Summary Chapter 1, Introduction (Mattias Fritz)




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Article: (Åsa Carlsson)

The Decision Rules of Cost-Effectiveness Analysis

Karlsson & Johannesson



The article is based on an example and frequently makes references to tables and figures. Unless this summary is totally clear to you, the best way to grasp the article is probably to try and follow the example with all its numbers and references, for they cannot easily be recaptured. But I will try to explain the set-up below.


Cost effectiveness analysis is based on the maximisation of the health effects (e.g. life years) for a given amount of resources (or a budget, measured in monetary units). It is a common method used to carry out economic evaluation of healthcare programmes.


By using a hypothetical example, the aim of the paper is to demonstrate the decision rules of cost-effectiveness analysis. Why? Well, many authors report results of cost-effectiveness analysis in a meaningless way. E.g., it’s common to report average cost-effectiveness ratios (CERs), rather than the appropriate incremental CERs, which provide guidance in decision-making.


Average CER = Total costs/total effects


It is impossible to conclude anything about the cost effectiveness of the different treatment alternatives based on average CERs. Incremental CERs must be calculated. This is done by ranking the alternatives (found in table 1) according to effectiveness and successively calculate the incremental cost/incremental effect (listed in table 2, p. 115). This gives us a measure that is the ”incremental cost of producing effectiveness by the treatment compared with the next most effective option”.

(AVERAGE C/E RATIOS: AN AVERAGE C/E-RATIO IS EQUAL TO THE COST OF A PROGRAMME DIVIDED BY THE EFFECTIVENESS COMPARED TO "DOING NOTHING" (THE BASE-CASE PROGRAMME).


INCREMENTAL (MARGINAL) C/E-RATIOS: AN INCREMENTAL C/E-RATIO IS THE INCREMENTAL COST OF A PROGRAMME DIVIDED BY THE INCREMENTAL EFFECTIVENESS COMPARED TO THE NEXT MOST EFFECTIVE MUTUALLY EXCLUSIVE PROGRAMME (IF ONLY ONE PROGRAMME IS COMPARED WITH DOING NOTHING THE INCREMENTAL C/E-RATIO IS THE SAME AS THE AVERAGE C/E-RATIO).


The example has the following features:

  • Assumes constant returns to scale

  • Three different patient groups with different alternative treatment methods that are mutually exclusive

  • 1000 patients in each group

  • The different alternatives have different costs and effectiveness. It is possible to give different patients within the same group different treatments. Evaluating the cost effectiveness disregards issues of inequity that could arise from this.


If the incremental CER decreases for a treatment, the previous treatment should be ruled out and excluded because of extended dominance. Extended dominance means that effectiveness is produced at a higher marginal cost than necessary. The treatment is excluded, since it is inefficient in the sense that it is possible to produce the same effectiveness at a lower cost, or more effectiveness at the same or a lower cost.


Table 3 shows the ranking of the alternatives after exclusion of dominated alternatives and with recalculated incremental CERs. Look at this table to determine which alternative to choose, using one of the following


Decision rules: (which alternative that should be chosen based on cost-effectiveness analysis depends on a fixed budget / willingness to pay decision rule, not on the rank of the alternative)


1. Budget approach: Budget as decision rule

Determine how much we are willing to spend on treating the patient groups

Start implementing the treatment with the lowest incremental CER.

Add independent treatments or replace mutually exclusive treatments with more effective treatments until the budget is exhausted.

See table 4, p. 117 and fig 2, p. 118


2. Willingness to pay approach:

Determine maximum price we are willing to pay for a unit of effectiveness as decision rule

Produce more units of effectiveness until the marginal cost of producing effectiveness reaches the max price – i.e., implement the treatment with the highest incremental CER that is below or at the max price within each patient group


Each price that is used will implicitly yield a budget, and using a budget as a decision rule will implicitly yield a price. The difference is that a fixed budget approach may yield different treatments for different patients in the same group, which may rise ethical issues. This is not a problem in the willingness to pay approach where the same treatment will be chosen for all patients within the same group.



1 This chapter only refers to continuous data. Continuous data are natural measures that in principle could take on different values for each observation, i.e. height, weight, income and not gender, race etc.

2 Those of you who attended lecture 5 may recall that we answered a question; this would be classified as a binary contingent valuation question.

3 Often done by logistic regression, in which the bid is the focal explanatory variable, possibly along with covariates.

4 QALY=quality-adjusted life year

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