Introduction to Cost-effectiveness Analysis

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Suppose the Department of Health and Family Welfare has conducted a rigorous evaluation to determine the impact of a maternal and child health program on a range of health outcomes. The results of the evaluation show that the program has had a significant, positive and high magnitude effect on a number of important health outcomes. The Health and Family Welfare Department is pleased to know that the program is effective, but wants to know what policy action to take given this positive impact. Should the program be continued, stopped, modified, or scaled up?

Consider another example. A community’s water supply has been contaminated with effluents leading to a large incidence of diarrhea within the population. An international aid organization has come up with two very different strategies to tackle this problem. One project manager in the organization is advocating for investments in modern water and sanitation infrastructure, including sewage and a piped-water supply, while another manager has proposed a distribution system where households are given free chlorine tablets to treat their own water at home. Through a randomized impact evaluation, these two methods were shown to be equally effective – each reducing diarrheal incidence by 80 percent. Which intervention should the organization implement?

Before we can answer both of these questions, we need to know additional information related to the costs of the program. Perhaps the maternal and child health program, while effective, is actually so costly that government budgets would not be able to sustainably afford a statewide scale up. In the second example, it is highly likely that modern infrastructure investments in an otherwise remote village would be prohibitively expensive. In this case, distributing chlorine tablets may well be the better program to implement.

Any program or policy we introduce has opportunity costs. In other words, there are alternative ways to spend money and time. It is not always enough to know that a policy or program has a positive impact on the lives of the poor; it is helpful to know whether the program is the best use of limited resources. Users of evidence, be it government, NGOs, donors, or other organizations that make evidence-informed policy, would like to consider not only whether or not a program had a positive impact, but also whether the program, when compared to its costs, is of sufficiently good value. The term “sufficiently good value” can be an abstract concept when comparing one program in isolation, but if we have information on the impact and costs of other related programs, we can begin to compare across programs to determine which yields the greatest value for money. One way of doing this is to conduct a Cost-Effectiveness Analysis, which is a method of summarizing complex programs in terms of a simple ratio of impacts to costs.

This manual introduces the concept of a Cost-Effectiveness Analysis (CEA) and provides practical steps to conducting this method of program evaluation.