Chapter 28: Cost Minimization Theory
If one can ignore the existence of consumer surplus, then a benefit is simply a negative cost. Since cost data are nearly always available, many health care studies evaluate interventions by just using costs. That is, if the current method costs $X and the alternative way of doing the same thing costs $Y, then the new method would be better then the old as long as $X > $Y. The difference $X – $Y would be the cost savings of the new method and this difference would also equal the net benefits of changing methods. This is the logic of cost minimization. With the application in the next chapter in mind, we will explain issues in terms of TB treatment. COST MINIMIZATION AS A CBA The theory underlying cost minimization is basically the same as for evaluating a quantity change brought about by a price reduction that we explained in Chapters 26 and 27, except that we are now dealing with a quantity change that is not necessarily market clearing (one where demand equals supply). Figure 28.1 summarizes how the cost minimizing evaluation is to take place. We start with a situation where we are treating 20 patients with TB using the standard regime, Method 1, at a cost of $200 per patient. Then a new regime is introduced, Method 2, that lowers costs to $100 per person. The question is: how beneficial is the new method? The total costs of Method 1 are represented by area 0bc20. This is equal to...
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