QUERI – Quality Enhancement Research Initiative

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Quality Improvement Methods

10. Cost Effectiveness Analysis

a. Definition: Cost effectiveness analysis (CEA) is the economic evaluation of alternatives by considering both the benefits and the costs. Costs are generally a monetary amount (dollars) and could include the indirect impact of an intervention. The benefits, in a health care setting, are sometimes difficult to put in monetary terms and therefore are measured as an improvement in health outcomes such as a reduction in morbidity or reduced hospital readmissions. Benefits may include an improvement in so-called quality-adjusted life years (QALY). The results are reported as the cost divided by the benefit, such as $500 per readmission avoided. Cost effectiveness should be considered on an incremental basis as the change in cost divided by the change in the outcome in comparison to other alternatives or to the current situation.

While CEA is important, it is sometimes difficult to quantify the full benefits of an intervention resulting from research into economic terms. One of the available alternatives to an intervention is often the status quo or no change. Thus, cost results from an intervention could be compared to costs for the "no change" scenario. Future costs and benefits should be reduced (discounted) at a percentage annual rate reflecting the time value of money. Satisfactory cost effectiveness may be compared to a predetermined minimum amount. Below that minimum a change may not be worthwhile in economic terms.

Economic evaluation can also use the percentage rate at which benefits are received for a particular cost, sometimes referred to a return on investment (ROI). The resulting rate is then compared to some minimally acceptable rate.

b. Literature:

  • Drummond, Michael F., Mark J. Sculpher, and George W. Torrance. Methods for the economic evaluation of health care programs. Oxford university press, 2005.
  • Gold, Marthe R., et al., eds. Cost-effectiveness in health and medicine. Oxford University Press, USA, 1996.
  • Siegel, Joanna E., et al. "Recommendations for reporting cost-effectiveness analyses." Jama 276.16 (1996): 1339-1341.
  • World Health Organization - CHOICE Choosing Interventions that are Cost Effective, http://www.who.int/choice/en/
  • Information, guidelines and additional references about cost effectiveness analysis specific to VHA are at http://www.herc.research.va.gov/methods/cea.asp A discussion of QALY is provided.

c. Steps: The particular steps will depend on if cost effectiveness is being determined prospectively (to decide whether to proceed with a particular intervention) or retrospectively to evaluate the results in economic terms. If prospective, there will be uncertainty regarding both costs and benefits, and modeling or simulation may be required. If retrospective, it may be difficult to determine actual costs and dollar benefits but the impact on outcomes will more likely be known.

d. Example: A project to change current clinical procedures in order to reduce emergency room visits is being considered. There is a forecast of the cost of the changes and their expected impact on health outcomes. Incremental (added) costs can be estimated as well as the economic benefits of reduced utilization of health services. Cost effectiveness can be calculated using the expected benefit of $400 per emergency room visit avoided with 20 visits a year avoided for 5 years, a $20,000 initial project cost and additional costs of $1,000 per year due to the changes. (These numbers are for example purposes only.) Thus, costs over 5 years would be $25,000 (or $20000 + $1000*5) and benefits $40,000 (or $400*20*5). A return on investment can be calculated based on the rate at which savings result from the initial cost. In this case there is a return on the investment of 35% per year (or ($400*20 - $1000)/$20000).2 Also, a consideration should be the uncertainty in the costs and benefits, what time horizon to use, and what investment alternatives are available.