Discount Rate

In health economic evaluations, the discount rate is the annual percentage rate at which future costs and health outcomes are reduced to their present value, reflecting the principle that people generally prefer benefits sooner rather than later and costs later rather than sooner. This concept, called time preference, recognizes that a health outcome gained today is valued more than the same outcome gained in the future. Rates differ between guidelines: for example, 1.5% for costs and outcomes in the reference case of Canada's Drug Agency (formerly CADTH), 3% for both in WHO guidance and the US Second Panel on Cost-Effectiveness in Health and Medicine, and 3.5% for both at NICE in England.

Health interventions often involve upfront costs (such as vaccination programs or screening infrastructure) with health benefits that accrue over years or decades. Without discounting, a prevention program whose costs are incurred today but whose benefits extend 30 years into the future would appear disproportionately cost effective compared to a treatment whose costs and benefits both occur in the present. Discounting places costs and outcomes on a common temporal footing, enabling fair comparison. The choice of discount rate can substantially change the conclusions of an economic evaluation; a higher rate reduces the present value of future benefits more aggressively, potentially making preventive interventions appear less cost effective. Guidelines from bodies such as NICE (3.5% for both costs and outcomes), the WHO (3% for both), and the US Panel on Cost Effectiveness (3% for both) specify the rates to be used in their jurisdictions.

Discounting applies a mathematical formula to convert future values to present values. The present value (PV) of a future amount (FV) occurring in year t is calculated as PV = FV divided by (1 + r) raised to the power of t, where r is the discount rate. For example, at a 3% discount rate, a health benefit of 1 QALY occurring 10 years from now has a present value of approximately 0.744 QALYs (1 divided by 1.03 to the tenth power). A benefit occurring 30 years from now would have a present value of approximately 0.412 QALYs.

In a health economic model, all future costs and health outcomes are discounted back to the present year of the analysis. Total discounted costs and total discounted QALYs (or DALYs averted) are then compared across interventions to calculate incremental cost effectiveness ratios (ICERs).

The discount rate applies equally to both costs and health outcomes in most guidelines, though there has been debate about whether health outcomes should be discounted at a lower rate than costs (differential discounting). Proponents of differential discounting argue that health does not depreciate the way money does and that applying the same rate to health as to money undervalues future health gains, disadvantaging prevention programs. Some countries, including the Netherlands (whose 2024 guideline uses 3% for costs and 1.5% for health outcomes), have adopted differential discounting. However, most guidelines continue to recommend the same rate for both to maintain internal consistency.

Sensitivity analysis should always test the impact of alternative discount rates on the study's conclusions. Many guidelines recommend testing at 0% (no discounting) and at rates above and below the base case rate.

Discounting should be applied in economic evaluations whose time horizon extends beyond one year. It is standard practice in cost effectiveness analyses, cost utility analyses and cost benefit analyses. Budget impact analyses are the usual exception: they report undiscounted costs for each year, because the budget holder needs to know the actual spending in each year. The specific rate and methodology should follow the guidelines of the jurisdiction in which the analysis will be used (for example, NICE methods for submissions in England, and the guidelines of Canada's Drug Agency, formerly CADTH, for Canada). Discounting is not needed for analyses with a time horizon of one year or less, since the impact of discounting is negligible over such short periods.

A common error is failing to discount altogether in analyses with multi year time horizons, which systematically overvalues future benefits and underestimates the true opportunity cost of resources. Another mistake is discounting costs but not health outcomes (or vice versa), which creates an inconsistency that can distort the comparison of interventions with different temporal profiles. Using a discount rate from one jurisdiction's guidelines in an analysis intended for another jurisdiction can lead to results that do not meet the target audience's analytical standards. Some researchers apply discounting to one time costs that occur at the beginning of the analysis period, which does not require discounting because they are already at present value. Finally, failing to conduct sensitivity analysis on the discount rate prevents readers from understanding how sensitive the conclusions are to this assumption.

A cost effectiveness analysis compares universal newborn screening for a genetic condition against no screening. Screening costs $2.4 million, all paid in the first year and so not discounted; for simplicity, this is treated as the only cost difference between the two strategies. Over the lifetimes of the screened cohort, screening prevents 45 cases of severe disability. At a 3% discount rate, the present value of the lifetime health gains (measured in QALYs) is 620 QALYs, yielding an ICER of $3,871 per QALY gained. At a 5% discount rate, the present value of the health gains decreases to 380 QALYs, increasing the ICER to $6,316 per QALY gained. Both ICERs fall well below conventional willingness to pay thresholds, but the analysis demonstrates how the discount rate influences the apparent cost effectiveness of prevention programs with long time horizons.