Cost Analysis in Health Care Economics: Understanding the Definition of Health Economics and Determing the Cost Effects of Treatments

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Health economics aims to find the best way to satisfy the ever increasing demand for health care given the limited resources. It is estimated that health care spending in the U.S. will reach 7% of GDP in 2020. That is health care spending might exceed military spending and/or education spending in the near future. This is inevitable given an aging and expanding U.S. population. Health economics will play an important role in the future when we try to figure out the best ways to maximize the benefits of health care spending.

Cost-effectiveness analyses of health care interventions have become one of the focal points in the decision making process in health care. The introduction of any health technology, whether it is a new drug or a new medical device, is often associated with an increase in health care costs. This will limit the funding available for other interventions. Health economics will help policy makers, health care providers, and insurance companies to determine whether the new intervention is cost-effective in comparison to other options.

To address the need for improving the quality, safety, efficiency, and effectiveness of health care, the U.S Department of Health and Services has created the Agency for Healthcare Research and Quality (AHRQ) You can go to the agency website and find a lot of economic information available on major diseases and conditions, such as cancer, heart diseases and diabetes.

For instance, the Agency for Healthcare Research and Quality estimates that there were 559,650 cancer deaths in 2007 and more than 10 million people in the U.S. living with cancer. There were about 1.5 million of new cases of cancer in 2007. The total cost of cancer in 2007 was $206 billion . The annual direct medical cost of cancer, defined as “personal health care expenditures for hospital and nursing home care, drugs, home care, and physician and other professional services”, was $77 billion.

You can also learn that colorectal cancer screening is very cost effective. The cost per quality-adjusted life year (QALY) saved by colorectal cancer screening is less than $14,000. For comparison, the cost per quality-adjusted life year saved by breast cancer screening is $35,000-$165,000. QALY accounts for how the presence of certain conditions affects quality of life. One year of perfect health is equivalent to 1.0 QALY, while death is equivalent to zero, and any condition that affects quality of life would have some value between 0 and 1.

In the U.K, the National Health Service established the National Institute for Clinical Excellence (NICE) with similar objectives. The National Institute for Health and Clinical Excellence is particularly known for its tough stance on expensive drugs.


Maciosek MV, Coffield AB, Edwards NM, et al. Priorities among effective clinical preventive services: results of a systematic review and analysis. Am J Prev Med. 2006 Jul;31(1):52-61.

Panel Backs Covering Eye Treatment in U.K., Wall Street Journal, ANITA GREIL, August 28, 2008; Page B2

Agency for Healthcare Research and Qualit

This post is part of the series: Health economics - The Primer

This series of articles will introduce readers to the emerging field of health economics. We will review how health economics influence decision making process in health care and the basic tools used in health economics.

  1. The Role of Health Economics
  2. Cost of Health Care
  3. Classification of Health Economic Analyses
  4. Health Economics Research: Cost Utility Analysis And More
  5. How Much Does a Healthy Year of Your Life Cost?