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1. COST- BENEFI T
ANALYSI S
Prabesh Ghimire
Economic Evaluation
Health Economic and Health Financing

2. Cost-Benefit Analysis
Compares costs and benefits of an intervention
• Standardizes all costs and benefits in monetary terms
Broader in scope than CEA/CUA
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3. Purpose of Cost-Benefit Analysis
To determine if the project is worthwhile financially
(justification/feasibility)
Which of the two or more projects provides the best return
on investment? (ranking/priority assignment)
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4. Steps of
Cost-Benefit Analysis
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5. 1. Identification of two or more
alternatives and outcomes
Alternatives may include
• Interventions from same program
• Interventions from different programs within a given
(health) sector
• Interventions across different sectors (health vs
education)
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6. 2. Determination of costs
Costing for each courses of action should include both
direct and indirect costs
• Direct costs specifically linked to health interventions
• Cost expenditures associated with adverse events
• Cost savings that accrue as a result of improved health
outcome
• Other opportunity and indirect costs
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7. 3. Determination and valuation of benefits
Outcomes of both alternatives should be measured in
terms of monetary unit.
All benefits the population receives in all sphere of their
wellbeing/welfare.
• Benefits in terms of improvement of life
• Benefit in terms of improvement in morbidity condition
• Benefit in terms of resources saved due to improvement in health
condition
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8. Benefits
Benefits can be direct, indirect or intangible
• Direct benefits
• Costs saved on curative treatment
Indirect benefits
• Productivity gained due to case prevented
• Improvement in household economies
Intangible benefits
• Improvement in quality of life of a person and family
• Satisfaction with life
• Psychological benefits of health
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9. Approaches to monetary valuation
Three general approaches to monetary valuation
of health outcomes
• Human Capital Approach
• Revealed Preferences
• Stated Preferences or Willingness to Pay
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10. 4. Determination of cost-benefit indicator
Two common indicators are used for comparison
• Net Present Value (NPV)/ Net benefit
NPV = Benefit of intervention − Cost of intervention
• Benefit-Cost Ratio (BCR)
BCR =
Benefit of interventon
Cost of interventon
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11. 5. Decision making
Net Present Value (NPV)
• NPV>0 = Benefit> Cost = Intervention is worthwhile
Benefit-Cost Ratio (BCR)
• BCR>1 = Benefit> Cost = Intervention is worthwhile
 When comparing two competing alternatives
Implement program with highest BCR or NPV
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12. Exercise 7
Children’s Immunization Program
• Monetary benefits: 1.2 million USD
• Direct medical cost saved
• Lost work time costs averted
• Monetary cost: 600,000 USD
• NPV?
• BCR?
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13. Advantages of CBA over CEA/CUA
Answers whether a program/intervention is worth
achieving given the social opportunity cost of all the
resources consumed
Converts all costs and benefits to money and is not
restricted to comparing programs between different
sectors.
• Can inform resource allocation decisions both within and between
the sectors of economy
Informs questions of allocative efficiency
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14. Disadvantages
Potential inaccuracies in identification and monetary
valuation of costs and benefits
• For example: Valuation of intangible benefits such as satisfaction
Complex procedure and method of monetary valuation
might be biased
Subjectivity: People use expectations or biased
experiences to assign different values to benefit.
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15. Approaches to
Monetary Valuation of Benefits
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16. Human Capital Approach
Views human being as a capital investment
Benefits is measured by earnings generate and
value of household productivity
Assumes worker’s value equals earning
Lost productivity = lost earnings
Valuation is simplest when an intervention affects
mortality
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17. Human Capital Approach
Valuation of death
Before intervention: Target group missed 20 days of work
per year on average
After intervention, missed 7 days of work per year
Average income: $50,000
Average earning: $200/ days (considering 250 work days
in a year)
13 days of productivity gained $200 - $2,600
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18. Human Capital Approach
Valuation of morbidity
More complicated process
Valuation may be more than work days lost
• Return to work may depend on occupation
• Return to work might not mean the same level of
productivity
• Change in health may require job switching
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19. Limitations of Human Capital Approach
Not equitable: High wage workers may have higher
indirect benefits than lower-wage earners
No market price for many groups: homemakers, elderly,
children
Assumes a perfect market, however
• Market imperfections are common
• Unequal job opportunities
• Unequal pay for same job
Ignores intangible consequences such as pain and
suffering
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20. Observed/Revealed Preference Approach
Infers value of non-market attributes from real-world
decisions
Based on consumer’s actual choices involving health vs
money
Challenge is finding markets where people purchase risk
reductions or take compensation for extra risk
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21. Revealed Preference
Job A
Income =$40,000
Risk of death = 0
Job B (preferred)
Income = $42,000
Risk of death = 1 per 1,000 =0.001
Value of statistical life
• Persons willing to accept 2,000 dollars to take a 0.001 risk of death
• Value of one statistical life = 2 million dollars
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22. Stated preferences
Surveys to elicit the maximum amount individuals are
willing to pay (WTP) to receive something or avoid
something
Two main methods
• Contingent valuation
• Discrete Choice Experiment (DCE)
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23. Contingent Valuation
Creates a hypothetical market for a good
Respondents are then asked about the maximum value
they are willing to pay ‘contingent’ on this hypothetical
market
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24. Discrete Choice Experiment
Involves asking individuals to state their preference over
hypothetical alternative scenarios.
Each alternative is described by several attributes
(convenience, quality of service, scope of services)
Price is treated as one of these attributed and therefore
marginal WTP for an attribute can be derived
Limitations
Is biased- respondents may find the hypothetical situation
difficult to understand
WTP may depend on the income of the respondent
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25. 25
Queries & Discussions…
Prabesh Ghimire