Economic evaluation can be thought of as efficiency evaluation. Two questions underlie economic evaluation: Is a planned or existing health care service worth providing, relative to other healthcare services, given the consumption of the same resources?
Is the affected population satisfied with a planned or existing health care service (and its consumption of resources), compared to some other health care service that would consume the same resources?
Economic evaluation is important to health care managers because the supply of resources is finite and they must thus make choices about what resources to devote to health care services.
Given the changes in how health care is organized (for example, health care reform, managed care), managers often seek formal methods of making resource allocation decisions, so they can evaluate health care outcomes associated with consumption of resources. Such systematic methods can identify possible and appropriate alternatives (von Neumann and Morganstern (1993).
Economic analysis of health services focuses on costs and resulting consequences of providing services. This analysis can be thought of as identifying the inputs and outputs associated with health services.
Economic evaluation determines the unit cost for the resulting unit of health benefit. Epidemiologic data are used to measure the relationship between health benefits and costs of providing a health service.
Four major types of economic evaluation are used in designing health care for populations: cost analysis, cost-benefit analysis, cost-effectiveness analysis, and cost-utility analysis.
This research paper will describe two of these types of evaluation methods and how they relate to population health management. These two are the cost-benefit analysis and the cost-effectiveness analysis.
Many healthcare managers confuse cost-benefit and cost-effectiveness analysis, often failing to make a distinction between the two. Cost-benefit analysis evaluates programs with different objectives, while cost-effectiveness analysis compares different approaches to achieving the same objective.
Cost-benefit analysis can also evaluate programs with similar objectives, but in practice it is not typically used for this purpose.
Both cost-benefit and cost-effectiveness analysis are useful tools for health care policy formulators. Both kinds of analysis involve information-gathering techniques, with the information structured and analyzed to guide policymakers and planners.
The distinction between the two types of analysis is in the method of valuing the desired outcomes, the health benefits.
In cost-benefit analysis, all health benefits and costs are expressed in monetary terms. Health benefits (for example, added years of life, number of lives saved, and so on) are converted to monetary terms, using valuations associated with work productivity. While in cost-effectiveness analysis, only costs are expressed in monetary terms, with health benefits
represented in natural units. Because cost-benefit analysis is based on comparing the health benefits of programs in monetary terms, it is expressed in one of two ways: the cost per unit of health benefit, or the health benefit per unit of cost.
The intent of this analysis is to determine the best use of resources. Because all costs and health benefits are expressed in dollars, cost-benefit analysis has the ability to determine the “worth” of providing a health care service or program (Nas,1996).
Cost-benefit analysis indicates the absolute benefit of health care services in dollars. It is typically employed when the health care service or program of interest is not being compared to other services or programs with the same managerial or clinical objective.
For example, cost-benefit analysis is useful when evaluating the decision whether to build a new hospital or to provide better roads to the hospital. In addition, cost-benefit analysis can evaluate the service or program of interest compared to “doing nothing.”
The constraint of expressing health benefits in strictly monetary terms has made cost-benefit analysis in health care less popular than other comparative constructs.
Those who propose not using cost-benefit analysis argue that expressing health benefits in monetary terms is unethical and immoral (Petitti, 1994).
There are studies in health care that use cost-benefit analysis, but these focus on technical efficiency instead of economic efficiency. The perspective of these cost-benefit studies is of the health care entity of interest, and not society.
These studies use economic assumptions and principles that are relevant to a societal perspective; true cost-benefit ratios are not calculated because costs and benefits that may occur over time are neglected (Nas, 1996).