Cost–Benefit Analysis and Health Care Evaluations

Cost–Benefit Analysis and Health Care Evaluations

Robert J. Brent

Cost–benefit analysis is the only method of economic evaluation which can effectively indicate whether a health care treatment or intervention is worthwhile. This book attempts to build a bridge between cost–benefit analysis, as developed by economists, and the health care evaluation literature which relies on other evaluation approaches such as cost-minimization, cost-effectiveness analysis and cost–utility analysis.

Chapter 2: Cost Minimization and the Definition of ‘Cost’

Robert J. Brent

Subjects: economics and finance, health policy and economics, public finance, social policy and sociology, health policy and economics


2. Cost minimization and the definition of ‘cost’ 2.1 INTRODUCTION We begin our account of health care evaluations with the cost part of CBA. All four evaluation types rely on these costs, which makes an analysis of costs common to all. We will be focusing on CM because an estimation of costs is all that is required to use this evaluation type. We start by defining economic costs and explain how they depend on the time period being considered. The role of discounting is then introduced. From there we present a detailed account of how CM fits in with economic theories explaining cost curves in the short and long runs. The first section closes with an analysis of how discounted costs at different times are combined into a present value figure. CM and its relationship with CEA and CBA criteria are explored in the next section. CM applications follow and the chapter ends with the final comments section. 2.1.1 Definition of ‘Cost’ To a non-economist, ‘cost’ is what you pay for a good or service. Backing up the idea of paying for something is the existence of a receipt. This is a tangible record of incurring cost. So accountants and tax authorities implicitly define cost as an expense for which you have a receipt. However, to an economist, cost refers to the sacrifice of benefits by using resources for a particular use rather than for some other (best) use. That is, by using...

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