Economic Evaluation

An economic evaluation is a systematic, comparative analysis of the costs and consequences of two or more alternative health interventions, programs, or policies. It provides decision makers with evidence on whether the additional health benefits of a more costly intervention justify its additional costs. The four main types of economic evaluation are cost effectiveness analysis (outcomes measured in natural units such as life years gained), cost utility analysis (outcomes measured in quality adjusted life years or QALYs), cost benefit analysis (outcomes measured in monetary terms), and cost minimization analysis (used when outcomes are equivalent and only costs are compared).

Health care resources are finite, and spending on one intervention means those resources are unavailable for another. Economic evaluation provides a structured framework for making these allocation decisions explicit and evidence based. Health technology assessment bodies such as NICE in England, Canada's Drug Agency (formerly CADTH), PBAC in Australia, and the Institute for Clinical and Economic Review in the United States use economic evaluations to determine whether new drugs, devices, and programs represent good value for money relative to existing alternatives. Without economic evaluation, these allocation decisions are made implicitly, without a transparent comparison of the health gained per dollar spent. Economic evaluations are required components of reimbursement submissions to bodies such as NICE in England and PBAC in Australia.

An economic evaluation compares at least two alternatives, typically a new intervention and the current standard of care. Drummond and colleagues call a study a full economic evaluation only when it compares two or more alternatives and considers both their costs and their consequences; a study that describes a single alternative, or that compares alternatives on costs alone or on outcomes alone, is a partial evaluation. For each alternative, the analysis estimates all relevant costs (intervention costs, health care utilization, patient out of pocket costs, and sometimes productivity losses) and all relevant outcomes (health gains, adverse effects, quality of life).

The incremental cost effectiveness ratio (ICER) is the primary output of cost effectiveness and cost utility analyses. It is calculated as the difference in costs between the two alternatives divided by the difference in outcomes. For example, if a new drug costs $50,000 more than standard therapy over a patient's lifetime but produces 2.5 additional QALYs, the ICER is $20,000 per QALY gained. The ICER is compared to a willingness to pay threshold to determine whether the intervention represents good value for money. NICE in England has used a range of 25,000 to 35,000 pounds per QALY since April 2026 (previously 20,000 to 30,000 pounds); the United States has no official threshold, but benchmarks of $100,000 to $150,000 per QALY are used, for example by the Institute for Clinical and Economic Review.

The analysis may be conducted alongside a clinical trial (trial based economic evaluation) or using a mathematical decision model (model based economic evaluation) that synthesizes evidence from multiple sources. Model based evaluations are more common because they can accommodate longer time horizons, incorporate evidence from multiple studies, and project outcomes beyond the duration of any single trial.

Sensitivity analysis is an integral part of a sound economic evaluation. One way sensitivity analysis varies individual parameters to identify which inputs most influence the ICER. Probabilistic sensitivity analysis varies all uncertain parameters simultaneously across thousands of simulations, generating a joint distribution of incremental costs and effects, which is plotted on the cost effectiveness plane and summarized in cost effectiveness acceptability curves. Scenario analysis tests structural assumptions, such as different model structures or alternative data sources.

Reporting should follow the Consolidated Health Economic Evaluation Reporting Standards 2022 (CHEERS 2022) statement, which replaced the 2013 CHEERS checklist and specifies the information that should be included in published economic evaluations.

Economic evaluation is appropriate whenever a decision involves choosing between alternatives that differ in both costs and outcomes, which encompasses most health care decisions. It is required in reimbursement submissions to HTA bodies such as NICE in England and PBAC in Australia (regulators such as the FDA in the United States and the EMA in the European Union do not require it for marketing approval), recommended by guideline development organizations, and useful for institutional decision making about program implementation. It is not appropriate when the decision is purely clinical with no resource implications, when the alternatives are identical in both costs and outcomes, or when the analysis would require so many assumptions that the results are uninformative. Budget impact analysis, which estimates the financial impact of adopting a new intervention without weighing costs against health outcomes, complements but does not replace economic evaluation.

A common error is comparing an intervention to "no treatment" rather than to the most relevant clinical comparator, which can make an intervention appear more cost effective than it actually is. Another mistake is adopting too narrow a perspective, including only drug costs while ignoring hospitalization, adverse event management, and productivity effects. Failing to discount future costs and outcomes in analyses with time horizons beyond one year overstates the present value of future costs and benefits. Reporting the cost effectiveness ratio (total cost divided by total effect) instead of the incremental cost effectiveness ratio (difference in costs divided by difference in effects) is a methodological error that prevents meaningful comparison between alternatives. Finally, presenting ICERs without uncertainty analysis (sensitivity analysis) gives a false impression of precision and prevents decision makers from understanding how confident they should be in the conclusions.

A cost utility analysis compares a new biologic therapy for moderate to severe psoriasis to methotrexate using a Markov model with a 10 year time horizon. The analysis adopts the perspective of the UK National Health Service. Costs include drug acquisition, administration, monitoring, and management of adverse events. Outcomes are measured in QALYs using EQ 5D health state utilities. The biologic produces 1.8 additional QALYs at an additional cost of 38,000 pounds, yielding an ICER of 21,100 pounds per QALY. Probabilistic sensitivity analysis shows a 72% probability of cost effectiveness at a willingness to pay threshold of 30,000 pounds per QALY. The main driver of uncertainty is the durability of the biologic's treatment response.