Cost Benefit Analysis (CBA) is an economic evaluation technique that measures all the positive (beneficial) and negative

(costly) consequences of an intervention or program in monetary terms. The valuation of all program outcomes in monetary units allows decisionmakers to directly compare the health outcomes of different types of health interventions. CBA can also be used to compare health-related interventions to those in other economic sectors. For example, when deciding how to allocate the limited funding approved by a state or local legislature, policy makers might have to choose between implementing a statewide, school-based screening program for tuberculosis infection or a job-training program for the unemployed. For each of these competing programs, CBA enables policy makers to determine whether the value of its positive consequences exceeds the value of societal resources required to implement the program. This will help policy makers choose the program that provides the best return on investing societal resources.

Cost Benefit Analysis Defined

The conceptual and theoretical framework of CBA is derived from welfare economics. Welfare economics is the study of changes in the well-being, or welfare, of individuals and society as decisions are made regarding the production, distribution, and consumption of goods and services. CBA incorporates theories that have been developed to address equity issues such as:

the distribution of potential benefits, and the costs of various economic policies.

In other words, a CBA identifies who (an individual or a group) gains and/or bears the costs of a project. For example, a CBA of publicly funded development and manufacture of vaccines against potential bioterrorism agents (e.g., smallpox or anthrax) will identify both the potential beneficiaries of vaccine development as well as who will incur the costs. The benefits of increased protection against the bio-agents will accrue to target populations for priority vaccinations such as those administered to:

health-care personnel, the military, and the general population.

The medical research and manufacturing industry will benefit from the development and production effort. The funding scheme details will identify whether the federal budget alone or a combination of federal and state financing will cover the costs of the project. Two prominent features differentiate CBA from other forms of economic evaluation:

CBA adopts a broad societal perspective (thus it includes all costs and all benefits), and CBA measures the outcomes in monetary terms.

CBA is the appropriate form of economic evaluation to assess the economic efficiency (whether maximum amount of output [e.g., persons screened, cases prevented, or cases treated] is produced from the given level of inputs) of public health-care interventions when health outcomes are disparate. It is a particularly helpful tool for the following purposes: Deciding Whether

To Implement a Specific Program

Public health interventions are designed to improve the health of the population by addressing particular health problems. The potential of a health program to achieve a specific health-related objective is a principal but not the only criterion that policy makers have to consider when making a decision to implement a program. A further justification for the implementation of a program will be the indication that the program is also economically efficient. A CBA might demonstrate that implementing the program will yield a net gain in societal welfare. Together with other relevant criteria, this will help decide whether the program is acceptable. For example, recent research indicates that a quadrivalent vaccine protects against two strains of human papillomavirus (HPV). (HPV is the virus that is responsible for the majority of cervical cancer cases.) A CBA might indicate that, even if the price of the vaccine is relatively high, the savings from

the averted HPV infection, the resulting cervical cancer treatment, and the averted productivity losses outweigh the costs of vaccination and generate a net gain in societal welfare.

This provides an additional argument for public decisionmakers to support an HPV vaccination program that can prevent thousands of deaths.

Choosing Among Competing Options

The results of a CBA can help policy makers choose the best alternative among programs that are equally successful in achieving a desired health outcome. The program with the largest net gain in societal welfare is preferable since it will provide the highest return to society in exchange for the expenditure of resources. Ranking by net gain in societal welfare can also be used to choose the best alternative among interventions with different health outcomes. For example, public health officials might have to choose between funding a program of free Pap smear testing for women at high risk of infection and an HPV vaccination program. The results of a CBA might indicate that the net gain in societal welfare equals $521 million for Pap smear testing and $987 million for HPV vaccination programs.

The evident preferable alternative would be the HPV vaccination program. In another scenario, a national health agency might be considering whether to concentrate on research and development of a therapeutic vaccine against:

melanoma, heart disease, or type 1 diabetes.

A CBA might indicate that the net gains in societal welfare for the three vaccines would be:

$1.7 billion, $3.8 billion, and $2.8 billion, respectively.

This would indicate that the development of a vaccine against heart disease is the preferable choice.

Choosing and Setting Priorities from a Group of Potential Programs

The social welfare maximization rule can also guide decisions on allocating a fixed budget among a group of potential programs. The combination of programs that has the largest net gain in societal welfare and that can be implemented within the resource constraints of a given budget is the preferred choice. For instance, based on its current commitments and future funding projections, the national health agency in the previous example might be able to predict that in the coming 6 years, it can commit annually up to $170 million for development of new vaccines. At the same time, the estimates of a CBA might indicate that the development of therapeutic vaccines against melanoma, heart disease, and type 1 diabetes will require annual investments of $58 million, $93 million, and $75 million, respectively, for that 6-year period. A simple comparison then shows that the agency budget will allow financing for two projects but not all three of them. Focusing on development of vaccines against heart disease and type 1 diabetes will generate the largest net gain in societal welfare, equal to $6.6 billion. This will require annual financing of $168 million, which is within the budget limit of $170 million. Therefore, the preferred choice would be to focus on development of vaccines against heart disease and type 1 diabetes.

What are costs and benefits?

Benefits are the monetary values of desirable consequences of economic policies and decisions. Together with costs they reflect the changes in individual and social welfare that result from implementing alternative programs. Benefits are generally classified as direct, indirect, and intangible:

Direct benefits are the values of desirable health and nonhealth outcomes directly related to the implementation of proposed interventions that can be estimated by using market-based data. Indirect benefits are the averted costs and savings resulting from the interventions but not related directly to them. Intangible benefits include the values of positive outcomes (e.g., reductions in health risk, pain, and suffering), which cannot be estimated from market data.

A vaccination program against an infectious disease protects the participants from catching the infection and provides additional "herd immunity" for the population, including unvaccinated persons. These are the program benefits:

The savings associated with prevented illness cases among those actually vaccinated would be classified as a direct benefit. The savings resulting from lower morbidity among unvaccinated persons due to herd immunity would be an indirect benefit. The reduced risks of catching the infection for those vaccinated and the peace of mind resulting from that risk reduction would be intangible benefits.

Methods of measuring and classifying costs are discussed in the Cost Analysis tutorial.

Framing a CBA
The first stage in conducting a CBA is framing the study, which determines the research framework of the study. We will use Influenza vaccination to illustrate this discussion of Framing. Framing a CBA involves these six steps:

1. Defining the Problem

The study problem must be identified at the outset of any analysis. A clearly stated problem defines the objective of the study. At this initial stage of the study we must consider:

what questions need to be answered, and which aspects of the problem need to be explained.

Influenza Vaccination Example: CBA of a Strategy To Vaccinate Healthy Working Adults Against Influenza

2. Identifying Interventions
The scope of the study and the variety of outcomes to be included are determined to a large extent by the nature of the programs under consideration. Often the study problem itself or the decisions made by policy makers specify the interventions to be analyzed.

These questions highlight the various aspects that will help in identifying the interventions: 1. What is the nature of each intervention (e.g., a vaccination or a screening program)? 2. What is the technology used for the intervention (e.g., an MRI test or a blood test)? 3. What are the target population, the delivery site, and the personnel for delivering the intervention? 4. What are the options? If no alternatives are stated in the program, we must compare the proposed project with the status quo.

Influenza Vaccination Example: Interventions

Interventions Technology Target population Delivery site and personnel Intervention options Vaccination Subdermal injection of inactivated influenza virus vaccine Healthy working adults aged 1864 years Low-cost settings (e.g., work site clinics, community health department clinics, and public clinics in drug stores and grocery stores) Proposed vaccination strategy compared with the status quo

3. Defining the Audience

Understanding what information the audience needs and how the study results will be used are the major factors that must be considered at this stage. These questions will help to identify the audience: A. Who will be using the results of the analysis? B. What information does the audience need? C. How will the results be used?

Influenza Vaccination Example: Audience

Regarding the study audience for the influenza vaccination program, we can answer the following questions: A. Who will use the results of the analysis?

Public health policy decisionmakers at local, state, and federal levels Health research institutions and scientists What are potential benefits of a nationwide immunization strategy?

B. What information does the audience need?

What are the direct and indirect costs of the program? To determine the economic impact of a nationwide influenza vaccination strategy for working age adults. To compare the results with those of earlier studies that did not incorporate indirect costs associated with productivity losses averted. To assess whether the findings from 19941995, 19971998, and 19981999 trial studies on the benefits of influenza vaccination can be generalized to other influenza seasons and to the general working adult population.

C. How will the results be used?

4. Defining the Perspective

Usually cost benefit analyses are conducted from a societal perspective. Thus all benefits and costs are considered. The results then indicate whether the benefits to the society as a whole outweigh the total costs of a proposed project. When using a narrower perspective, we should include only the benefits and costs relevant to that specific perspective. For instance, a CBA from the patient perspective will estimate the benefits the patient will receive and the costs that patient will incur as a result of implementing the program. The CBA can be conducted from any of these perspectives depending on the audience:

Patient perspective Provider perspective Payer perspective Health-care system perspective Government perspective Societal perspective

Influenza Vaccination Example: Perspective

The CBA was conducted from a societal perspective. The benefits and costs considered were as follows: Benefits Direct costs averted

Costs Direct costs

Health-care provider visit costs Hospitalization costs

Vaccination costs Side effect costs

Productivity losses averted

Productivity losses

Work absenteeism costs averted Future lifetime earnings preserved as a result of deaths prevented Reduced work effectiveness averted costs

Productivity losses attributable to vaccination Productivity losses attributable to potential side effects

An analysis from the patient perspective will include only benefits and costs incurred by patients. Productivity losses are composed mostly of work absenteeism. Patients who take paid sick leave (provided as a work benefit) will not consider these productivity losses as a cost they incur. Similarly, vaccinations provided free of charge by public health departments and employers will not be considered as costs for patients.

5. Defining the Time Frame and Analytic Horizon

The time frame and the analytic horizon are largely determined by the treatments or interventions under consideration. The analytic horizon is usually longer than the time frame because the majority of interventions or treatments produce multiple health and nonhealth outcomes for periods far exceeding the durations of the interventions or treatments. Although theoretically possible, the inclusion in a study of all possible outcomes and related benefits is usually difficult and costly because of practical considerations (e.g., uncertainties associated with expected effects, time constraints, and resource constraints). Keeping in mind the practical feasibility matters and the objective of comprehensive inclusion of relevant costs and benefits, we have to choose a time frame and an analytic horizon that are:

short enough that the outcomes are not unacceptably uncertain, but long enough: to capture fully the costs and benefits that can readily be associated with the program, and to account for seasonal variations in program activity levels and targeted health problems.

Influenza Vaccination Example: Program Time and Analytic Horizon

The analytic horizon for the model was 1 year. The 1-year period was allowed to track the costs and benefits of a nationwide vaccination campaign and of side effects (e.g., Guillain-Barr syndrome).

6. Defining the Discount Rate

Discounting makes it possible to compare benefits and costs that occur at different times by adjusting their values according to the time preference corresponding to the chosen perspective.

CDC recommends that a 3% social discount rate be used in analyses. The discount rate is one parameter that can be varied in a sensitivity analysis to test its impact on the results of analysis and to make the results of studies based on different discount rates comparable.

Influenza Vaccination Example: Discount Rate

The study was conducted from a societal perspective; the discount rates used in the model were 5% and 3%. The worst-case scenario (in terms of vaccine efficacy as determined by the match between circulating viruses and corresponding vaccine strains) used the 5% discount rate, while the base-case and best-case scenario results were estimated at the 3% discount rate.

Valuation of Health Outcomes

Valuation of Health Outcomes

Identifying Intervention Outcomes
Identifying the intervention outcomes and classifying them as benefits or costs is the next step in conducting a CBA. The results of interventions are broadly classified as:

health outcomes, nonhealth outcomes, or intangible outcomes,

based on the nature of the impacts they represent. We must include in the analysis all outcomes relevant for the study perspective while keeping in mind practical feasibility issues discussed in the previous chapter, Framing a CBA . Each outcome is classified then as either a benefit or a cost, according to the adopted viewpoint.

Health Outcomes
The majority of health-related outcomes included in cost benefit analyses fall into one of the following categories:

decreased mortality, decreased morbidity, increased life expectancy, reduced disability, improved quality of life, and averted medical costs.

For example, a CBA of population pre-exposure smallpox vaccination will include health outcomes such as:

averted medical costs, and

reduced disability from averted cases of smallpox disease in case of an attack.

A program considering provision of diabetes screening for persons at increased risk of disease will include outcomes such as:

decreased morbidity, increased life expectancy, and averted medical costs as a result of early detection and treatment of the disease.

Identifying the relevant health outcomes of an intervention or program often involves close consideration of available clinical and epidemiologic data. Issues that contribute to the complexity of the task and highlight the importance of careful identification of proper outcomes include:

a time lag between the identification and improved health outcomes, and the use of intermediate health outcomes for measuring the effectiveness of tests and screening programs.

Nonhealth Outcomes
Often nonhealth outcomes that can be attributed to the impact of a public health program include:

reductions in time lost from work, and changes in property values attributable to: provision of health services in the area, improved access to health services in the area, and other causes.

A CBA should account for the values of these nonhealth outcomes to arrive at a correct measure of the economic value of the proposed public health program. If the values of nonhealth outcomes are not included in a CBA because of the relative insignificance of the effects or the absence of uncontroversial estimation methodologies, they should be discussed qualitatively.

Intangible Outcomes
Intangible health outcomes (e.g., reductions in health risks, pain, and suffering) might be major considerations in implementing an intervention or health program. The results of a CBA will not reflect the full economic value of the effects of a program if the values of intangible outcomes are not included.

General Health Valuation Methods

Cost-of-Illness Method
The cost-of-illness (COI) method is used to estimate the direct and indirect costs of an intervention. This method is based on the human capital approach and is discussed in detail in the Cost Analysis tutorial.

The intangible costs are estimated using nonmarket valuation methods.

Nonmarket Valuation Methods

The choices people make in the marketplace (i.e., their behaviors) result from their valuations of the goods they buy and the prices they are willing and able to pay. If a market exists, we can comfortably use what consumers are willing to pay as an estimate of how much they value the good. Therefore, existence of a market is relevant in this search. However, because the majority of health outcomes (e.g., health risks) do not have markets, valuing them presents analytical challenges. Economists have developed theoretically sound and intuitively appealing ways of estimating the value of nonmarket goods. These methods and procedures are based on generally accepted economic theories and are broadly referred to as nonmarket valuation methods. Until recently, these methods were applied primarily to the valuation of environmental and natural resources. They are now a relevant and necessary part of contemporary health research. In general, two main valuation methods are employed: the revealed preference method and the stated preference method.

1. Revealed Preference Method (RPM)

Hedonic pricing and averting behavior are the two main types of revealed preference methods (RPMs) used in health economics. By use of these indirect methods, a person's valuation of a health outcome is observed through actions in markets that already exist. This behavior in the market is used to make inferences about the person's valuation of the related health outcome. Hedonic Pricing (Wage) W = f ( q, e, ex, a, g ) W = the wage rate q = a measure of qualification e = education ex = experience a = age g = gender W = f ( q, e, ex, a, g, s/d )

2. Stated Preference Method

This direct method uses primary surveys that ask persons to place values on an intervention to attain a level of health outcome in question. The technique is generally known as the contingent valuation method (CVM). The major advantage of the CVM over the revealed preference method is that it estimates both tangible and intangible values, thereby providing a better estimate of the true value of the intervention or action. Theoretical Basis for the CVM area = ( base x height )

CS = ( 7 x 7 ) = 24.5m TSV = ( 7 x 7 ) + 4 x 7 = 52.5m TMV = 4 x 7 = 28m CS = TSV TMV CS = 52.5 28 = 24.5m Initial CS = 24.5m Final CS = ( 5 x 5 ) = 12.5m CS = 24.5 12.5 = 12m CS = ( 2 x 5 ) + ( 2 x 2 ) = 10 + 2 = 12m Yo = PoG + PSoS G = Yo / Po ( PSo / Po ) S Yo / Po = the intercept on the vertical axis, and PSo / Po = the slope of the budget line.

Practical Application
The graphic representations presented in the preceding section closely model how a rational consumer responds to changes in the market. However, estimating one's indifference curve (utility function) becomes the real challenge; in fact, it is practically impossible. For goods that are traded on the market, it is somewhat easier to estimate the compensated demand curves and to compute EV and CV without having to deal with indifference curves. Because no markets exist for the majority of health outcomes, the contingent valuation method (CVM) is relied on to arrive at estimates for EV and CV as measures of changes in CS. The CVM

is used to estimate the values of intangible outcomes (e.g., reductions in health risks, pain, and suffering), and relies on survey studies to elicit individuals' maximum willingness to pay or minimum willingness to accept for these intangible outcomes in hypothetical or contingent scenarios.

These measures represent respondents' valuations of the intangible outcomes. Hypothetical Example: Willingness to Pay for Higher Security (Reduced Risk of Bioterrorist Attack in the United States) A CVM study could be conducted to estimate the intangible benefit of reduced anxiety of a bioterrorist attack in the United States. A study using the CVM will involve a survey in which individuals will be asked how much they would be willing to pay for a proposed tighter security program on sea and land that will reduce the risk of an attack from one in 100 to one in 100,000.

For the purpose of illustration, let us assume that these numbers correctly reflect the actual reduction in average risk of attack attributable to increased security. If the hypothetical scenarios from the proposal (i.e. risks and consequences of attack, including how the proposed program could achieve the set goals) are conveyed intelligibly to the respondents, then economic theory suggests that a rational consumer (the average American in this case) will:

consider everything else in her life together with the issue at hand, decide based on her best assessment of the situation, and eventually state her subjective valuation of the proposal.

This can be represented in a simplified two-good world diagram as shown in Figure 13: Figure 13. Two-good world diagram

In Figure 13, status quo risk is one in 100. At her current valuation of risk of attack, she consumes S1. The security measures will make her better off because the risk of attack decreases. This is equivalent to a decrease in her subjective unit value (implicit price) for security so her budget line pivots out and she enjoys a higher level of security at S2. Note: This is an example of a positive welfare change, in contrast with the previous example, which is a negative welfare change. Two questions can be asked: 1. How much are you willing to pay to reduce the risk of bioterrorist attack from one in 100 to one in 100,000?

2. If this level of security is not available, how much are you willing to accept as compensation? The choice of the appropriate question (i.e., 1 or 2) as the right value for the benefits is one based on property rights, which is beyond the scope of this tutorial. Steps in Conducting a Contingent Valuation Study The CVM employs survey studies to gather data on a relevant population's:

maximum willingness to pay, or minimum willingness to accept the intangible benefits it stands to gain or lose from a public health intervention or program.

Sophisticated regression techniques are then applied to analyze the assembled data and to estimate the population WTP. A detailed description of the various methods of conducting survey studies and regression analyses is beyond the scope of our tutorial series. Instead, we will present a summary of the major stages in conducting a contingent valuation study. A systematic contingent valuation study can be conducted by following these six steps: 1. Reconnaissance Survey A reconnaissance survey provides an overview of the characteristics of the population under study. Its characteristics are:

It normally involves the use of maps and socioeconomic and demographic data. It is relevant for all studies because a good understanding allows one to do a good survey. Visiting the area and seeing things firsthand might be necessary to best: design the survey, and determine the type of sampling that is suitable for the information needs of the research.

A survey to determine willingness to pay for higher security (lower risk of bioterrorist attack) in the United States would require information on multiple factors (e.g., the size of the population and its component ethnic groups and income distribution). 2. Sampling Method and Sample Size Calculation It is important to obtain a sample that is representative of the population under investigation. Because surveying the whole population is very costly, the statistically appropriate sample size is in order. In a survey to determine willingness to pay for higher security (lower risk of bioterrorist attack) in the United States, sampling must be done in such a way that all ethnic groups, social classes, and regions are represented. 3. Developing the Survey Questionnaire

The major components of a CVM survey are: 1. Introductory questions The introductory questions are designed to determine the knowledge, attitudes, and beliefs of respondents about the intervention and the health risks the program aims to alter. 2. A description of the health risks and the disease that the intervention under consideration must alleviate The risks of an attack and the disease or health condition and their shortand long-term impacts are explained in a short scenario. The security measures that would reduce the risks are also described in this section. 3. The main part of the questionnaire, i.e., a set of questions asking whether respondents would pay a specified amount for a specified reduction in health risks This part includes three types of questions: A. An open bid or preset bid, in which the respondent is asked whether he would pay a fixed amount. For example, "Would you pay $75 for a security measure that reduces your annual risk of attack from one in 100 to one in 100,000?" B. An open-ended question asks how much the respondent is willing to pay for a reduction in the risk of attack from one in 100 to one in 100,000. C. A closed-ended question, in which the respondent is asked to name a value within specific ranges or to pick a range within which their offer falls. 4. A set of demographic questions concerning factors such as gender, age, occupation, and income to determine the socioeconomic status of the respondent. This information, together with the data collected from the introductory part, helps to explain the differences in valuation for respondents with different knowledge and experiences. For the accuracy and statistical power of the survey to be ensured, both the bid amount and the potential reduction in risk must vary randomly. 4. Conducting a Pilot Survey In a pilot survey, questionnaires are tested on a small sample of the subjects. Completed questionnaires are inspected for possible mistakes and for unforeseen drawbacks of the procedure or the questions in the survey. The pilot survey is very important because it reduces cost and prevents serious mistakes in the main study. It must be performed early enough to allow for major changes. 5. Administering the Survey Once the questionnaire is ready, we can administer the survey.

Based on a multitude of factors (e.g., questionnaire complexity, target population, and budgetary constraints), we can choose to administer the survey through face-to-face interviews, telephone interviews or mail surveys. To determine the most suitable mode of administering the survey, each method's advantages must be weighted against its relative shortcomings:

Face-to-face interviews with trained interviewers are most suitable for surveys with detailed questions and answers, but are usually the most expensive. Telephone interviews are the least preferred method because of the difficulty in conveying potentially complex information over the telephone. Mail surveys (the least costly of the three) are frequently used but have the highest non response rate.

Each method must be checked for potential biases, such as interviewer or non response bias. 6. Collating, Analyzing, and Calculating WTP Having collected the data from the questionnaires, we organize the data in the order and format suitable for the analysis that is to be performed. Total WTP is achieved by deriving the population average WTP from the data and multiplying it by the population size, N. The regression techniques allow us to estimate the population average WTP, after controlling for all variables that are suspected to be relevant and for which data are available. The regression of the survey respondents' WTP on variables that characterize the sample and the intervention, such as:

income (Y), education (E), age (A), disease or health risk exposure experience (D), and quantity of the intervention proposed (Q)

provides us with the functional relationship between the WTP and these variables: WTPi = f ( Yi, Ei, Ai, Di, Qi ... ) where i indexes respondents. To arrive at the population average WTP, we then have to insert the population average values for income, education, and other variables in the estimated regression equation. The population WTP is then calculated as the product of the population average WTP and the size of the population, N.

Advantages and Limitations of the WTP Method

A major advantage of the CVM is that it accomplishes the task of estimating willingness to pay for services and goods with no existing markets. The WTP estimates of intangible benefits of these non-traded goods and services complement the estimates of the benefits and costs of public health

programs and thus provide a measure of the full economic value of proposed interventions. Three concerns with the CVM method have been expressed:

The major concern with the CVM method is the reliability of the estimates (i.e., how accurately they reflect true willingness to pay). Because WTP estimates are based on stated willingness to pay rather on than actual payments made by respondents, estimates of the true value might be systematically under- or overestimated.

A second source of bias in WTP estimates is the potential undervaluation of health-care services costs by persons who can rely on health insurance to pay for a considerable part of their medical treatment expenses. By lowering the individual's financial burden of medical treatment, insurance coverage makes health services more affordable, leading to their potential overuse. Economists call this a moral hazard. At the same time, because work-benefit packages (e.g., paid sick leaves) shield persons from income loss associated with indirect medical costs of illness, persons might overemphasize the value of intangible outcomes of diseases. Together with moral hazard, this might cause a bias in respondent valuation.

Another problem with the method is the difficulty of explaining the CVM sufficiently well that respondents actually internalize the perceived effects. For example, it is difficult for people to understand the difference in probabilities/risks associated with the health intervention.

These potential problems indicate that the design of a CVM questionnaire and survey is a complex undertaking. It requires the participation of trained specialists and considerable amount of time to execute and analyze the survey results.

Calculating and Presenting the Summary Measures

After all the benefits and costs have been estimated, the next and final step is the presentation of results in a simple and understandable form for the audience. The two summary measures typically used are:

net present value (NPV), and benefit-cost ratio (BCR).

NPV is calculated by summing the dollar-valued benefits and then subtracting all of the dollar-valued costs, with discounting applied to both benefits and costs as appropriate.

Net Present Value

The formula for NPV is:

A CBA will yield a positive NPV if the benefits exceed the costs. Implementing such a program will generate a net benefit to society.

Benefit-Cost Ratio
The benefit-cost ratio (BCR) represents the ratio of total benefits over total costs, both discounted as appropriate. The formula for calculating BCR is:

For example, a BCR value of 1.2:1 will indicate that for every $1 invested (costs), society would gain $1.2 (benefits).

Example: CBA of School-Based Tuberculin Screening Program

This study was conducted in 1995 to compare tuberculin screening strategies:

screening of all kindergartners and high school entrants (screen-all strategy), versus screening limited to high-risk children (targeted screening).

The tuberculosis incidence in the United States declined for three decades as a result of school-based screening programs for tuberculosis infection recommended by the U.S. Public Health Service. As the screening programs were revised to focus on persons at high risk of infection, the majority of health departments discontinued tuberculin screening of schoolchildren. But such screening had a resurgence beginning in 1985. This study considered the costs and benefits of two alternative school-based tuberculosis screening strategies to help in making decisions regarding initiation or continuation of screening programs. Table 1 shows the results of the study:

Table 1. Impact of two programs of tuberculin screening of kindergartners and high school entrants in Santa Clara County, California, with baseline assumptions Progra m cost($) Cases Net prevented annual Benefi Benefits( (discount cost t-cost $) ed cases (net ratio prevented benefits)( ) $) 58,201 11.1 (3.9) 125,628 70,276 195,904 0.31 0.76 0.58

Strategy

Group

Screenall

Kindergartne rs High school entrants Both

183,86 8 287,45 2 471,32 0

217,176 37.2 (16.1) 275,377 48.3 (20.0)

Targete Kindergartne d screenin rs g High school entrants Both

42,218

41,099

7.9 (2.7)

1,119

0.97

155,92 5 198,14 3

169,136 28.9 (11.3) 210,235 38.6 (11.3)

(13,211) (12,092)

1.08 1.06

Source: Boetani M. JAMA 1995; 274(8): 6139.

Findings: Tuberculin Screening

For the two tuberculin screening programs:

The program cost of the screen-all program is $471,320 per year, and the net cost is $195,904. The targeted screening program costs less, $198,143, and produces a net saving of $12,090.

For each dollar invested in the screen-all program, $0.58 is saved (BCR = 0.58). For each dollar invested in the targeted screening program, $1.06 is saved (BCR = 1.06).

On the other hand, the screen-all program results in more cases prevented than does the targeted screening.

These findings should be considered when deciding which strategy to employ in school-based tuberculosis screening programs.

Advantages and Limitations of BCR as a Summary Measure

Benefit-cost ratio is a simple summary measure that allows a straightforward communication of results of a CBA for decision making. However, many researchers have highlighted these two shortcomings of BCR that limit its usefulness when comparing the results of various cost benefit analyses: 1. BCR is sensitive to how costs and benefits of a project are classified. Let us consider the previous example, with an additional assumption that the analyst classified the benefits from costs averted for high school entrants as a negative cost for the program. Table 2 presents the results of calculating BCRs for both classifications: Table 2. Benefit-cost ratios for screen-all versus targeted screening programs Classification A (screen-all) Strateg y Group Cost( $) 183,8 68 Benefit s($) Bene fitcost ratio 0.31 Classification B (targeted screening) Cost( $) 183,8 68 Benefit s($) Bene fitcost ratio 0.31

Screen Kindergart -all ners

58,201

58,201

High school entrants

287,4 217,176 52

(287,4 52 217,1 0.76 76) = 70,27 6 0.58 254,1 44 42,21 8

Both Target Kindergart ed screeni ners ng

471,3 275,377 20 42,21 8

58,201

0.23

41,099

0.97

41,099

0.97

High school entrants

155,9 169,136 25

(155,9 25 169,1 1.08 36) = 13,21

1 Both 198,1 210,235 43 1.06 29,00 7 41,099 1.42

The reclassification of some benefits as negative costs changed the BCRs of both strategies: For every dollar invested in the screen-all program:

the return in benefits fell from $0.58 to $0.23, and the BCR for the targeted screening program increased from 1.06 to 1.42.

2. BCR is scale sensitive, i.e., it is sensitive to sizes of the numerator and denominator in the ratio. One reason that the targeted screening strategy with original classification has a higher BCR than the screen-all strategy (represented by Classification A in the table above) is that its costs and benefits are much lower than those of the screen-all strategy. Therefore, a BCR is a good summary measure when we consider only one program relative to no program, in which scale (how large or small) is not a factor. The same is true when we are interested in determining whether an intervention would have a BCR exceeding or falling short of a certain value and thus are not interested in scale considerations.

Advantages and Limitations of NPV as a Summary Measure

Unlike a BCR, an NPV is not sensitive to classification of benefits and costs because it measures the absolute difference between them. This is one of the main reasons that most economists prefer to use NPV as the summary measure of a CBA. Furthermore, by using NPV as summary measures of CBA we can compare alternatives among a group of projects and pick the preferred alternatives that meet our budget constraints. This can be done both for programs equally successful in achieving a desired health outcome and for those with different health outcomes. Choosing the alternative(s) with the largest NPV that does not exceed a given budget is the decision rule for selecting the preferred program(s). To make the right choice when the additional consideration of budget constraint is a factor in a CBA, we have to provide information on a project's resource requirements. Presenting the discounted costs together with the NPV of a project provides this information and allows decisionmakers to make informed choices about resource use.

Incremental Summary Measures

When we are conducting a CBA of a project or intervention, we are comparing it to a "no intervention" baseline. NPV can also be used to consider the benefits and costs of alternatives such as:

expanding an existing program, adopting an intervention to replace an existing intervention, or the alternative with respect to a program which will definitely be adopted.

Incremental NPV is a summary measure that is used to compare programs under those circumstances. It is calculated as follows: PV PV PV Incremental )( ) =( PV BenefitsB BenefitsA CostsB CostsA NPV Incremental = NPVB NPVA NPV Here the baseline, intervention A, is either the existing intervention or the intervention deemed to be less effective.

Example: Incremental NPV for the Screen-All Strategy

We can calculate the incremental NPV for the screen-all strategy with respect to targeted screening in a school-based tuberculosis screening program. Using the Costs and Benefits values from Table 1 , the incremental net present value for screening all kindergartners versus targeted screening is: Incremental PV PV PV = ( PV BenefitsAll )( ) NPV BenefitsTS CostsAll CostsTS ( $58,201 ( $183,868 = $41,099 ) $42,218 ) = $124,509 The results of similar calculations for high school entrants and both groups of students are shown in Table 3. Table 3. Incremental net present value (NPV) for the screen-all strategy Program cost($) Incremental annual cost (incremental benefit) ($) 124,509 57,065 183,812 ...

Strategy

Group

Benefits($)

Screenall

Kindergartners High school entrants Both

183,868 287,452 471,320 42,218

58,201 217,176 275,377 41,099

Targeted Kindergartners screening

High school entrants Both

155,925 198,143

169,136 210,235

... ...

As is evident, the incremental costs exceed incremental benefits when comparing the screen-all strategy with targeted screening.

Conducting a Sensitivity Analysis

Having estimated the summary measures, we can then study the impact of different input variables on the results of our analyses by conducting a sensitivity analysis. Sensitivity analysis takes into account the uncertainty associated with the assumptions and parameters of CBA by studying how changes in variable values impact the results. A conclusion of CBA is considered "robust" with respect to a variable if a relatively large change in the value of the variable does not change the conclusion. We can conduct both one-way and multi-way sensitivity analyses, in which a single variable or multiple variables are altered, respectively. The results of a multi-way sensitivity analysis will be more informative, however, because our estimates involve interdependent epidemiologic, clinical, and economic data. The results of simultaneous changes in more than one variable are bound to more accurately reflect interactions between these variables and their impact on conclusions of our CBA. Please see the Sensitivity Analysis section of the cost analysis tutorial for more detail.

Advantages and Limitations of CBA

As a decision-making tool that helps allocate scarce resources to programs that maximize societal economic benefit, CBA compels analysts to study the full economic impact of all potential outcomes of an intervention. Expressing the results of this comprehensive analysis in purely monetary terms makes it possible to compare:

different programs having different health outcomes, or health programs to nonhealth programs.

Furthermore, the identification of all resource requirements (costs) and benefits of an intervention or program allows analysts to examine its distributional aspects, (e.g., who will receive these benefits and who will bear the costs). The major limitation of CBA is the empirical difficulty associated with assigning monetary values to benefits (e.g., extended human life, improved health, and reduced health risks). Besides the complexity of various methods designed to value these benefits, analysts usually confront controversy over the appropriateness of attaching a certain monetary value to human life.

Measuring the cost per unit of health outcome in CEA circumvents the need to make an explicit valuation of human life. Nevertheless, when decisions are to be made as to whether to implement a lifesaving intervention based on its cost-effectiveness measure, policy makers must make the implicit decision as to whether the investment is worth the lives it will save. CBA makes this consideration explicit. Finally, as in any other study, the results of CBA are only as good as the assumptions and valuations on which they are based. Hence, understanding the implications of analysis assumptions and methods is essential for a correct interpretation of results.

Glossary Cost Benefit Analysis

Benefit-cost ratio (BCR) A ratio that expresses benefits (in dollars) per each dollar spent. If it is:

greater than one, then benefits outweigh cost; less than one, then costs outweigh the benefits; and equal to one, then they are the same.

Budget line A line that defines the combination of commodities that one can buy given one's income and the prevailing market prices. Compensated demand curve A type of demand curve that shows the relationship between price and quantity demanded when utility is held constant by income compensation (i.e. the price changes are compensated for by changes in income). Compensation variation (CV) The amount of money that would have to be given to or taken away from a person after a change to make her as satisfied as she was before the change. Consumer surplus (CS) The difference between the amount that a person is willing to pay and the amount she actually pays on the market. It is a measure of welfare. Contingent valuation method (CVM) A survey study that gathers data on population's willingness to pay, or accept payment for the intangible benefits/costs from a public health intervention or program. Demand curve/schedule (ordinary demand curve) A line that defines the quantities of a commodity that a consumer is willing and able to buy at various prices, all else constant. Equivalent variation (EV) The amount of money that would have to be given to or taken away from a person in the absence of the change to make her as satisfied as the change would make her. Hedonic pricing A statistical technique that is used to reveal how much a consumer pays (implicit price) for each of the components (or characteristic) of a commodity. Indifference curve

A locus of points that defines the combinations of goods that gives the same utility (satisfaction). Net present value (NPV) The present value (discounted future value) of the net benefits of a project or program. Point of tangency The single point at which the budget line touches the indifference curve. Rational consumer A consumer, believed to be of sound mind, who makes analytically sound decisions based on all available information. Regression analysis A statistical procedure that is used to determine the values of parameters for a function that best fit a set of data observations. Statistical life A measure used to compute the value of life that is independent of the characteristics of any particular person. Utility Term used by economists to connote satisfaction.