Until now our blogs have paid attention to important theoretical concepts, such as scarcity and opportunity cost, and methods to measure and value outcomes, including the QALY and WTP. The aim of this blog is to move away from the outcomes side to the, often-neglected but equally-important cost side of the economic evaluation ‘equation’.

Let’s start by outlining what we mean by ‘cost’ in economic evaluation and then see where this leads us in terms of rules for identifying, measuring and valuing the resource impacts of population health interventions. Finally we try to outline some of the specific challenges arising in costing within population health intervention – namely multi-sectoral costing and the problem of attribution of costs and cost savings.

The concept of opportunity cost, as outlined in an earlier blog, refers to having to make choices within the constraint of limited resources - certain opportunities will be taken up while other opportunities must be forgone. The benefits associated with forgone opportunities are termed opportunity costs. Economists perceive the true cost of any intervention in relation to the benefits forgone of investing those resources in their next best alternative use. For example, in population health, the opportunity cost of investing in a home visiting intervention for vulnerable infants could be the QALYs that could have been gained through investing these same resources in, say, reducing asthma through improved housing ventilation.  Although such forgone benefits are often difficult to measure in practice, opportunity cost represents a useful mode of thought as it emphasises the explicit trade-offs being made by investing in one intervention and not another and that it is resources which have opportunity costs and thus require valuation. While in theory the opportunity cost is the correct ‘price’, in practice, most economists use market prices (at least as a starting point) to value the majority of resource items in an economic evaluation.

Costing has three elements: identification; measurement and valuation. Identification of costs requires consultation with service users, professionals delivering a service and where possible detailed research of the scope of possible costs and effects. In population health interventions where the scope of costs and cost savings are likely to be broader than a clinical evaluation, this ‘identification’ stage is highly important and contact with stakeholders within all affected sectors should be established early on in the evaluation.

Measurement of the quantities of resource use is the next stage. Within the confines of a well designed evaluation, it is likely that for some interventions the costs will be readily measured in terms of say number of home visits, costs of access to sports facilities, costs of telephone advice for smoking cessation. However, it may become more complex when a new swimming pool is purpose built to increase leisure activity within a population. To ensure accuracy, these lumpy one-off built costs should ideally be measured at the stage when budget information on the spend is available, as would be the case for say, regeneration of housing activities. Without good dialogue or the use of common ‘cost language’ with stakeholders in such sectors accurate cost information may be difficult to obtain. It may also be the case that lumpy items of cost may have to be shared between more than one population health intervention and hence costs apportioned between programmes accordingly.  The second stage to the measurement of costs is deciding the appropriate ‘unit of analysis’ – is this per person? Per household? Per community? The unit of analysis on the cost side should eventually be aligned with the appropriate unit of analysis on the outcome side such that the decision maker can identify the resources required for achieving a given level of outcome. The key issue is that we estimate the ‘total cost’ arising from any particular policy proposal and the unit of analysis essentially gives us the rate at which costs are incurred - identifying the appropriate unit of analysis however is important as it will influence the ultimate ‘cost per unit of outcome’ and the final economic recommendation may be sensitive to changes in the unit of analysis.  Outlined below are examples of the possible types of resource use for inclusion within population health interventions:

Health sector resources: hospital stay; outpatient appointments; staff time; drugs; consumables; theatre time; equipment; capital items; overheads; community based health care e.g. GP appointments; paramedic and emergency ambulance services.

Community health and personal social service resources: community based social care e.g. social workers and local authority occupational therapy services; nursing home; residential care; community based health care staff; local authority day care; foster care services;

Patient and family resources: travel time and expenses; out of pocket costs such as over-the-counter medications; opportunity cost of leisure time; childcare costs; domestic resources e.g. cleaning and gardening costs due to ill health.

Other Government sector costs: housing; employment; education; environmental; home affairs and justice; social welfare; transport.

Productivity gains/losses: value of changes in productivity (patient and carers);

Transfer payments: tax receipts and sickness benefit payments; carers allowance (while theoretically not formally included on the cost side of an economic evaluation, as they are transfer payments, quantifying these amounts still provides a useful measure of change).

The final stage is the valuing of costs, this is done by attaching relevant unit costs or prices to the measured costs. It may be the case in population health interventions that typical unit costs of the type used in health sector economic evaluations are not relevant, as outlined in the example of the costs of building a swimming pool or housing regeneration. For these large scale lumpy costs, their values will be derived from available budgetary spend on these items and this may be an accounting exercise in the first instance. The opportunity cost of such large items can however be reported alongside the monetary price to identify potential benefits forgone.  In the instance of extended time horizons which may occur with preventive interventions such as smoking cessation or childhood interventions, lumpy costs will require annuitisation over the expected life span of the intervention using a recommended discount rate (currently NICE recommends 3.5%) as well as some consideration of the ‘throughput’ or ‘cost per use’. Alternatively a more practical approach may be to leave these costs in their ‘lumpy total cost’ format and report the various consequences alongside in a ‘cost-consequence’ approach. These technical details will be explored in later blogs.  A further point to note here is that, as Pearce (1971) outlines in his discussion of cost-benefit analysis (CBA) “..the basic decision rule in CBA requires that benefits and costs be expressed in monetary units over the economic life of the project”. This is especially important for population health interventions as it is a reminder that, with many costs in population health interventions being front-loaded (such as investment in housing or preventive health measures) with benefits likely to be longer term, appropriate consideration of the relevant time horizon for costs and cost savings is crucial. Only longer time horizons will allow longer term effects to fully manifest themselves. A further blog on theory and modelling will follow later in this health economics series.

As outlined by Weatherly et al (2009), costs included in a population health evaluation should reflect the perspective of the analysis. Adopting a broad societal perspective is recommended in population health interventions to permit all costs, cost savings and effects to be measured and valued within each affected sector. By reporting the results of economic evaluations in population health in this way, decision makers can easily see where the impacts occur. This may however be challenging where costs/savings occur across sectors, because identifying units of analysis which can be aggregated meaningfully across sectors may be difficult in practice. Attribution of costs and benefits is also a technical challenge. Consider a home visiting intervention which aims to improve outcomes in infants, the costs incurred are to the health and social services yet the cost savings may be accrued within the educational sector (improved attainment hence less truancy and costs of monitoring) as well as the justice sector (reduced crime), the housing sector (with increased educational outcomes there may be less likelihood of government housing provision required) and so on. A narrow health care perspective in this instance would have overlooked important effects to the other sectors.

On a final point therefore, in terms of ‘rules’ for costing, the following is recommended: the broader and more long-term the better. But also remember: don’t worry too much (!) – Economists are well equipped with appropriate costing tools for every scenario.

Pearce D. Cost-benefit analysis. London: Macmillan; 1971.

Weatherly H, Drummond M, Claxton K, Cookson R, Ferguson B, Godfrey C, Sculpher M, et al. Methods for assessing the cost-effectiveness of public health interventions: key challenges and recommendations. Health Policy 2009;93:85-92.