Benefit-Cost Analysis

Both cost‐effectiveness analysis and benefit‐cost analysis provide information on the costs and consequences of interventions. Each estimates costs using monetary units. The primary difference is that in benefit‐cost analysis, both health and non-health benefits are measured in monetary units. In contrast, in cost‐effectiveness analysis, health benefits are measured using non-monetary units such as quality-adjusted life years (QALYs) or disability‐adjusted life years (DALYs). Which type of economic analysis is most appropriate depends on the nature of the problem to be addressed and the needs of the decision makers.

By using money as a common metric, benefit‐cost analysis allows the simultaneous, integrated consideration of multiple consequences, including both health and non‐health impacts. Money is not important per se; it is simply a convenient way to measure the trade‐offs individuals and societies are willing to make. If an individual chooses to purchase a particular good or service, he or she presumably values that good or service at least as much as the other things he or she could have used that money to buy. More generally, if a country or other funder chooses to spend more on one initiative, it will have fewer resources available to devote to other purposes – including other initiatives that address the same or similar problems.

In benefit-cost analysis, the value of an improvement is typically estimated based on individual willingness to pay (WTP). WTP is the maximum amount of money an individual would exchange for an improvement, such as a reduction in the risk of becoming ill or dying over a defined time period. It may be estimated based on market prices or using survey methods.

The value per statistical life (VSL) is derived from individual’s willingness to exchange their own money for small changes in their own mortality risks within a specific time period such as one year. VSL can then be multiplied by the expected number of deaths averted by a policy to estimate related benefits. It is typically calculated by dividing individual willingness to pay by the risk change. For example, if an individual is willing to pay $1,000 for a one-in-10,000 reduction in his or her own risk in a given year, the equivalent VSL is $10 million ($1,000 divided by one-in-10,000). The concept is often misinterpreted. VSL is not the value that the individual, the government, the society, or the analyst places on saving a life with certainty.