Opportunity Cost

Opportunity Cost in Health Economics

Opportunity cost is the idea on which every health economic comparison rests. Committing staff, beds, medicines or money to one use means giving up whatever they would otherwise have achieved. When a health service spends from a fixed budget, the loss falls mainly on patients whose care is not provided. The supply-side threshold k turns extra spending into health displaced, and empirical estimates of k for the English NHS differ from the GBP 25,000 to GBP 35,000 per QALY range NICE applies. The same principle governs costing, so resources such as volunteer time are valued at opportunity cost rather than price.

Why economic evaluation is built on forgone benefits

Because health care resources are limited, any decision to fund one activity is also a decision not to fund another. Palmer and Raftery describe opportunity cost as fundamental to the economist's view of costs and say that the opportunity cost of investing in a health care intervention is best measured by the health benefits that could have been achieved had the money been spent on the next best alternative. This is why economic evaluation always compares options, since a cost has meaning only against what the same resources would otherwise have produced.

Steuten and colleagues, in a 2026 report for the Health Economics Methods Advisory (HEMA), give a similar definition, the health that could have been produced if the same resources had been used for other care. In their framing, economic evaluation checks that the benefits to those who gain from a new intervention are at least as great as the losses to those whose care is displaced; if not, population health falls.

Formally, when a set of mutually exclusive uses competes for the same resources, the opportunity cost of choosing option $j$ is the value of the best option not chosen, as below.

$$OC_j = \max_{i \neq j} V_i$$

where $OC_j$ is the opportunity cost of choosing option $j$, $V_i$ is the value that alternative $i$ would have produced with the same resources, and the maximum is taken over every feasible alternative other than $j$. Only the best forgone alternative counts, because the rejected options could not all have been funded together. The scarcity page works through this rule with a fixed budget and four competing uses.

Expressing the sacrifice in money or in health

Turner and colleagues, in a 2023 paper on economic costs, note that although opportunity costs are usually expressed in money for convenience, they can also be expressed in natural units or as the health benefits forgone by not using the resources elsewhere, which they call health opportunity costs. The money form underlies cost estimation, because the economic cost of a resource is its value in its next best use, which may differ from what was paid for it. Within a fixed health budget, the next best use of money is other health care.

Health opportunity cost and the supply-side threshold k

Claxton and colleagues, in a 2015 NIHR report, define the cost-effectiveness threshold relevant to the NHS in supply-side terms, as the additional cost that has to be imposed on the system to forgo one quality-adjusted life year (QALY) of health through displacement. Written as k, it converts extra spending into health displaced, as follows.

$$H = \frac{\Delta C}{k}$$

where $H$ is the health opportunity cost in QALYs, $\Delta C$ is the additional cost falling on the fixed budget, and $k$ is the marginal cost per QALY of the activity that is displaced. The value of k describes the productivity of current spending at the margin, which is an empirical question about the health system rather than a judgement about the value of health.

The report's central estimate for the English NHS was GBP 12,936 per QALY, at 2008 expenditure with 2008 to 2010 mortality data, and its uncertainty analysis gave a probability of 0.89 that the threshold lies below GBP 20,000 per QALY. The same report found that the health effects of spending changes were greater when budgets were under more pressure, and concluded that the appropriate threshold should be lower for technologies with a greater impact on NHS costs. Later estimates are similar or lower. Lomas, Martin and Claxton estimated that an additional QALY cost the English NHS between GBP 5,000 and GBP 15,000 over 2003 to 2012, and Martin and colleagues put the marginal cost per QALY for all NHS expenditure in 2016/17 at about GBP 7,000 once differences between types of spending were allowed for.

NICE accepts the same logic. Section 6.2.25 of its manual (PMG36) says decisions must consider health care programmes for other patient groups that may be displaced, which it calls the opportunity cost.

Empirical k and the value placed on health

A supply-side k differs from a demand-side value, such as a willingness-to-pay threshold, which states how much a society is willing to give up in other consumption for a unit of health. The two can legitimately differ in size.

NICE's manual (PMG36, last updated 13 October 2026) states in section 6.3.1 that the appropriate maximum acceptable ICER is the opportunity cost of programmes displaced by new, more costly technologies, and sections 6.3.4 to 6.3.8 set the cost-effectiveness threshold as a range of GBP 25,000 to GBP 35,000 per QALY gained. The range is presented as a proxy for opportunity cost but sits well above the empirical estimates of k, which are in 2008, 2003 to 2012 and 2016 prices, and the gap remains after allowing for inflation since then.

A technology with an ICER between the empirical k and the NICE range would be accepted on cost-effectiveness grounds yet, if those estimates are right, would displace more health than it adds. Lomas, Ochalek and Faria recommended in 2022 that analysts present results against both the policy threshold and the latest empirical evidence on health opportunity costs until the discrepancy is better understood or resolved.

Net health benefit, or health gained against health displaced

Net health benefit puts health opportunity cost directly into the decision rule. It subtracts health displaced from health gained, both in QALYs, as follows in incremental form.

$$NHB = \Delta E - \frac{\Delta C}{k}$$

where $NHB$ is incremental net health benefit in QALYs, $\Delta E$ the incremental health gain and $\Delta C$ the incremental cost. A positive value means population health rises; a negative value means the health lost elsewhere exceeds the health gained.

PMG36 section 6.3.2 states that negative net health benefits mean the health benefits of the new technology are not large enough to prevent overall health loss because of health care not funded elsewhere. That reading holds only as far as the k used reflects what is actually displaced.

Uncertainty adds a further health cost. The HEMA report notes that a funded technology may turn out to give its recipients less benefit than its extra costs impose on other patients, and that the consequences of such errors in forgone health matter as well as their likelihood. It calls the expected health lost by deciding under uncertainty the cost of uncertainty, interpreted as the expected value of perfect information in value of information analysis.

Costing at opportunity cost rather than price

On the cost side, Palmer and Raftery state that resources used in economic evaluations should be valued at opportunity cost and note that accounting practices do not aim to measure it. Medicine prices may be poor estimates of opportunity cost, they add, because they reflect patents, profit regulation and sunk research and development. Resources with no market price need a shadow price, an estimated value that stands in for their opportunity cost. Palmer and Raftery give informal care and patient time as examples and, while noting disagreement over valuing time, treat the wage that working-age adults earn, or could earn, as the best valuation for that group. Turner and colleagues note that a community health volunteer receives no salary, so no financial cost appears, yet the time still has an opportunity cost because the volunteer gives up another activity.

Which resources are counted depends on the perspective. The NICE reference case in PMG36 (section 4.4.1) counts resources under the control of the NHS and personal social services and values them using the prices relevant to those services, so the price paid stands in for opportunity cost and unpaid inputs outside those services fall outside the reference case. The HEMA report adds that unit costs from fee schedules, formularies or tariffs may not reflect the opportunity cost of providing the service in the setting of interest, and suggests testing them in scenarios using plausible alternative settings and costing sources.

Worked example of a volunteer-supported programme under a fixed budget

The figures in this example are illustrative. A community falls-prevention programme serves one annual cohort of 400 people and is compared with usual care. For that cohort it costs the NHS budget GBP 120,000 more than usual care, for paid staff and materials, and it is expected to gain 10 discounted QALYs over usual care. It also relies on 3,000 hours of volunteer time and on a donated room. The value of k is set at an illustrative GBP 15,000 per QALY, chosen for round numbers.

1. Financial and economic cost. Valuing volunteer time at an illustrative shadow price of GBP 11 an hour, and the room at an illustrative local rental value of GBP 7,000, the economic cost is calculated as follows.

$$120000 + 3000 \times 11 + 7000 = 160000$$

where 120,000 is the budget outlay in pounds, 3,000 × 11 is the volunteer time valued at GBP 33,000, and 7,000 is the room. The financial cost understates the resources used by GBP 40,000.

2. Health displaced by the budget outlay. Only the GBP 120,000 falls on the fixed health budget, so the health displaced is calculated as follows.

$$\frac{120000}{15000} = 8$$

where the result is the QALYs expected to be displaced elsewhere. Net health benefit is 10 minus 8, or 2 QALYs, so in its current form the programme adds to population health.

3. Scaling up without volunteers. Where volunteers and donated rooms are not available, paid staff and rented space replace them at the same values and the full GBP 160,000 falls on the budget, giving the following.

$$10 - \frac{160000}{15000} \approx -0.67$$

where 160,000 divided by 15,000 is about 10.67 QALYs displaced, against a gain of 10. Its ICER is GBP 16,000 per QALY, below the lower end of the range NICE applies in technology appraisal (GBP 25,000), yet at the illustrative k the programme would displace more health than it adds.

4. Interpretation. The donated inputs did not make the programme free; they shifted part of its opportunity cost onto volunteers and the room's owner. A costing of budget outlays alone would wrongly suggest the programme can be copied at the same cost.

Sunk costs, idle capacity and nearby concepts

A sunk cost has already been incurred and cannot be recovered, so it is not an opportunity cost of any decision still to be made; only resources whose use can still change between the options count. Spare capacity is not automatically free either. Turner and colleagues state that resources bought earlier or used below full capacity should be treated as having an opportunity cost if they could be used for other activities within the timeframe of the analysis.

Opportunity loss, from decision theory, is the net benefit lost by choosing an option that turns out not to be the best once uncertainty is resolved. Budget impact analysis measures the change in spending for a budget holder, while opportunity cost asks what that spending displaces.

Misreadings of opportunity cost

A common misreading treats k as a fixed, transferable constant. The estimates above relate to the English NHS at particular dates and carry substantial uncertainty, and the 2015 report expected its central estimate to understate the health displaced by technologies with large budget impacts, so applying them to another health system or a much larger spending decision needs explicit justification. Another assumes that displacement can be seen directly. New spending can displace activity spread thinly across a health system rather than one identifiable service, which is one reason k is estimated from the observed relationship between spending and health outcomes rather than from a list of cuts.

Sources

• Claxton K, Martin S, Soares M, et al. Methods for the estimation of the National Institute for Health and Care Excellence cost-effectiveness threshold. Health Technology Assessment. 2015;19(14):1-503, v-vi. doi:10.3310/hta19140
• Drummond MF, Sculpher MJ, Claxton K, Stoddart GL, Torrance GW. Methods for the Economic Evaluation of Health Care Programmes. 4th ed. Oxford: Oxford University Press; 2015.
• Lomas J, Martin S, Claxton K. Estimating the marginal productivity of the English National Health Service from 2003 to 2012. Value in Health. 2019;22(9):995-1002. doi:10.1016/j.jval.2019.04.1926
• Lomas J, Ochalek J, Faria R. Avoiding opportunity cost neglect in cost-effectiveness analysis for health technology assessment. Applied Health Economics and Health Policy. 2022;20(1):13-18. doi:10.1007/s40258-021-00679-9
• Martin S, Claxton K, Lomas J, Longo F. The impact of different types of NHS expenditure on health: marginal cost per QALY estimates for England for 2016/17. Health Policy. 2023;132:104800. doi:10.1016/j.healthpol.2023.104800
• National Institute for Health and Care Excellence. NICE technology appraisal and highly specialised technologies guidance: the manual (PMG36). London: NICE; published 31 January 2022, last updated 13 October 2026. Sections 4.4.1, 6.2.25, 6.3.1, 6.3.2 and 6.3.4 to 6.3.8.
• Office for National Statistics. Implied GDP deflator at market prices: SA index (series L8GG, Quarterly National Accounts). Release of 30 September 2026.
• Palmer S, Raftery J. Economic notes: opportunity cost. BMJ. 1999;318(7197):1551-1552. doi:10.1136/bmj.318.7197.1551
• Steuten L, Thavorn K, Cipriano LE, et al. Methods to Analyze and Present Uncertainty in Economic Evaluation to Support HTA Decisions. HEMA Report 2. Health Economics Methods Advisory; 2026. https://hemamethods.org/wp-content/uploads/2026/10/HEMA-Report-2_For-Publication_100726.pdf
• Turner HC, Sandmann FG, Downey LE, Orangi S, Teerawattananon Y, Vassall A, Jit M. What are economic costs and when should they be used in health economic studies? Cost Effectiveness and Resource Allocation. 2023;21:31. doi:10.1186/s12962-023-00436-w