Cost effectiveness analysis and cost benefit analysis

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Cost benefit analysis and cost effectiveness analyses (CBA / CEA)

by USTUTT (Peter Bickel)

Cost-Effectiveness Analysis (CEA) and Cost-Benefit Analysis (CBA) are methods for comparing alternative measures or projects. There is often a need to compare health outcomes of the issue / scenario assessed with each other or with costs. Therefore, monetary values should be give to the health outcomes. The principles of a cost-benefit-analysis and a cost-effectiveness-analysis is explained.

Cost-Effectiveness Analysis

Cost-effectiveness analyses compare costs of alternative measures or projects with their usefulness. Usefulness means how well certain aims can be reached with a special alternative. Usefulness is not transferred to a common unit, but is brought into the analysis as a physical unit.

Example: NOx emissions of coal firing are to be reduced. Different techniques are available, such as optimised burner adjustment, selective catalytic reduction, adsorption and reduction processes, etc. The effectiveness can be determined in this case with the volume of reduced emissions compared to the costs. The ratio of costs and effectiveness (e.g. costs in €/ avoided NO<subx</sub> emissions in tonnes) is a measure for the efficiency of a technology. This is a useful tool for a decision maker to decide which technology to use.

However, the situation becomes more complicated if more than two aims (in the example: NOx emission reduction and low costs) are to be reached at the same time. If the heating system of the example were converted to natural gas then this would of course reduce NOx emissions – but at the same time, SO2, CO and CO2 emissions would also be reduced significantly. Within a cost-effectiveness analysis, the impacts of different technical alternatives can be determined, but a comprehensive weighting is not done. Therefore the cost-effectiveness analysis is only helpful if the benefit can be measured in one single unit. This, however, is not very often the case in typical decision situations.

Cost-Benefit Analysis

Cost-benefit analysis is a technique for comparatively assessing the (monetised) costs and benefits of an activity or project over a relevant time period. The technique has its origins in economic feasibility studies of public infrastructure projects such as dams and levees. It is used for overall assessments of the advantages of projects, measures, technologies etc.

To use cost-benefit analysis in evaluating the merits of public actions requires translation of positive and negative effects to a common monetary measure. It achieves a positive appraisal if at a certain point in time the discounted difference between the benefits and the costs is positive. Formal cost-benefit analysis often demands costly and sometimes disputed expertise and data. Done carefully, it provides an array of information that can inform the decision process. Done poorly or taken out of context, the results can create a false sense of clarity and precision.

Comparison of CBA and CEA

Valuation of costs In monetary units In monetary units
Valuation of benefits In monetary units In physical measures (usually only one objective)
Type of result Net benefit: sum of all discounted benefits ./. sum of all discounted costs Cost-effictiveness matrix; effectiveness-cost ratios
Statements of absolute profitability Possible (if the net benefit greater than zero) Not possible
Statements of relative profitabilty Possible (order of preference according to the level of net benefit (B-C) or according to the level of benefit cost ratio (B/C) Only possible for projects with similar purpose and implications. Definite results only in cases with a one-dimensional aim criterion

External links

  • English Wikipedia entry for cost-benefit analysis [1] (Note that this link takes you outside of Intarese-wiki)
  • Cost Benefit Analysis of Health Impact Assessment [2] Final report 2006
  • Books:
    • Miller et al. 2006. Valuing Health [3]
    • Brent R. 2003. Cost-benefit analysis and health care evaluations. [4]