Skip main navigation

New offer! Get 30% off one whole year of Unlimited learning. Subscribe for just £249.99 £174.99. New subscribers only. T&Cs apply

Find out more

Why do we need economic evaluation?

In this article, we take a closer look at economic evaluation and explore its connection to cost-effectiveness.
Health economic evaluation flow chart showing how an incremental cost-effectiveness ration is calculated
© The University of Sheffield

What is economic evaluation?

Economic evaluation is a type of analysis that measures value for money. It has two key features. First, it measures costs and outcomes.

Secondly, it assesses these costs and outcomes for at least two or more treatments. If a new treatment is considered to be a good value for money compared to other treatments, it is said to be ‘cost-effective’.

However, this is not a precise definition of cost-effectiveness; a more detailed consideration of economic evaluation is required to truly understand what cost-effectiveness means.

Cost-effectiveness analysis

There are actually several different sub-types of economic evaluation. Cost-effectiveness analysis (CEA) is the most common. CEA has the same two defining features as all economic evaluations – it looks at costs/outcomes and is comparative – but it is made special by measuring outcomes in a single unit of health.

This unit may be directly related to health, for example, years of life, or indirectly related to health, for example, blood pressure.

Incremental cost-effectiveness (ICER)

Once this unit has been chosen, combined with costs and compared between treatments, cost-effectiveness can be summarised in terms of an incremental cost-effectiveness ratio (ICER). Incremental means ‘additional’. The ICER is, therefore, the incremental costs of one treatment over another, divided by the incremental effects.

So, if a new treatment produces 10 additional years of life more than current treatments and costs £10,000 more than current treatments, its ICER is 10,000 divided by 10, or £1,000 per life-year gained.

The ICER, therefore, combines cost and outcome data in a simple summary measure. Treatments with lower ICERs produce units of health (e.g. life years) at a lower cost than treatments with higher ICERs. As such, they are said to be more cost-effective.

Why should we consider cost-effectiveness?

Imagine that we are faced with five treatments for five different patient groups. Suppose each treatment saves one life, but we face two problems; we have a limited budget to spend, and the number of treatments of each group is limited to a maximum of 100.

The cost of each treatment is listed below. The total available budget is £3 million. [UPDATE: Budget figure amended on 07/03/2016 to correct mistake]

Patient group Cost per patient (£)
A 10,000
B 20,000
C 30,000
D 40,000
E 50,000

If we were to ignore cost, then it is possible that the budget is spent by treating 20 patients from each group. If this happened, we would save 100 lives.

Looking at the data

Alternatively, we could look at the data and see that some treatments are more cost-effective than others. Treatment of patients in Group A has an ICER of £10,000 per life saved, whilst treatment of patients in Group E has an ICER of £50,000 per life saved. If we were to spend as much as possible on the most cost-effective treatment, then move to the next most cost-effective treatment, we would save more lives.

More specifically, we would fund treatments for 100 patients in Group A and 100 patients in Group B; saving 200 lives in total.

Clearly, this is a simplified example, but the principles that lie behind it are the same as those applied in HTA. By considering cost-effectiveness, we are able to generate more health gains for the same amount of money.

Economic evaluation and HTA

Whilst economic evaluation may look like a mathematical problem, there are a large number of judgements made in producing the ICERs. Judgements are required when defining the decision problems, identifying the relevant disease management pathway, identifying the best outcome measures, plus many, many issues.

It should also be noted that even the most complete cost-effectiveness analysis is not capable of capturing all of the effects of treatment. For example, measuring life-years saved does not capture the quality of life within those years. The economic evaluation also does not capture all potentially relevant ethical and legal considerations.

As such, economic evaluation is typically seen as an aid to decision making. It does not dictate the decision.

© The University of Sheffield
This article is from the free online

Health Technology Assessment: Choosing Which Treatments Get Funded

Created by
FutureLearn - Learning For Life

Reach your personal and professional goals

Unlock access to hundreds of expert online courses and degrees from top universities and educators to gain accredited qualifications and professional CV-building certificates.

Join over 18 million learners to launch, switch or build upon your career, all at your own pace, across a wide range of topic areas.

Start Learning now