Concept Architecture
Concept
Theoretically, Discounting Costs is the process of converting future healthcare costs into their present value to reflect time preference and the opportunity cost of resources. It is founded on welfare economics and intertemporal choice theory, and exists because costs incurred in the future are generally considered to have a lower present value than identical costs incurred today.
Mathematically, Discounting Costs is represented by applying a specified discount rate to future cost streams. Each future cost is divided by a discount factor determined by the discount rate and the time at which the cost occurs, allowing costs arising in different years to be compared on a common present-value basis.
In practice, Discounting Costs is applied throughout the time horizon of an economic evaluation using the discount rate specified by the relevant health technology assessment guideline. Discounted costs are then combined with discounted health outcomes to calculate incremental cost-effectiveness measures, with sensitivity analyses commonly exploring alternative discount rates.
Purpose
Used to convert future healthcare costs into present values, account for time preference, compare costs occurring at different times, and support economic evaluation and health technology assessment.
Mathematical Formulae
Primary Formula
PV_C = C? / (1 + r)?
where:
- PV_C = present value of cost
- C? = future cost at time t
- r = discount rate
- t = time period
Supporting Formulae
PV_C = ????? C? / (1 + r)?
Related Mathematical Methods
- Present value
- Discount rate
- Differential discounting
- Net Present Value (NPV)
- Incremental Cost-Effectiveness Ratio (ICER)
Example
A healthcare programme incurs a maintenance cost of �12,000 five years after implementation. Using an annual discount rate of 3.5%:
PV_C = 12,000 / (1.035)? = �10,103
The discounted cost of �10,103 is used in the economic evaluation instead of the undiscounted future cost.
Excel Implementation
| Function | Example Formula | Health Economics Application |
|---|---|---|
| PV | =PV(3.5%,5,0,-12000) | Calculates the present value of a future healthcare cost. |
| NPV | =NPV(3.5%,B2:B11) | Discounts a stream of future healthcare costs. |
| POWER | =B2/(1+C2)^D2 | Calculates the discounted value of an individual future cost. |
| SUM | =SUM(E2:E11) | Aggregates discounted costs over the evaluation period. |
VBA (Optional)
Automate discounting of future healthcare costs across the evaluation time horizon using user-defined discount rates.
Sources
- Drummond MF, Sculpher MJ, Claxton K, Stoddart GL, Torrance GW. Methods for the Economic Evaluation of Health Care Programmes. Oxford University Press.
- Briggs A, Claxton K, Sculpher M. Decision Modelling for Health Economic Evaluation. Oxford University Press.
- Gold MR, Siegel JE, Russell LB, Weinstein MC. Cost-Effectiveness in Health and Medicine. Oxford University Press.
- NICE. Health Technology Evaluation Manual.
- Husereau D, Drummond M, Augustovski F, et al. CHEERS 2022 Statement. BMJ. 2022.
Related Concepts (2)
Library
Publications
1
NICE DSU Technical Support Document 22: Mapping to Estimate Health State Utility Values — Wailoo, Hernandez Alava, Pudney, et al., TSD 22 ed., 2023 (NICE Decision Support Unit (University of Sheffield))
Updated guidance on mapping methods to estimate health-state utility values, covering model selection, estimation and validation for cross-walking to preference-based measures.
Frequently Asked Questions (6)
What is discounting costs?
The application of a discount rate to future costs within an economic evaluation, converting them into a common present-day value.
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.
How are costs discounted?
Each future cost is divided by one plus the discount rate raised to the power of the number of years until it occurs, which converts it into the amount that would have to be set aside today to meet it. Costs arising in the first year are conventionally not discounted, and those in later years are discounted from the point at which they fall. Where costs accrue continuously through a year, a mid-year adjustment is sometimes applied, which makes a small difference over short horizons and a larger one over long ones.
Source: Drummond et al. 2015
Why are costs discounted at all?
Because money not spent now can be used elsewhere and will yield a return, so committing resources later imposes a smaller sacrifice than committing them today. The rate applied reflects that alternative use. This reasoning is more straightforward for costs than for health outcomes, since the opportunity cost of money is observable in a way that the social weighting of future health is not, which is why discounting costs attracts far less dispute than discounting health.
Source: HM Treasury, The Green Book 2022
What is the relation between discounting costs and inflation?
They are separate operations that are frequently confused. Inflation adjustment expresses costs from different years in the prices of a common year, removing general price change. Discounting then adjusts for the timing of the flows, using a real rate applied to those constant-price values. Applying a rate that already embodies expected inflation to values already expressed in constant prices double counts, and the resulting error compounds with the horizon.
Source: Drummond et al. 2015
Which costs are affected most by discounting?
Those arriving furthest in the future, which in health analyses are typically the downstream consequences of prevention, the running costs of long-lived capital, and long-term care associated with extended survival. Interventions incurring cost immediately and generating savings much later are the most affected, since discounting reduces the savings while leaving the initial outlay at full value. This is the mechanism by which discounting disfavours preventive spending, and it operates on the cost side as well as the benefit side.
Source: healtheconomics.wiki
What should be reported when costs are discounted?
The rate applied, the year treated as the present, and whether costs in the first period were discounted. Undiscounted totals should be reported alongside discounted ones where the horizon is long, since the difference between them indicates how much the conclusion depends on the rate. Where a framework specifies a rate and the analysis uses another, the specified rate should also be presented so the results remain comparable with other submissions.
Source: Drummond et al. 2015
Trust Record
Verified by Dr Darrin Baines
British health economist
Professional identity: darrinbaines.org
Verification date: 13 Aug 2025
Content version: 1.0.0
Canonical Identity
- Persistent URI
- https://healtheconomics.wiki/concept/discounting-costs
- Term code
- HE-EE-DC-005
Stable URI · Machine-readable · Resolvable · CC BY 4.0