Fundamentals of Health Economics: Different Types of Health Care Economics Analysis

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According to Shih and Halpern (2008), there are 6 types of economic analyses of health care technology, namely, cost analysis, cost minimization analysis, cost benefit analysis, cost-effectiveness analysis, cost utility analysis, and budget impact analysis. In this article, we describe the first three.

Cost analysis compares the cost of health care interventions and does not consider the differences in health outcomes. This type of analysis is often used to assess the economic impact of health care interventions. The National Institutes of Health (NIH) conducted a cost analysis every year to assess the total cost of cancer in the United States. For instance, in 2006, the NIH estimated that the total cost of cancer was $206 billion, of which 38% was direct medical costs. The rest was indirect costs, which include about $18 billion due to morbidities and $110 billion due to mortality.

Cost-minimization analysis (CMA) is used to select the cheapest interventions among the interventions that show the same health outcomes. It is important to make sure that the interventions, indeed, have the same impact on health outcomes. For instance, In another example, Merli et al. (2001) compared the use of vinorelbine plus cisplatin versus paclitaxel plus carboplatin in the treatment of advanced non-small cell lung cancer (NSCLC). They found that the survival rate and quality of life between two treatment arms are not significantly different from each other. The authors then conducted a CMA and report that vinorelbine plus cisplatin is the cheaper intervention.

Cost-benefit analysis (CBA) uses a common monetary frame of reference to evaluate both outcomes and costs. That is both the costs of interventions and their values of outcomes are assessed in term of dollars. This analysis is particularly useful if the outcomes out-weight costs and one need to select the largest net benefit (outcomes subtracted for costs). Alternatively, one can calculate the ratio between the intervention outcomes and the intervention costs. This ratio is often known as the benefit-cost ratio. It is preferred that an intervention has a benefit-cost ratio greater than 1. It is not clearly established which cost components should be included in costs and which should be included in outcomes. For instance, cost of adverse events can be considered either as part of the overall treatment cost, or a negative part of the overall benefits. Depending on where it is allocated to, the cost of adverse events can lead to a lower or higher benefit-cost ratio.

The main problem with CBA is that economic evaluation of outcomes is subjective. The standard method in CBA is to use salaries to quantify the values of human lives. Obviously, if one evaluates outcomes based on salaries, the outcomes of children or retirees will be completely different from the outcomes of people who are working.

To circumvent this issue, some researchers use the willingness-to-pay (WTP) approach. In this approach, study participants are asked to give the maximum amount of money they willingly pay for an intervention. The problem with this approach is for some intervention the WTP price is much lower than the market price.


Merli G, Spiro TE, Olsson CG, et al. Subcutaneous enoxaparin once or twice daily compared with intravenous unfractionated heparin for treatment of venous thromboembolic disease. Ann Intern Med 2001;134:191–202.

Economic Evaluations of Medical Care Interventions for Cancer Patients. How, Why, and What Does it Mean? Ya-Chen Tina Shih, PhD and Michael T. Halpern, MD, CA Cancer J Clin 2008; 58:231-244

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?