Economic Evaluation

Economic evaluation

Economic evaluation is the comparative analysis of the costs and consequences of alternative courses of action in healthcare. A full evaluation compares both elements across two or more alternatives, a partial evaluation omits at least one of them, and the main forms of economic evaluation differ in how they measure consequences. The analysis runs from the original decision question through the comparison of costs and outcomes and the interpretation of incremental results, and its evidence is used in health technology assessment and resource-allocation decisions.

Economic evaluation is not simply an exercise in reducing expenditure. A less expensive intervention may produce worse outcomes, while a more expensive intervention may produce benefits that justify its additional cost. The central question is whether the differences in outcomes are worth the differences in resource use.

Why healthcare choices need comparison

Costs and outcomes only become meaningful when one course of action is compared with another. The comparator may be current practice, another intervention, no intervention, or a relevant mixture of care. Choosing the wrong comparator can make an intervention appear more or less attractive than it really is.

Economic evaluation therefore estimates the differences between alternatives rather than describing one intervention in isolation. This comparative approach connects economic evaluation to scarcity and opportunity cost because choosing one option may prevent the same resources from being used elsewhere.

What makes an economic evaluation full or partial

A full economic evaluation compares two or more alternatives and examines both their costs and consequences. A partial economic evaluation omits at least one of these defining elements. Partial evaluations can still provide useful information, but they cannot answer the same comparative value question as a full economic evaluation.

Full economic evaluation

A full economic evaluation assesses the costs and consequences of alternative courses of action. This allows decision-makers to compare what must be given up with what is gained.

• Two or more alternatives are compared.
• The relevant costs of each alternative are examined.
• The relevant health or other outcomes of each alternative are examined.
• A full economic evaluation can show the comparative costs and consequences of alternative courses of action.

Partial economic evaluation

A partial economic evaluation examines some economic information without completing the full comparison of alternatives, costs and consequences. It may describe costs, outcomes or resource use, but it cannot establish comparative value on its own.

• Alternatives are not always compared.
• Costs are sometimes examined.
• Consequences are sometimes examined.
• A partial economic evaluation can provide selected information about the costs, consequences or resource use associated with one or more courses of action.

The Economic Evaluation Study Design Explorer can help readers determine whether a study is full or partial and identify which analytical form may apply.

How the main forms of economic evaluation differ

The main forms of economic evaluation differ primarily in how they measure and present consequences. Each form still needs a clearly defined population, relevant alternatives, costs, evidence, time horizon, and analytical perspective. The appropriate method depends on the decision question and the way outcomes need to be represented.

• Cost-effectiveness analysis compares costs with outcomes measured in a shared natural health unit, such as life-years gained or cases prevented.
• Cost-utility analysis compares costs with preference-weighted health outcomes, most commonly quality-adjusted life years.
• Cost-benefit analysis expresses both costs and benefits in monetary terms so that net social value can be assessed.
• Cost-consequence analysis presents costs and multiple outcomes separately so that decision-makers can examine the components directly.
• Cost-minimisation analysis compares costs only after credible evidence has established that the relevant outcomes are equivalent.

These methods are related but not interchangeable. For example, cost-minimisation analysis is not appropriate merely because two treatments appear similar. The claim of equivalent outcomes must be supported by suitable evidence.

How an economic evaluation is carried out

An economic evaluation begins by defining the decision that the analysis is intended to inform. The population, alternatives, perspective, time horizon, evidence, and outcome measures determine what enters the analysis and how the results should be interpreted. The following steps provide a practical route through the work rather than a rigid template for every study.

1. Define the decision problem and population so that the analysis addresses a specific healthcare choice.
2. Identify the relevant alternatives so that each option is compared with an appropriate comparator.
3. Select the analytical perspective so that the included costs and consequences reflect the intended decision-maker.
4. Choose the time horizon so that the analysis captures all material differences between the alternatives, and discount costs and consequences that occur in future years.
5. Identify and measure resource use for each alternative.
6. Assign consistent values to the resources included in the analysis.
7. Identify and measure relevant health and non-health consequences for each alternative.
8. Compare incremental costs and consequences rather than relying on separate average results.
9. Examine uncertainty, assumptions, and population differences that could change the findings.
10. Interpret and report the results within the original decision context.

The exact implementation varies with the form of economic evaluation and the institutional setting. However, transparent reporting should allow readers to understand what was compared, what information was included, and how the conclusion was reached.

How resource use becomes cost

Economic evaluation separates the amount of each resource used from the value assigned to it. Resources may include staff time, medicines, tests, hospital care, equipment, facilities, patient time, travel, or productivity effects, depending on the analytical perspective. Keeping quantities and unit costs separate makes the calculation easier to audit and update.

The cost of each resource is generally calculated by multiplying the quantity used by its unit cost.

Resource cost = Quantity of resource used × Unit cost

Total cost is then the sum of the relevant resource costs.

Total cost = Σ(Quantity × Unit cost)

Resource use should be measured consistently across alternatives. Analysts should state the price year, currency, data source, valuation method, and any assumptions used when quantities or unit costs are unavailable.

Common errors include omitting important resource consequences, double-counting the same resource, combining quantities with unit costs from incompatible settings, and treating charges or prices as economic costs without explaining the choice.

How costs and outcomes are compared

Economic evaluation focuses on the additional costs and consequences associated with choosing one alternative instead of another. Incremental analysis prevents decision-makers from confusing the total performance of an intervention with the change produced by adopting it. The signs and sizes of both differences must be understood before a ratio is interpreted.

Incremental cost

ΔC = Cnew − Ccomparator

Incremental effect

ΔE = Enew − Ecomparator

When ratio interpretation is appropriate, the incremental cost-effectiveness ratio is calculated as follows.

ICER = ΔC ÷ ΔE

An ICER should not be interpreted as a conventional cost-per-unit-of-health result when an alternative is less costly and more effective, more costly and less effective, less costly and less effective, or produces no incremental effect. In those situations, the direction of incremental costs and effects, the dominance classification, and net benefit provide clearer information. When more than two alternatives are compared, dominated and extendedly dominated options are removed and each ICER is calculated against the next less effective non-dominated alternative.

At a decision threshold λ, incremental net monetary benefit may be calculated as follows.

INMB = (λ × ΔE) − ΔC

A positive incremental net monetary benefit means that the value assigned to the additional health exceeds the additional cost at the stated threshold. It does not prove that the intervention is affordable, equitable, feasible, or certain to be adopted.

Worked example comparing current care with a new intervention

Consider a decision between current care and a new intervention. The example uses quality-adjusted life years as the outcome so that the calculation resembles a cost-utility analysis. The figures are illustrative and do not represent a real technology or reimbursement decision.

• Current care costs £10,000 per patient and produces 4.50 QALYs.
• The new intervention costs £14,000 per patient and produces 4.80 QALYs.

Incremental cost = £14,000 − £10,000 = £4,000

Incremental effect = 4.80 − 4.50 = 0.30 QALYs

ICER = £4,000 ÷ 0.30 = approximately £13,333 per QALY gained

At an illustrative threshold of £20,000 per QALY, the incremental net monetary benefit is calculated as follows.

INMB = (£20,000 × 0.30) − £4,000 = £2,000

The example produces a positive incremental net monetary benefit at the stated threshold. That result supports the new intervention on expected value-for-money grounds, subject to the evidence, uncertainty, assumptions, and wider decision context. It does not demonstrate that the intervention is affordable.

How assumptions and uncertainty affect the result

Every economic evaluation depends on evidence and assumptions. These may concern treatment effects, resource use, unit costs, health-state values, adherence, disease progression, extrapolation beyond observed data, the time horizon, discounting, and the population expected to receive the intervention. The results may change when these inputs or structural choices change.

Analysts should explain each important assumption, why it was necessary, and how it affects the comparison. Deterministic sensitivity analysis, scenario analysis, and probabilistic sensitivity analysis can be used to examine whether the conclusion remains stable when uncertain inputs or assumptions vary, and subgroup analysis can show whether it differs between populations.

Uncertainty should not be treated as a minor technical detail. A favourable expected result may still be accompanied by substantial decision uncertainty, and different populations or settings may produce different costs and outcomes.

How economic evaluation supports healthcare decisions

Economic evaluation provides structured evidence about the costs and consequences of alternative choices. Health technology assessment can use that evidence alongside clinical effectiveness, safety, equity, feasibility, organisational effects, and other relevant considerations. Economic evaluation therefore informs a decision but does not make the final decision.

The result also needs to be interpreted alongside budget impact analysis. Economic evaluation examines comparative value, while budget impact analysis estimates how adoption could change expenditure for a particular budget holder over a specified planning period. An intervention can represent good value and still be difficult to afford.

What economic evaluation cannot answer on its own

Economic evaluation answers an important but limited part of a healthcare decision. Its conclusions depend on the comparator, perspective, time horizon, population, evidence, assumptions, and decision rule used in the analysis. Other evidence and deliberation are required before a policy, coverage, or adoption decision is made.

• Economic evaluation does not determine whether a health system has enough money to adopt an intervention.
• Economic evaluation does not determine whether health gains and costs are distributed fairly across population groups.
• Economic evaluation does not replace an assessment of clinical effectiveness, safety, or evidence quality.
• Economic evaluation does not determine whether implementation is operationally feasible.
• Economic evaluation does not automatically transfer a conclusion from one jurisdiction or population to another.
• Economic evaluation does not require a decision-maker to adopt the alternative with the most favourable economic result.

Common mistakes and how to avoid them

Several errors can make an economic evaluation misleading even when the calculations appear correct. Most arise because the decision problem, comparator, evidence, or interpretation has not been defined carefully enough. These checks help readers assess whether the reported result answers the intended question.

• Treating a cost analysis as a full economic evaluation omits the required comparison of both costs and consequences.
• Using an irrelevant comparator produces incremental results that do not represent the actual decision.
• Reporting average rather than incremental results can conceal the additional cost and benefit of moving between alternatives.
• Assuming cost-effective means cost-saving confuses good value with a reduction in expenditure.
• Assuming cost-effective means affordable confuses comparative value with total financial consequences.
• Ignoring uncertainty or population differences can make a conditional result appear more certain or generalisable than it is.
• Using cost-minimisation analysis without credible equivalence evidence can hide meaningful differences in outcomes.
• Omitting or double-counting resource use can distort the estimated cost difference between alternatives.
• Combining quantities, prices, or evidence from incompatible settings can produce results that do not represent the intended decision context.
• Treating a reporting checklist as proof of methodological quality confuses transparent reporting with valid study design.

CHEERS 2022 is reporting guidance rather than a method-quality scoring system. ISPOR identifies the use of CHEERS to assess the quality of study methods, or to score studies quantitatively in systematic reviews, as inappropriate.

How to interpret an economic evaluation responsibly

An economic evaluation should be interpreted within the decision problem for which it was produced. Its conclusion applies to the specified alternatives, population, perspective, time horizon, evidence, prices, assumptions, and institutional context. A result should not be transferred automatically to another healthcare system or decision.

The strongest interpretation explains both what the analysis suggests and what remains uncertain or outside its scope. WHO similarly places economic evidence within a broader priority-setting process that also considers feasibility, budget impact, equity, and financial protection.

Sources

• Drummond MF, Sculpher MJ, Claxton K, Stoddart GL, Torrance GW. Methods for the Economic Evaluation of Health Care Programmes, 4th edition. Oxford University Press. 2015.
• Husereau D, Drummond M, Augustovski F, de Bekker-Grob E, Briggs AH, Carswell C, et al. Consolidated Health Economic Evaluation Reporting Standards 2022 (CHEERS 2022) statement: updated reporting guidance for health economic evaluations. BMJ. 2022;376:e067975.
• Cantor SB. Cost-effectiveness analysis, extended dominance, and ethics: a quantitative assessment. Medical Decision Making. 1994;14(3):259-265.
• Briggs AH, Weinstein MC, Fenwick EAL, Karnon J, Sculpher MJ, Paltiel AD. Model parameter estimation and uncertainty analysis: a report of the ISPOR-SMDM Modeling Good Research Practices Task Force Working Group-6. Medical Decision Making. 2012;32(5):722-732.
• Sullivan SD, Mauskopf JA, Augustovski F, Jaime Caro J, Lee KM, Minchin M, et al. Budget impact analysis: principles of good practice. Report of the ISPOR 2012 Budget Impact Analysis Good Practice II Task Force. Value in Health. 2014;17(1):5-14.
• Bertram MY, Lauer JA, Stenberg K, Edejer TTT. Methods for the economic evaluation of health care interventions for priority setting in the health system: an update from WHO CHOICE. International Journal of Health Policy and Management. 2021;10(11):673-677.
• World Health Organization. Making fair choices on the path to universal health coverage: final report of the WHO Consultative Group on Equity and Universal Health Coverage. World Health Organization. 2014.