Concept Architecture
Concept
Cost is the economic value of resources consumed or displaced when healthcare is provided. Money is the unit used to express that value, but a payment is not necessarily the underlying economic cost. In economic evaluation, cost reflects resource use and the opportunities forgone when those resources cannot be used elsewhere.
This page explains how cost differs from price, charge and expenditure; how resource use is converted into cost; and how perspective determines which resources count. It also covers cost classifications, valuation methods, incremental cost, uncertainty and transparent reporting.
Cost, price, charge and expenditure
These terms describe related but different ideas. Keeping them separate prevents a billed or paid amount from being treated automatically as the economic value of the resources used.
- Cost is the economic value of resources consumed or displaced.
- Price is the amount requested or paid for one unit.
- Charge is a billed amount and may not reflect the resources used.
- Expenditure is the monetary outlay that actually occurs.
- Opportunity cost is the value of the best alternative use forgone when resources are committed.
How resource use becomes cost
Resource use records the physical healthcare and non-healthcare inputs associated with an intervention or comparator. Examples include staff time, medicines, tests, hospital days, equipment, patient travel and unpaid care.
Costing has three connected stages: identify the resources relevant to the chosen perspective, measure how much of each resource is used and assign an appropriate unit value to each quantity. Keeping resource use separate from valuation shows whether a cost difference is caused by different quantities, different unit values or both.
Total cost = Σ(qᵢ × pᵢ)
In this formula, qᵢ is the quantity of resource i and pᵢ is its unit cost. Quantities and unit costs should be reported separately so that assumptions can be inspected, challenged and updated.
How perspective changes which resources count
Perspective determines whose resource consequences are included in the analysis. The perspective should be selected before resources are identified because different perspectives can produce different cost totals for the same intervention.
- A healthcare-payer perspective may include reimbursed services, medicines and other payments made by the payer.
- A healthcare-system perspective may include a broader set of provider and patient healthcare resources.
- A societal perspective may also include patient time, informal care, productivity and costs outside the healthcare system.
Cost categories from different perspectives should not be mixed without explanation. Difficult-to-measure resources should not be excluded solely because collecting the data is inconvenient.
Which cost categories may be relevant
The relevant categories depend on the decision problem, perspective, population, comparator and time horizon. Each included category should represent a genuine resource consequence and should not duplicate a cost recorded elsewhere.
- Direct medical costs may include medicines, staff, tests, procedures and hospital care.
- Direct non-medical costs may include travel, accommodation and adaptations.
- Patient and caregiver time may include time receiving care, travelling or providing unpaid support.
- Productivity costs may reflect changes in paid or unpaid work when required by the perspective.
- Informal-care costs may represent unpaid care provided by family members or others.
- Programme costs may include implementation, administration, training and monitoring.
- Capital costs may include equipment, buildings and other longer-lived assets.
- Overhead costs may include shared organisational resources assigned to the activity.
- Downstream costs may include later resource consequences caused by changes in health or treatment.
Terms such as direct and indirect cost are not used consistently across every discipline or jurisdiction. Analysts should define the resources included instead of relying on category labels alone.
How costs behave and why the distinction matters
Costs can be classified in several ways, and each classification answers a different analytical question. The appropriate distinction depends on whether the analysis is examining activity volume, an additional unit, a comparison between alternatives, the useful life of an asset or whether expenditure can be avoided.
- Fixed versus variable cost asks whether cost changes with activity volume.
- Average versus marginal cost distinguishes cost per unit from the cost of producing one additional unit.
- Total versus incremental cost distinguishes the whole cost of an option from the difference between alternatives.
- Recurrent versus capital cost distinguishes repeatedly consumed resources from longer-lived assets.
- Avoidable versus unavoidable cost asks whether a cost would disappear if an activity stopped.
These classifications are not interchangeable. For example, an average cost per patient may not represent the cost of treating one additional patient when spare capacity or service constraints are present.
Worked example: converting resource use into cost
This example separates the quantity of each resource used from the value assigned to one unit. Each line cost is calculated by multiplying resource use by unit cost.
- Clinical visits: 4 visits × £120 per visit = £480
- Laboratory tests: 2 tests × £45 per test = £90
- Medication: 12 months × £85 per month = £1,020
- Administration: 3 hours × £30 per hour = £90
Total cost = £480 + £90 + £1,020 + £90 = £1,680
The calculation is transparent because resource use and valuation remain separate. An analyst can update unit costs for another setting without changing the quantities, or test different patterns of resource use without changing the unit values.
How total cost becomes incremental cost
Economic evaluation normally compares the costs of alternatives rather than examining one option in isolation. Incremental cost measures the difference between the total cost of an intervention and the total cost of its comparator.
**ΔC =
Media & tools (1)
Cost Identification and Micro-Costing Workbook
Helps users identify relevant resource categories, separate quantities from unit values, and calculate intervention, comparator and incremental costs.
cost-identification-micro-costing-v1.0.xlsx →Related Concepts (1)
Institutional Perspectives (8)
- NICE
NHS & Personal Social Services Perspective
Costs should be measured from the NHS and Personal Social Services perspective.
NICE Methods Guide 2022 (PMG36)View source → - CADTH (CDA-AMC)
Publicly Funded Health Care Payer Perspective
In the reference case, costs should be identified, measured, and valued from the perspective of the publicly funded health care payer; broader societal costs may be included only as a non-reference case analysis.
CADTH (now CDA-AMC), Guidelines for the Economic Evaluation of Health Technologies: Canada, 4th Edition (2017), Guideline Statement 11.1View source → - PBAC
Health Care System Perspective
Submissions must adopt a health care system perspective, including health and health-related costs and cost offsets incurred by the patient and by public or private health care providers; a societal perspective may only be presented as a supplementary analysis.
Pharmaceutical Benefits Advisory Committee, Guidelines for Preparing a Submission to the PBAC, Section 3A.1View source → - IQWiG
Net Costs Plotted Against Benefit (Efficiency Frontier)
IQWiG plots the net cost per patient of an intervention on the horizontal axis against its added therapeutic benefit on the vertical axis to construct an efficiency frontier used to judge whether costs are appropriate relative to benefit.
IQWiG, General Methods, Version 7.0 (2023), Chapter 4: Health Economic EvaluationView source → - ICER
Health Care System Perspective with Modified Societal Co-Base Case
ICER's primary base case uses the health care system perspective, focused on direct medical costs; a modified societal perspective is presented as a co-base case when societal costs are judged substantial and are supported by direct data.
Institute for Clinical and Economic Review, ICER Reference Case (2023)View source → - HAS
Collective Perspective
The reference case analysis adopts a collective perspective, taking into account all resources involved in the production of care regardless of who bears the cost; a healthcare system perspective is used only if the collective perspective cannot be applied and this must be justified.
Haute Autorité de Santé, Choices in Methods for Economic Evaluation (2020)View source → - ZIN
Societal Perspective
All significant societal costs and benefits must be included in the analysis regardless of who bears them, including costs falling outside the healthcare sector such as informal care, patient time, and criminal justice costs.
Zorginstituut Nederland, Guideline for Economic Evaluations in Healthcare (2024)View source → - TLV
Socio-Economic Perspective
TLV applies a socio-economic perspective in which costs and savings are included regardless of whether they fall on the individual, a municipality, a region, or the state, though TLV notes this is not an exhaustive societal accounting.
Tandvårds- och läkemedelsförmånsverket (TLV), How Should We Assess and Pay? (2021)View source →
Library
Publications
4
Methods for the Economic Evaluation of Health Care Programmes — Drummond, Sculpher, Claxton, Stoddart & Torrance, 4th Edition ed., 2015 (Oxford University Press)
The standard international reference text for economic evaluation methods in health care, covering cost-effectiveness, cost-utility and cost-benefit analysis, measurement of costs and outcomes, evidence synthesis, and the characterisation of uncertainty.
BookView source →NICE Health Technology Evaluations: The Manual (PMG36) — National Institute for Health and Care Excellence, PMG36 ed., 2022 (NICE)
NICE’s consolidated methods and processes manual for health technology evaluation, defining the reference case for economic evaluation (perspective, comparators, time horizon, discounting, EQ-5D, cost-effectiveness thresholds and the severity modifier) — the authoritative HTA methods reference for the English NHS.
Guidelines for the Economic Evaluation of Health Technologies: Canada, 4th Edition — Canadian Agency for Drugs and Technologies in Health (CADTH), 4th Edition ed., 2017 (CADTH / CDA-AMC)
CADTH’s national methods guidelines for the economic evaluation of health technologies in Canada — reference case, comparators, modelling, effectiveness, discounting and uncertainty — a major national HTA methods reference (co-authored with Sculpher and other leading health economists).
ICER Value Assessment Framework (2023 Update) — Institute for Clinical and Economic Review, 2023 Update ed., 2023 (Institute for Clinical and Economic Review (ICER))
ICER’s framework describing its philosophy and methodology for assessing the value of medical interventions in the US — long-term cost-effectiveness, other benefits and contextual considerations, short-term budget impact, and adaptations for ultra-rare diseases and single/short-term therapies — the leading US value-assessment approach.
Media
2
Webinar Series: Perspectives on US Cost-Effectiveness Thresholds — Claxton, Grueger, Sullivan & McCabe, 5-part series ed., 2019 (Institute for Clinical and Economic Review)
A five-part webinar series featuring leading health economists debating how a US cost-effectiveness threshold should be set, and the theory and practice behind threshold-based decision rules.
Webinar RecordingView source →Value Insider, Season 1 Episode 4: How Are Costs Measured, and How Are They Used in Economic Evaluations? — Chambers, Mike (host); Rutten-van Molken, Maureen (guest), Season 1, Episode 4 ed., 2022 (Dove Medical Press / International Journal of General Medicine)
A podcast episode walking through how costs are measured and used in economic evaluations, with a health economics professor from Erasmus University Rotterdam.
Audio (Podcast)View source →
Economic evaluation — National Institute for Health and Care Excellence, Technology appraisal and highly specialised technologies guidance manual ed., 2026 (NICE)
Official methods guidance for comparative economic evaluation, including incremental analysis, ICERs, comparators and the treatment of dominated options.
Web GuidanceView source →Guidelines for Preparing a Submission to the PBAC — Section 3: Economic Evaluation — Pharmaceutical Benefits Advisory Committee, Current online guidance ed. (Australian Government Department of Health, Disability and Ageing)
PBAC requirements for cost-minimisation where non-inferiority or superiority and equivalent or superior safety are established and costs are equivalent or lower.
Web ResourceView source →PBAC Guidelines — Section 4: Use of the Medicine in Practice — Pharmaceutical Benefits Advisory Committee, Current online guidance ed. (Australian Government Department of Health, Disability and Ageing)
Official Australian guidance for estimating likely use, uptake, displaced medicines, annual financial effects and uncertainty for government health budgets.
Web ResourceView source →
Frequently Asked Questions (6)
What is cost?
The value of resources consumed in producing a good or delivering a service, measured in monetary terms.
Source: Drummond MF, Sculpher MJ, Claxton K, Stoddart GL, Torrance GW. Methods for the Economic Evaluation of Health Care Programmes. 4th ed. Oxford University Press; 2015.
What does cost mean in economics rather than accounting?
In economics the cost of using a resource is the value of what it would have produced in its best alternative use, so cost is measured by what is forgone rather than by what was paid. An accounting cost records a transaction that occurred, which coincides with the economic cost only where the price paid reflects the alternative use. The two diverge wherever prices are administered, wherever a resource was donated or volunteered, and wherever an asset already owned is committed to a use without any payment being made.
Source: Drummond et al. 2015
How is cost measured in practice?
Three questions are answered in sequence, and keeping them apart is what makes an estimate reusable. Which resources are relevant follows from the perspective and from whether the options differ in their use of them. How much of each was consumed is recorded in natural units, such as staff minutes, bed days or items dispensed. What each unit is worth is settled last, using prices appropriate to the setting. Because the quantities are recorded separately from the values, an estimate produced in one setting can be re-priced for another without the underlying measurement being repeated.
Source: Drummond et al. 2015
Does cost mean the same thing to every party?
No, and the perspective determines the answer. The same resource consumption appears as a cost to a provider, to a payer, to a patient or to society depending on who bears it, and a payment moving between two of them is a cost to one and income to the other rather than a resource cost at all. Taxes on purchases behave this way. An analysis therefore has to state whose costs it counts before any figure means anything, and a cost quoted without a perspective cannot be interpreted.
Source: Byford & Raftery 1998
What is the difference between cost and price?
A price is what was charged, and it reflects a pricing decision incorporating margin, cross-subsidy and whatever the market or the regulator permits. A cost is the value of the resources consumed. The two are related only where competition forces the price towards the cost, which in healthcare is uncommon. Charges are therefore a poor substitute for costs, and the standard correction applies a ratio derived from the organisation's accounts, which is approximate and better than using the charge unadjusted.
Source: Finkler 1982
Which cost is relevant to a decision?
Only the cost that would change as a result of the decision. Expenditure already incurred is irrelevant however large, since it cannot be recovered by any choice now available. Costs identical across the options cancel and can be omitted, provided they are identical in timing as well as amount. What remains is the difference between the options, which is usually a small fraction of the totals involved. Analyses built on full absorbed costs rather than on this difference systematically overstate both the savings from stopping something and the cost of starting it.
Source: Horngren, Datar & Rajan 2015
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