearly defined activities (in which costs and impacts are easily identifiable), than for the collection of information supporting the analysis of activities, whose sources are varied. The tool is not suitable for the analysis of multiple impact activities, whose effects are varied and difficult to rank.

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  WHAT ARE THE SPECIFICITIES OF COST-EFFECTIVENESS ANALYSIS?

Its place among economic evaluation tools

Cost-effectiveness analysis belongs to the economic analytical tools which assess per se or comparatively the effectiveness or efficiency of a policy or a programme.

Various economic analysis tools available for comparing intervention programmes
Type of analysis Definition Effectiveness criteria Conditions of use
Cost-minimisation analysis Analysis of the least costly intervention through the comparison of several programmes None Used when the impact of the interventions is supposed (or believed) to be identical
Cost-effectiveness analysis The impact is assessed with non-monetary, precise, quantified and homogeneous indicators Physical and quantifiable units (used as criteria for measuring outcomes) Used when the impact of the interventions can be expressed with a key variable for which the evaluator has a quantifiable indicator
Cost-benefit analysis The impact is compared with the benefit of the service or the intervention for the people concerned Units of benefit measuring the usage value of the outcomes for the users and beneficiaries Used when the impact of the interventions has at least two major dimensions (or more)
Cost-advantage analysis The impact of the intervention is expressed in monetary terms and presented with a ratio Monetary units Used to compare different interventions in different situations

In addition to these tools, some authors include cost-feasibility analysis which assesses the feasibility of a policy with the estimation of the costs it generates.

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  Effectiveness measured with a single outcome

In order to measure the effectiveness of a policy or a programme, the tool focuses on the main expected impact of the intervention. The analysis does not consider other impacts of the policy or programme, whether they are targeted impacts or not.

Because the tool focuses on a single dimension, the effectiveness of the intervention's results can easily be measured. This is appropriate for analyses dealing with an intervention whose primary objective and results are clearly identified, or obvious. Conversely, the tool may be inappropriate or too partial for broad scope interventions, whose implementation is characterised by various impacts (causing various and concurrent outcomes).

The determination of the single variable is one of the difficulties with the analysis.

Determination of a relevant outcome
Measuring the outcome of HIV/AIDS care

An ideal outcome measure for assessing the economic impact of care would be life-years gained or disability-adjusted life-years gained but this is rarely possible owing to the nature of the data required. If the goal of the programme is to treat a particular opportunistic infection, the number of those infections treated and cured is an alternative primary outcome. Otherwise, an intermediate outcome combined with some qualitative assessment of the programme may be more useful and appropriate.

Extract from Cost-effectiveness analysis and HIV/AIDS,1998, P 4-5.
 


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  A measure based on a physical basis, not a monetary one

The other specificity of cost-effectiveness analysis is to measure the effectiveness with indicators highlighting results and outcomes. Contrary to cost-advantage analysis, cost-effectiveness analysis does not evaluate the monetary value of the outcomes. Thus, it is an economic (and not a financial) analysis methodology.

The analysis yields the unit costs of a result. For example, a heath programme focusing on the decreasing number of ill people:

  • How much does the eradication of the illness cost per individual?
  • How much does the eradication of the illness cost in an awareness programme dedicated to increase literacy?
  • At what cost does the programme increase the proportion of the educated population by 1%?
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  WHICH QUESTIONS CAN A COST-EFFECTIVENESS ANALYSIS ANSWER?

Cost-effectiveness analysis may contribute to answers to the following questions:

  • How much does a programme or a measure cost, compared with the cost of a particular component of its objective (for example, the cost per child attending school)?
  • Is it preferable (or has it been preferable) to invest resources in an intervention, to the detriment of another, for the achievement of the target?
  • What type of intervention or group of interventions yields (or would have yielded) the best outcomes in respect of the final objective and the available resources?
  • How can the use of the resources be optimised (or should have been optimised), given competing needs between programmes?
  • At what level of additional investment can the chosen intervention be (or could have been) a factor of improvement for the outcome?

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